|
Introduction
India has made many great improvements over the last decade in
achieving economic growth and poverty reduction. The most
significant advancement came in 1991 when India removed
governmental obstacles and allowed its doors to open to foreign
investment. Foreign Direct Investment (FDI) has emerged as an
eminent source of economic development and employment generation
for developing countries (including India) as it contributes in
creating a more competitive business environment, enhances
enterprise development, human capital formation and international
trade integration.
This paper is an attempt to throw light on the policies of the
Government of India towards FDI. The paper lists out the options
as well as the corresponding procedures prescribed by the
Government for the foreign entity to invest in India and also
deals with the advantages and drawbacks of those options for FDI.
1.
Setting up as an Indian or a Foreign Company
A foreign company planning to set up business operations in India
has the option of either setting up as an Indian company or as a
foreign company
1) As An Indian Company
A foreign company can commence operations in India by
incorporating a company under the Companies Act, 1956 through
Joint Ventures (JV) or Wholly Owned Subsidiaries.
A) Joint Ventures
Foreign Companies can set up their operations in India by
incorporating a JV Company with an Indian partner and/or with the
general public and operating either as a listed company or as an
unlisted company.
Benefits of JV for a foreign investor:
1. Established distribution/ marketing set up of the Indian
partner
2. Available financial resource of the Indian partners
3. Established contacts of the Indian partners, which help in
smoothening the process of setting up of operations
4. A good strategy for first entering a foreign market, especially
when the commercial risks and country risks are high.
5. It creates more flexibility for adapting the operation to meet
the requirements under different competitive conditions.
6. It incurs lower cost and lower resource commitment for entering
foreign markets.
Drawbacks:
1. An artificial and uneasy atmosphere is created by trying to
combine the resources and the management approaches of two
separate companies with different nationalities, backgrounds,
experiences, abilities in one enterprise to pursue a common goal,
to agree on common means and to work under the same authority,
which creates problems in the day-to-day operation and the future
planning for the JV.
2. There is fear of the leakage of technical secrets since a
strong foreign partner could use this technology for its own
competitive advantage and perhaps create a future detriment to the
parent company.
3. JVs have to share the profit with local partners as well as
reinvest the revenues for future expansion purposes.
B) Wholly Owned Subsidiaries
Foreign companies can also set up wholly owned subsidiary in
sectors where 100% foreign direct investment is permitted under
the FDI policy.
For registration and incorporation of the company, an application
has to be filed with Registrar of Companies (ROC) as well as RBI.
Once a company has been duly registered and incorporated as an
Indian company, it is subject to Indian laws and regulations as
applicable to other domestic Indian companies.
Foreign equity in such Indian companies can be up to 100%
depending on the requirements of the investor, subject to equity
caps in respect of the area of activities under the FDI policy.
Benefits:
1. Maintenance of effective control over its subsidiaries
2. Transaction costs including the cost of negotiating and
transferring information and capability to another firm, cost of
personnel training, cost of losing the opportunity to having
direct sales or getting the full amount of profit, and the threat
of creating a competitor in markets beyond the purview of the
agreement might be avoided.
3. It minimizes the dissemination risk
Drawbacks:
1. Involves highest level of risk and commitment by the foreign
investing companies
2) As A Foreign Company
Foreign Companies can set up their operations in India through
A) Liaison Office/Representative Office: It acts as a channel of
communication between the principal place of business or head
office and entities in India. It can not undertake any commercial
activity directly or indirectly and can not, therefore, earn any
income in India. Its role is limited to collect information about
possible market opportunities and providing information about the
company and its products to prospective Indian customers. It can
promote export/import from/to India and also facilitate
technical/financial collaboration between parent company and
companies in India.
Approval for establishing a liaison office in India is granted by
Reserve Bank of India (RBI).
B) Project Office: Foreign Companies planning to execute specific
projects in India can set up temporary project/site offices in
India. RBI has now granted general permission to foreign entities
to establish Project Offices subject to specified conditions. Such
offices can not undertake or carry on any activity other than the
activity relating and incidental to execution of the project.
Project Offices may remit outside India the surplus of the project
on its completion, general permission for which has been granted
by the RBI.
C) Branch Office: Foreign companies engaged in manufacturing and
trading activities abroad are allowed to set up Branch Offices in
India for the purposes of export/import of goods, rendering
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 company, representing the parent company in India
and acting as buying/selling agents in India, rendering services
in Information Technology and development of software in India,
rendering technical support to the products supplied by the
parent/ group companies, foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing
activities on its own but is permitted to subcontract these to an
Indian manufacturer. Branch Offices established with the approval
of RBI, may remit outside India, profit of the branch, net of
applicable Indian taxes and subject to RBI guidelines
D) Branch Office on
Stand Alone Basis: Such Branch Offices would
be isolated and restricted to the Special Economic zone (SEZ)
alone and no business activity/transaction will be allowed outside
the SEZs in India, which include branches/subsidiaries of its
parent office in India.
The above mentioned offices can undertake any permitted
activities. Companies have to register themselves with Registrar
of Companies (ROC) within 30 days of setting up a place of
business in India.
No approval shall be necessary from RBI for a company to establish
a branch /unit in SEZs to undertake manufacturing and service
activities subject to the following conditions:
a. Such units are functioning in those sectors where 100% FDI is
permitted.
b. Such units comply with part XI of the Companies Act(section 592
to 602)
c. Such units function on a stand alone basis,
d. In the event of winding up of business and for remittance of
winding-up proceeds, the branch shall approach an authorized
dealer in foreign exchange with the document required as per FEMA.
Such offices can undertake activities permitted under the Foreign
Exchange Management (Establishment in India of Branch or Office or
other place of business) Regulations, 2000.
2. Procedures prescribed for FDI
FDI in relation to control or ownership of a company in India
takes one of two routes:
1)
Procedure Under "Automatic Route"
FDI in sector/ activities to the extent permitted under automatic
route does not require any prior approval either by Government of
India or RBI. The investor are only required to notify the
Regional office concerned of RBI and file the required documents
with that office within 30 days of receipt of inward remittances.
The investment should be in accordance with the prescribed
guidelines. This procedure is applicable only for fresh
investments directly in Indian companies and not for purchase of
shares from the existing shareholders.
This route is available to all sectors or activities that do not
have a sector cap i.e. where 100% foreign ownership is
permitted, or for investments that are within a sector cap and
where the Automatic route is allowed.
A) For 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. 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
sectoral policy and equity caps and RBI ensures compliance of the
same. Any change in sectoral policy/sectoral equity cap is
notified by the SIA in the Department of Industrial Policy &
Promotion.
B) For Existing Companies
Automatic route for FDI/NRI/OCB investment is available to the
existing companies with an expansion programme, subject to
following additional requirements that:
# the increase in equity level must result from the expansion of
the equity base of the existing company without acquisition of
existing shares by NRI/OCB/foreign investors;
# the money to be remitted should be in the sector(s) under the
automatic route.
Otherwise, the proposal would need Government approval through the
FIPB supported by a Board Resolution of the existing Indian
company.
For existing companies without an expansion programme, the
additional requirements are that:
# they are engaged in the industries under automatic route
(including additional activities covered under the automatic route
regardless of whether the original activities were undertaken with
Government approval or by accessing the automatic route);
# the increase in equity level must be from expansion of the
equity base; and
# the foreign equity must be in foreign currency.
2)
Procedure Under "Government Approval"
FDI in activities not covered under the automatic route requires
prior Government Approval and are considered by the Foreign
Investment Promotion Board (FIPB). Approvals of composite
proposals involving foreign investment/ foreign technical
collaboration are also granted on the recommendation of the FIPB.
Application of all FDI cases, except Non-Resident Indian (NRI)
investments and 100% Export Oriented Units (EOUs), should be
submitted to the FIPB Units, Department of Economic Affairs (DEA),
Ministry of Finance. Applications for NRI and 100% EOU cases
should be presented to SIA in Department of Industrial Policy and
Promotion. Application can also be submitted with Indian Missions
abroad who forward them to the Department of Economic Affairs for
further processing.
A) Regulation and procedures
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.
B) Government approval (FIPB route)
For the following categories, Government approval for FDI/NRI/OCB
through the FIPB shall be necessary:
# proposals requiring an Industrial License.
# 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.
# proposals relating to acquisition of shares in an existing
Indian company.
# proposals falling outside notified sectoral 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.
3. FDI 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.
4. Other Modes of Foreign Direct Investments
1. 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.
2. Minority stakes in host-country firms, for example,
through the direct purchase of shares on the local stock exchange.
These investments are often referred to as passive or portfolio
investments, because the investors do not assume control of the
firm's operations and may have very little input into how the firm
is managed. Minority stakes in foreign firms are often obtained
through privatizations of state-owned enterprises and debt-equity
swaps of both private and state-owned firms.
3. Licensing agreements with host-country firms. The MNC may
transfer the rights to use a specific technology to a local firm,
which would be responsible for production and marketing in the
local market. The local firm would pay the MNC for the right to
use its technology. This type of arrangement offers the MNC a
low-risk way of entering a foreign market. MNCs sometimes acquire
shares of local firms with which they enter into licensing
agreements.
5. Investment in a Firm or a Proprietary Concern By NRIs
A Non-Resident Indian or a Person of Indian Origin resident
outside India may invest by way of contribution to the capital of
a firm or a proprietary concern in India on a non-repatriation
basis provided,
i) Amount is invested by inward remittance or out of NRE/FCNR/NRO
account maintained with AD
ii) The firm or proprietary concern is not engaged in any
agricultural/plantation or real estate business i.e. dealing in
land and immovable property with a view to earning profit or
earning income there from.
iii) Amount invested shall not be eligible for repatriation
outside India.
NRIs/PIOs may invest in sole proprietorship concerns/ partnership
firms with repatriation benefits with the approval of Department
of Economic Affairs, Government of India/ RBI.
6. List of Sectors where FDI is restricted
Sectors where FDI is not permitted are restricted to Railways,
Atomic Energy and Atomic Minerals, Postal Service, Gambling and
Betting, Lottery and basic Agriculture or plantations activities
or Agriculture (excluding Floriculture, Horticulture, Development
of Seeds, Animal Husbandry, Pisiculture and Cultivation of
Vegetables, Mushrooms etc. under controlled conditions and
services related to agro and allied sectors) and Plantations
(other than Tea plantations).
7. Sectors which attract Ceiling on Foreign Ownership Sector
Telecom, Coal and lignite, Mining, Private sector banking,
Insurance, Domestic airlines, Petroleum (other than refining),
Refining, Investing companies/ Services sector, Atomic minerals,
Defence industry sector, Broadcasting, Setting up hardware,
facilities such as uplinking, HUB, etc., Cable network,
Direct-to-Home, Terrestrial Broadcasting FM, Small scale
industries (SSI) sector, Satellites, Tea sector, Print Media.
8. Taxation in India
Foreign nationals working in India are generally taxed only on
their Indian income. Income received from sources outside India is
not taxable unless it is received in India. The Indian tax laws
provide for exemption of tax on certain kinds of income earned for
services rendered in India. Further, foreign nationals have the
option of being taxed under the tax treaties that India may have
signed with their country of residence.
Remuneration for work done in India is taxable irrespective of the
place of receipt. Remuneration includes salaries and wages,
pensions, fees, commissions, profits in lieu of or in addition to
salary, advance salary and perquisites. Taxable payments include
all allowances and tax equalisation payments unless specifically
excluded. The stock options granted by the employer are taxable as
capital gains at the time of sale of shares acquired due to
exercise of options.
Conclusion
Prior to 1991, the Indian government policies on FDI were stricter
as compared to most industrialized economies and the government
exercised a high degree of control over industrial activity by
regulating and promoting much of the economic activity.
The Industrial Policy of 1991 greatly enhanced the business
climate in India, led to various trade reforms in Indian economy
and provided clarity to foreign businesses looking to invest in
India.
The Government of India has introduced a liberal, transparent and
investor-friendly FDI policy and it regularly reviews the policies
and guidelines and makes necessary changes towards FDI in order to
make foreign investment beneficial both for the Indian economy as
well as for foreign investors.
The above mentioned options and the procedures prescribed by the
Government of India have enhanced the FDI in India which has
ultimately facilitated the growth of economy of India.
|
Options
Available For A Foreign Entity To Invest In India
More
Articles:
The
author can be reached at:
loreesonchhatra@legalserviceindia.com /
