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INDIA

 

DOING BUSINESS AND
INVESTING IN INDIA

COUNTRY INCENTIVES AND POLICY

 

DOING BUSINESS AND INVESTING IN INDIA
The first and second-generation reforms have created a conductive environment for foreign investments in India. Market oriented policies are boosting economic activity, all round development and GDP growth rate. Government procedures are constantly being simplified and paper work minimized. As the Indian economy gears for competition in the international market, overseas investors clearly see the potential for attractive returns from investments in India, which is also evident from the many FDI success stories already achieved.

 

POLICY FRAME WORK

INDUSTRIAL POLICY
The Indian Government’s market liberalization and economic policy reforms program aims at rapid and substantial economic growth and integration of the country’s economy with the global economy. The industrial policy reforms have eliminated the industrial licensing requirements except for certain select sectors, removed restrictions on investment and expansion and facilitated easy access to foreign technology and direct investment.

The Industrial Policy Resolution of 1956 and the Statement on Industrial Policy of 1991 provide the basic framework for the Government’s overall industrial policy. The procedures for obtaining government approvals have been progressively simplified and quickened. Normal FDI proposals are cleared within a month. Areas earlier reserved for public sector have mostly been opened for private sector participation also.

INDUSTRIAL LICENSING
All industrial undertakings are exempt from obtaining an industrial license to manufacture, except for the following:
Industries reserved for the Public Sector;
Industries retained under compulsory licensing;
Items of manufacture reserved for the small scale sector; and
Any proposal attracting location restriction;

Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM) with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion.

FOREIGN INVESTMENT POLICY
Foreign investment is permitted in virtually every sector, except those of strategic concern such as defense (opened up recently to a limited extent) and rail transport. Foreign companies are permitted to set up 100 per cent subsidiaries in India. No prior approval from the exchange control authorities (RBI) is required, except for certain specified activities. The investment should be in accordance with the prescribed guidelines and the details of the investment should be filed with the authorities within the prescribed time limit. This procedure is applicable only for fresh investments directly in Indian companies and not for purchase of shares from the existing shareholders. This investment procedure is commonly known as the "automatic approval route".

Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of FDI into the country, as also to provide appropriate institutional arrangements, transparent procedures and guidelines for investment promotion and to consider and approve/recommend proposals for foreign investment.

Secretariat for Industrial Assistance (SIA) has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce & Industry to provide a single window service for entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects (including liaison with other organizations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy decisions relating to investment and technology, and collects and publishes monthly production data for select industry groups.

In order to give further impetus to facilitation and monitoring of investment, as well as for better coordination of infrastructural requirements for industry, a new cell called the "Investment Promotion and Infrastructure Development Cell" has been created.

REGULATION AND PROCEDURES
Procedures for obtaining government approvals have been considerably simplified. Approval procedures have been laid out for undertakings that are:

Exempt from industrial licensing requirements (including existing units undertaking substantial expansion);
Subject to compulsory industrial licensing; and
Small scale units exceeding the prescribed limit of investment in plant and machinery and continuing to manufacture small scale reserved item(s) or, in cases where exemption from industrial licensing granted for any item, is withdrawn.

AUTOMATIC APPROVAL ROUTE AND FIPB ROUTE
Foreign investment into India is governed by the Foreign Direct Investment (FDI) policy of the Government of India and the Foreign Exchange Management Act, 1999 (FEMA). With increasing liberalization of the Indian economy, generally, there is no need to obtain prior approval of the Government of India for a fresh investment to be made into an Indian company (only procedural filings have to be made with the Reserve Bank of India (RBI), the Indian central bank). In certain cases, however, and also for investment in certain specified sectors, prior approval is required. Further, investment in certain specified sectors is subject to foreign equity caps.

NEW VENTURES
All items/activities for FDI up to 100% by Non-Resident Indians (NRI)/Overseas Corporate Bodies (OCB) fall under the Automatic Route except those that expressly require a prior Government approval.

An investor may, if so preferred, choose to make an application to the FIPB and not avail of the automatic route.

Investment in Public Sector Units as also for units located in Export Oriented Units (EOU)/Export Processing Zones (EPZ)/Special Economic Zones (SEZ)/Electronic Hardware Technology Parks (EHTP)/ Software Technology Parks (STP) would also qualify for the Automatic Route. Investment under the Automatic Route is governed by the notified sectorial policy and equity caps and RBI ensures compliance of the same.

Any change in sectorial policy/sectorial equity cap is notified by the SIA in the Department of Industrial Policy & Promotion.

GOVERNMENT APPROVAL (FIPB ROUTE)
For the following categories, Government approval for FDI/NRI/OCB through the FIPB shall be necessary:

All proposals requiring an Industrial License;
All proposals in which the foreign collaborator has a previous venture/tie-up in India in the same or allied field. However, this condition is not applicable for proposals in the Information Technology industry;
All proposals relating to acquisition of shares in an existing Indian company;
All proposals falling outside notified sectorial policy/caps or under sectors for which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route;

Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittance and issue of shares to the foreign investors. These Companies are required to notify the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors.

FOREIGN INVESTMENT IN THE SMALL SCALE SECTOR
Small Scale Undertakings (SSUs) are defined as units having investments in fixed assets in plant and machinery of not more than INR 10 million. Under the small scale industrial policy, equity holding by other units including foreign equity in a small scale undertaking is permissible up to 24 per cent. However there is no bar on higher equity holding for foreign investment if the unit is willing to give up its small scale status. In case of foreign investment beyond 24 per cent in a small scale unit which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent must be obtained.

A SSU manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license.

FOREIGN INVESTMENT POLICY FOR TRADING ACTIVITIES
Foreign investment for trading is permissible under the automatic route up to 51% foreign equity, and beyond this by the Government through FIPB. For approval through the automatic route, the requirement would be that it is primarily export activities and the undertaking concerned is an export house/trading house/ super trading house/star trading house registered under the provisions of the Export and Import policy in force. However, under the Government route, 100% FDI is permitted in case of trading activities carried out in certain specified sectors such as hi-tech medical and diagnostic items, items for social sector, exports, bulk imports, to name a few.

FDI up to 100% is also permitted for E-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world.

OTHER MODELS OF FOREIGN DIRECT INVESTMENTS
Global Depository Receipts (GDR)/American Deposit Receipts (ADR)/Foreign Currency Convertible Bonds (FCCB)

Indian companies are allowed to raise equity capital in the international market through the issue of GDRs/ADRs/FCCBs. These are not subject to any ceilings on investment. An applicant company seeking Government’s approval in this regard should have a consistent track record for good performance (financial or otherwise) for a minimum period of 3 years.

There is no restriction on the number of GDRs/ADRs/FCCBs to be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under Automatic Route whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the prescribed percentage for automatic approval, or which is implementing a project not contained in project falling under Government Approval route, would need to obtain prior Government approval. Foreign investment through preference shares is also treated as foreign direct investment.

STATE LEVEL PROJECT IMPLEMENTATION
India has evolved a comprehensive organizational structure at the state level for industrial development. In most states the organizations present to assist and promote industries are:

Investment Promotion Agencies (IPA)
State Industrial Development Corporation (SIDC)
Small Scale Industries Development Corporation (SSIDC)
State Financial Corporation (SFC)
District Industries Centre (DIC)
Single Window Service and Escort Service

Several state governments have set up single window services (SWS) and investor escort services (ES). SWS aim at providing the investors a single point of contact to meet all regulatory requirements and get the required approvals. ES is targeted at large and medium sized projects and one individual is assigned from one of the state government agencies to the investor. ES seeks to help the investor in information collection, identification of project sites, arranging feasibility studies, clearance of the project by financial institutions, etc.

INVESTMENT INCENTIVES
The state finances a part of the fixed capital cost of the project. Various states have designated areas as ‘A’, ‘B’ and ‘C’ according to their levels of development. The level of incentive provided by a state varies and is generally larger for investment in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.

POWER TARIFF INCENTIVES
Power tariff incentives are extended by state governments in different ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets.

The actual incentives given vary across states and from industry to industry and are also dependent upon the area in which this unit is set up. Some states specify a list of industries, which do not qualify for some of these incentives.

OTHER INCENTIVES
Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. Such incentives include concessional loans granted by State Financial Corporations, price preference on goods made by Small Scale Industries (SSIs) in purchases made by government and semi government organizations, exemption from the payment of “octroi” (entry tax) for a certain specified period, preferential allotment of land and sheds in industrial areas to SSIs and grant of interest free loans in lieu of deferred sales tax.

A few states have taken the initiative to streamline the investment approval process by introducing common application forms for various approvals. A ‘green channel facility’, has been introduced in some states, where applications required for clearances will be received and processed through various institutional offices on a time bound basis.

POLICY FRAMEWORK
Most FDI activities permitted for foreign direct investment are placed on the automatic route. Under this the applicant company has only to notify the Reserve bank of India within 30 days of inward remittance of funds and again within 30 days of issuing shares to the non-resident investor. Some salient features of the FDI policy are:

Original investment as also the returns on investment are fully repatriable
Payment of fee and royalty to foreign technology provider is permitted including that by a wholly owned subsidiary to its off-shore parent company
Payment of royalty and use of trade marks and brand name without transfer of technology is also permitted
FDI is not permitted in the areas of agriculture and plantations other than the tea sector, real estate business other than development of integrated townships and settlements, retail trading, atomic energy, lottery business, gambling and betting sectors.

FOREIGN INVESTMENT IMPLEMENTATION AUTHORITY (FIIA)
The Government of India has set up the Foreign Investment implementation Authority (FIIA) to facilitate the process of translating FDI approvals into implementation. The agency provides services to foreign investors to help obtain necessary approvals, sort out operational problems and seek intervention of various government agencies to find solution to their problems.

The functions of the FIIA are as under:

Expediting various approvals/permissions;
Fostering partnership between investors and government agencies concerned;
Resolve difference in perceptions;
Enhance overall credibility;
Review policy framework; and
Liaise with the Ministry of External Affairs for keeping India’s diplomatic missions abroad informed about translation of FDI approvals into actual investment and implementation.

The FIIA acts as a single point interface between the investor and Government agencies including Administrative Ministries/State Governments/Regulatory Authorities/Tax Authorities/Company Law Board, etc.

INVESTMENT PROMOTION AND INFRASTRUCTURE DEVELOPMENT (IP & ID) CELL
The functions of the Cell include:

Dissemination of information about investment climate in India;
Investment facilitation;
Developing and distributing multimedia presentation material and other publications;
Organizing Symposiums, Seminars, etc. on investment promotion;
Liaison with State Governments regarding investment promotion;
Documentation of single window systems followed by various States;
Match-making service for investment promotion;
Coordination of progress of infrastructure sectors approved for investment/technology transfer, power, telecom, ports, roads, etc.;
Facilitating Industrial Model Town Projects, and Industrial Parks, etc.;
Promotion of Private Investment including Foreign Investment in the infrastructure sector;
Compilation of sectorial policies, strategies and guidelines of infrastructure sectors, both in India and abroad; and
Facilitating preparation of a perspective plan on infrastructure requirements for industry.

 

 

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