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Last update: November 2010

India

Investing in India

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India, the largest democracy in the world, with its consistent growth/performance and abundant skilled manpower, provides enormous opportunities for investment, both domestic and foreign. India is the fourth largest economy in terms of Purchase Power Parity and the tenth most industrialized country in the world.

Major initiatives such as industrial decontrol, simplification of investment procedures, enactment of competition law, liberalisation of trade policy, full commitment to safeguarding intellectual property rights, financial sector reforms, liberalisation of exchange regulations etc., have been taken, which provide a liberal, attractive, and investor friendly investment climate.

The Indian economy is among the fastest growing economies in the world, with over 6% GDP growth. India is expected to continue growing at close to 5% till the year 2050.

Government of India is following a set of liberal investment policies to enable global entrepreneurs to harness opportunities. International studies and surveys find India as the top three investment hot spots. The hunger of India for automobiles, telecom services, energy, consumer goods and infrastructure services have created vast investment potential. (Source: India Brand Equity Foundation)

In 2006, UK-India bilateral trade has been growing at the rate of 23% to 24% and in 2006-07, the bilateral trade between the two countries touched USD 10 billion. (Source: High Commission of India)

Liberalisation of the economy continues apace, with trade barriers largely removed and the peak tariff down from 350% in 1991 to 20% in 2005. Privatisation programmes are gradually reducing the still-significant role of the public sector in the production and consumption of goods. (Source: UK Trade and Investment)

In 2006, The UK was India's fourth largest trading partner after the US, China and EAE; UK had achieved the third largest share (9.8%) of inward investment approvals over this time, and the UK was India's second largest market for IT services ($1 billion) (Source: House of Commons)

India's time tested institutions offer foreign investors a transparent environment that guarantees the security of their long-term investments. These include a free and vibrant press, a well-established judiciary, a sophisticated legal and accounting system and a user-friendly intellectual infrastructure. India's dynamic and highly competitive private sector has long been the backbone of its economic activity and offers considerable scope for foreign direct investment, joint ventures and collaborations. (Source: High Commission of India)

 

Industrial Policy

The Government's liberalization and economic reforms programme was initiated in July 1991, under the new Industrial Policy Resolution. The industrial policy reforms have substantially reduced the industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment.
 
Source: Government of India, Ministry of Industry
 
 

Check on Economic Policies

The general economic direction in India is toward liberalisation and globalisation. India's economic policies are designed to attract capital inflows into India on a sustained basis. Policy initiatives adopted in recent years include:

  • Automatic approval for majority foreign equity participation up to 74% in certain key areas, and up to 51% or 50% in several others.
  • Up to 100% foreign equity permitted in many industries.
  • Free repatriation of profits and capital investment.
  • It is not necessary for foreign investors to have a local partner.


Incentives to investors

Investors setting up units to manufacture goods for export can set them up as Export Promotion Zones (EPZs), or 100% Export Oriented Units (EOUs) outside EPZs. 100% foreign equity is welcome in both. Export earnings are exempt from income tax.

 

Export Promotion Zones

The Export Promotion Zones (EPZs) are designed to provide an internationally competitive duty-free environment at low cost for export production. Each zone provides basic infrastructure and facilities like developed land, standard-design factory buildings, roads, power, water supply and drainage, and customs clearance facilities.
 
 
Export Oriented Units

Export Oriented Units (EOUs) offer a wider option in project location with reference to sourcing of raw materials, port of export, availability of technological skills, presence of an industrial base and the need for a larger area of land.
 
Source: India Finance and Investment Guide
 
 

Foreign Direct Investment Policy:

The Foreign Direct Investment (FDI) has been progressively liberalised and in June 2000, India revised the foreign investment guidelines substantially, retaining a very small list of areas that require prior approval. Most of the restrictions on foreign investment have been removed and the procedures simplified, with a substantially reduction of industrial licensing requirements.

With limited exceptions (foreign investment is not permitted in gambling and betting; lottery business; agriculture and plantations; print media; broadcasting; postal services and retailing), foreigners can invest directly in India.

Foreign Direct Investment up to 100 % is allowed under the automatic route in all sectors except some.

Prior approval of the government on the recommendations of the Foreign Investment Promotion Board (FIPB) is required for:

  • Activities that require an industrial licence
  • Industries reserved for the public sector
  • Manufacture of items reserved for the small scale sector or units in which foreign investment is more than 24% in the equity capital
  • Proposals in which the foreign collaborator has an existing financial technical relation in India in the same field
  • Proposals for acquisition of shares in an existing India company in favour of a foreign investor.

Prior approval of the government is compulsory for:

  • Banking and non banking financial companies (NBFCs)
  • Civil aviation
  • Telecom services
  • Petroleum explorations
  • Venture capital funds
  • Trading
  • Defence production
  • Atomic energy; bulk drugs and intermediates; mining
  • Advertising and films.

Source: Department of Industrial Policy & Promotion (India's Ministry of Commerce & Industry)

 

Foreign Direct Investment Policy and Procedures

This report is an overview of Foreign Direct Investment; Industrial Licensing; Foreign technology Agreements; Entry Options for Foreign Investors; Exchange Control Regulations; Portfolio Investment Scheme; Incorporation of Company; Other Schemes & Incentives; Taxation in India and Investment Guidance and Facilitation.

Source: Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India

Click here to see the full report

 

 Foreign Investment Promotion Board (FIPB)

Foreign Investment Promotion Board (FIPB) of the Government of India is constituted mainly to promote inflows of Foreign Direct Investment 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.

Source: Ministry of Finance, Foreign Investment Promotion Board

 

Foreign Investment Implementation Authority (FIIA)

The government has set up a Foreign Investment Implementation Authority (FIIA) in the Ministry of Commerce and Industry, which facilitates quick transaction of Foreign Direct Investment approvals into implementations, provides a proactive one-stop aftercare service to foreign investors by helping them obtain the necessary approvals and sort out operational problems and meet with various Government Agencies to find solutions to problems and maximising opportunities through a partnership approach.

Source: Ministry of Commerce & Industry, Department of Industrial Policy & Promotion

For further information, please read the Manual on Industrial Policy and Procedures and visit our Export Opportunities page.

 

Entry Into India

Foreign nationals (except citizens of Nepal and Bhutan) entering into India are required to carry a valid passport/travel documents and a valid visa. Visas for the purpose of tourism, entry, transit, conferences, business and employment in India re issued to foreign nationals by Indian Embassies and Consulates abroad.

Business visas may be issued for upto 5 years, with multiple entry provision. While a business visa is issued by an Indian Embassy abroad, it can be renewed/extended within India if the applicant so desires. Foreign nationals who wish to work in India must obtain a Residential Permit from the Foreigners Regional Registration Office (FRRO) that are located in all major cities, or, in the case of smaller cities, from the principal police station.

A foreign national, holding a visa (other than a tourist visa) valid for a period exceeding 180 days, is required to be registered with the FRRO within 15 days of arrival in India. Change of purpose or type of visa is a not permitted. Further, visa other than employment, student and entry are normally not considered for extension.

The transfer of residence scheme applies to foreign nationals visiting India for long durations. Under this scheme, foreign nationals can import certain personal effects without paying customs duty. A bank guarantee has to be provided for this purpose, which is returnable after the individual has stayed in India for a year. To avail of this scheme, the goods have to be shipped within two months before the entry into India or one month after entry into India. The goods brought into India under the transfer of residence scheme have to be owned by the importer or his family for at least one year.

For further information, please go to our India useful info/visa's section

 

Setting up of a company

The principal forms of business organisation in India are:

  • Companies - both public and private
  • Partnerships
  • Sole proprietorships

Companies incorporated in India and branches of foreign corporations are regulated by the Companies Act, 1956 (the Act). The Act, which has been enacted to oversee the functioning of companies in India, draws heavily from the United Kingdom's Companies Acts and although similar, is more comprehensive. The Registrar of Companies (ROC) and the Company Law Board (CLB), both working under the Department of Company Affairs, ensure compliance with the Act.

For further information, please go to India products to market/setting up a company's section

 

Types of Companies

A company can be a public or a private company and could have limited or unlimited liability. A company can be limited by shares or by guarantee. In the former, the personal liability of members is limited to the amount unpaid on their shares while in the latter, the personal liability is limited by a pre-decided nominated amount. For a company with unlimited liability, the liability of its members is unlimited.

Apart from statutory government owned concerns, the most prevalent form of large business enterprises is a company incorporated with limited liability. Companies limited by guarantee and unlimited companies are relatively uncommon.

A private company incorporated under the Act has the following characteristics:

  • The right to transfer shares is restricted.
  • The maximum number of its shareholders is limited to 50 (excluding employees).
  • No offer can be made to the public to subscribe to its shares and debentures.
  • Private companies are relatively less regulated than public companies as they deal with the relatively smaller amounts of public money. A private company is deemed to be a public company in the following situations:
  • When 25 percent or more of the private company's paid-up capital is held by one or more public company.
  • The private company holds 25 percent or more of the paid-up share capital of a public company.
  • The private company accepts or renews deposits from the public.
  • The private company's average annual turnover exceeds Rs. 250 million during a period of 3 consecutive financial years.

A public company is defined as one which is not a private company. In other words, a public company is one on which the above restrictions do not apply. Regarding the necessary procedures to be followed for registering the company, a flow chart presents the summary of the steps involved in formation of a company with Registrar of Companies.

Foreign investors can enter into the business in India either as a foreign company in the form of a liaison office/representative office, a project office and a branch office by registering themselves with Registrar of Companies (ROC), New Delhi within 30 days of setting up a place of business in India or as an Indian company in the form of a Joint Venture and wholly owned subsidiary. For opening of the foreign company specific approval of Reserve Bank of India is also required.

 

 
Foreign Exchange Managment Act

The Parliament has enacted the Foreign Exchange Management Act, 1999 to replace the Foreign Exchange Regulation Act, 1973. This Act came into force on the 1st day of June 2000. The object of the Act is to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market in India.

This Act extends to the whole of India and will also apply to all branches, offices and agencies outside India owned or controlled by a person resident in India. It will also be applicable to any contravention committed outside India by any person to whom this Act is applicable.

Approvals/clearances required for new projects

For starting a new project, a number of approvals/clearances are required from different authorities such as Pollution Control Board, Chief Inspector of Factories, Electricity Board, Municipal Corporations, etc.

 

Taxation in India

Indian tax laws distinguish between domestic and foreign companies in administering tax rates. Indian Companies are taxed on their worldwide income, while foreign companies are taxed only on the income that arises from Indian operations.

Foreign companies (companies registered and located outside India) not having a permanent establishment in India are taxed under the withholding provisions of bilateral Double Taxation Avoidance Treaties, in respect of royalties and fees for technical services, interest on foreign currency loans, dividend and income from specified on mutual funds, remitted from India.

India has signed bilateral treaties with several countries, providing tax credit for the foreign tax paid on overseas income. Credit is generally given for those foreign taxes withheld or paid that correspond to Indian income tax. The tax credit is limited to the lower of the tax paid abroad and the Indian tax on the foreign company.

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.

Source: Asia Invest - EuropeAid

 

Guide to doing business in India - Tax and Regulatory Aspects

 

This guide from HSBC (In partnership with PWC) will give you a basic understanding of the structure in conducting business within the India economic environment.

  

Labour Rules/Regulations

Under the Constitution of India, Labour is a subject in the Concurrent List where both the Central & State Governments are competent to enact legislation subject to certain matters being reserved for the Centre. Some of the important Labour Acts, which are applicable for carrying out business in India, are:

  • Workmen's Compensation Act, 1923
  • Employees' State Insurance Act, 1948
  • Factories Act, 1948
  • Employees' Provident Fund and Miscellaneous Provisions Act, 1952
  • Maternity Benefit Act, 1961
  • Payment of Bonus Act 1965
  • Contract Labour [Regulation & Abolition] Act 1970
  • Payment of Gratuity Act, 1972
  • Mines Act, 1972
  • Dock Workers (Safety, Health & Welfare) Act, 1986
  • Minimum Wages Act

Source: International Labour Organization

For further information, please go to our India product to market/employment law's section

 

Intellectual Property Rights

India is a signatory to the agreement concluding the Uruguay Round of GATT negotiations and establishing the World Trade Organisation (WTO). This Agreement, inter-alia, contains an Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which came into force from 1st January 1995.

It lays down minimum standards for protection and enforcement of Intellectual Property Rights in member countries, which are required to promote effective and adequate protection of Intellectual Property Rights with a view to reducing distortions and impediments to international trade. The obligations under the TRIPS Agreement relate to provision of minimum standards of protection within the member country's legal systems and practices.

For further information, please go to our India useful info/Intellectual Property Rights' section

 

Guide to doing business in India - Tax and regulatory aspects

This guide from SKP Dalal, updated in March 2007, will give you all the information you need if you want to do Business in India: overview of India; Foreign Investment; forms of businesses; corporate laws; taxation in India; Export Incentive Schemes; employee regulations, etc..

FOR THE FULL REPORT PLEASE CLICK HERE

 

Last update: November 2010

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