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June - July 2007
The ‘Jai Bharat’ Way on how to invest in India’s Businesses
Foreign Direct Investment (FDI) in Indian Businesses has now become a smooth affair: entry-strategies for Foreign Investors are governed by a clear-cut policy and well-laid out procedure, administered ably by the Secretariat for Industrial-Assistance (SIA) under the Department of Industrial Policy and Promotion of the Government of India. Gone are the days of running from pillar-to-post or the tales of agonizing waiting, reminding, reviews, appeals or of the abandonment of viable-proposals, on whatever account. It is the ‘Jai Bharat’ way to make your investments NOW… almost like the ‘open-sesame’ fashion… We shall, without much ado, proceed to examine the ways and manner of making one’s investments in India’s Businesses from whichever part of the world. Firstly, any company set up with FDI has to be necessarily incorporated under the Companies Act, 1956 with the appropriate Registrar of Companies in India: all Indian operations would be conducted through the aegis of this Company.
Secondly, a foreign company incorporated under the Indian Companies Act is treated at par with any domestic Indian Company, subject to the scope of approval and subject to all privileges and powers as well as liabilities applicable under prevalent laws in India.
Thirdly, such foreign companies can make investments or operate their business in any of the following ways, viz; by opening a Liaison or Representative-office in India, by establishing a project-office in India, by opening a Branch-office in India, by setting up a 100% wholly-owned subsidiary-company in India and by starting a Joint-Venture company in India.
The most attractive route is the ‘automatic-approval’ through the Reserve Bank of India (RBI) which route is available for all items/activities (excepting those specifically prohibited). This facilitates a direct investment activity, dispensing with any pre-entry level governance/permissions from the Government. The Company’s concerned is only required to report to the RBI within 30-days of the receipt of such a foreign equity/allotment of shares.
RBI accords automatic approval within a period of two weeks (provided certain parameters are met) to all proposals involving: Foreign-equity up to 50% in 3 categories relating to mining-activities (List 2), Foreign-equity up to 51% in 48 specified industries (List 3), Foreign-equity up to 74% in 9 categories (List 4). (List 4 includes items also listed in List 3, 74% participation shall apply).
The Lists are comprehensive and cover most industries of interest to foreign companies. Investments in high-priority industries or for trading companies primarily engaged in exporting are given almost instant approval by the RBI. Further, RBI now permits 100% foreign investment in the construction of roads/bridges.
The other route is through the Foreign Investment Promotion Board (FIPB). Thus, the FIPB approval would be required for all other proposals which are not eligible for Automatic-Approval. So, applications involving Non-resident Indians (NRIs) or Overseas Corporate Bodies (OCBs) and 100% EOU (Export-oriented Units) investment must be submitted to the SIA whereas all other type of investment-proposals would have to be submitted to the Department of Economic Affairs in the Ministry of Finance, Government of India.
In order to impart greater transparency to the approval-process, guidelines are in place and these govern the consideration of all proposals received by the FIPB.
FIPB approves all such cases where the parameters of automatic approval are not met. The normal processing-time is 4-6 weeks. Its approach is liberal for all sectors and all types of proposals and rejections are very few.
(It is not necessary for Foreign Investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity-capital of the company; the portion of the equity not proposed to be held by the foreign investor can be offered to the public).
Trading is permitted under the automatic-route with FDI up to 51% provided it is primarily export-activities and the undertaking is an export-house/trading-house/star trading house. But, a 100% FDI is permitted in case of trading companies for the following activities, viz;
2. Bulk-imports with export/ex-bonded warehouse-sales.
3. Cash and carry wholesale-trading.
4. Other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third-party use or onward transfer/distribution/sales. (No prior-approval is required for wholesale trading-activity).
FDI is permitted under the following forms of investments made, viz; through financial-collaborations, through joint-ventures & technical-collaborations, through capital markets (via Euro-Issues) and through private-placements or preferential allotments. FDI is however forbidden in the following industrial-sectors: Arms and Ammunition, Atomic energy, Railway, Coal and lignite, Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper and zinc.
Activities such as opening an office in India, incorporates assessing of the commercial opportunity for self, planning business, obtaining legal, financial, official, environmental and tax advice, as may be required, choosing the legal and the capital-structure, selecting the location, obtaining personnel, developing a product-marketing strategy and much more.
Indian Companies are now allowed to raise equity-capital in the International-market through the issue of Global Depository Receipts (GDRs). GDRs are designated in U.S. Dollars and are not subject to any ceilings on Investment. An applicant-company seeking approval from the Government should possess a consistent track-record for good-performance for a minimum period of 3 years.
(This condition will be relaxed for infrastructure projects such as power generation, telecommunication, petroleum exploration and refining, ports, airports and roads).
The proceeds of the GDRs can be used for financing capital goods, imports, capital expenditure including domestic purchase or installation of plant, equipment and building and investment in software development, prepayment or scheduled repayment of earlier borrowings and towards equity-investment in Joint-Ventures/Wholly-owned Subsidiary in India.
However, investment in stock markets and real estate will not be permitted. Companies may retain the proceeds abroad or may remit funds into India in anticipation of the use of funds for approved end-uses. Any investment from a foreign firm into India requires the prior approval of the Government of India).
There is no restriction on the number of Euro-Issues to be floated by a company or a group of companies in the financial-year. A major policy-change introduced to encourage foreign direct and foreign institutional investment has come from the SEBI (Securities and Exchange Board of India), which has laid out guidelines to facilitate the operations of foreign brokers in India on behalf of registered Foreign Institutional Investors (FIIs): these brokers can now open foreign currency denominated or rupee accounts for crediting inward-remittances, commissions and brokerage-fees (certainly spreading smiles across many such business-folks keen on making their fortunes on Indian Bourses).
Yet another, significant move is that a 5-year tax-holiday is extended to enterprises engaged in development of infra-structural facilities. Thus, even without having a registered-office in India, foreign companies are allowed to start multi-model transport services in India. Discriminatory-bias against foreign firms is a thing of the past and a sea-change has come about in the policies of the Government of India. Key features include the lifting of the ban against the use of foreign brand-names and trademarks; reduction of the corporate-tax for foreign-companies as also lowering of long-term capital-gains rate. And remarkable indeed is the fact that as of now, there are no investment disputes over expropriation or nationalization. Even otherwise, Indian Courts certainly provide adequate safeguards for the enforcement of Property and Contractual Rights! Indian Income-Tax Act exempts the export-earnings from corporate-income tax for both Indian and Foreign firms.