An Overview of Doing Business in India - Nov 2010

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LawQuest 2010. All Rights are Reserved. 1An Overview on Doing Business in India

An Overview onDoing Business in Indiaby Poorvi Chothani, Esq.

LawQuestwww.lawquestinternational.com

November 22, 2010
http://www.lawquestinternational.com/http://www.lawquestinternational.com/


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Investment Scenario for FDI Inflows into India

FDI equity inflows in April 2010 - US$ 2,214 million;

The cumulative amount of FDI equity inflows from August 1991 to April 2010stood at US$ 134,642 million

Financial and non-financial 21% of the total FDI with FDI worth US$ 4.4 billionduring April-March 2009-10

Construction activities US$ 2.9 billion

Housing and realestate FDI worth US$ 2.8 billion

Telecommunications US$ 2.5 billion during the financial year 2009-10 The automobile industry US$ 1.2 billion

Power US$ 1.4 billion during April-March 2009-10

FDI inflows during the financial year 2009-10 according to data released by DIPP:

Mauritius US$ 10.4 billion comprising 43 per cent of the total FDI equity

inflows into the country.Singapore US$ 2.4 billion

The United States US$ 2 billion

Source : India Brand Equity Foundation www.ibef.com


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Investment Scenario for FDI Inflows into India

Investments in India in April 2010 (data released by DIPP ) in US$ from:Mauritius US$ 568 million

Singapore US$ 434 million

Japan US$ 327 million according to latest

In May 2010, 24 foreign investment proposals, worth US$ 304.7 million.These include:Asianet's US$ 91.7 million investment non-news and current affairs televisionchannels.

Rupert Murdoch-controlled Star India holdings' investment of US$ 70 million inTata Sky.

AIP Power investment of US$ 24.4 million in joint ventures.

Source : India Brand Equity Foundationwww.ibef.org
http://www.ibef.org/http://www.ibef.org/


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ForeignInvestmentsinIndia

FOREIGN

INVESTMENTS

Foreign Venture Capital

Investments

Government

Route

Automatic

Route

Foreign Portfolio

Investments

Foreign Direct

Investments

Other Investments

(G-Sec, NCDs, etc)

Investments on

Repatriable /Non-Repatriable basis

VCF,

IVCUs

SEBI regd.

FVCIs

NRIs,

PIO

FIIs

SEBI regd.

Persons Resident

Outside India


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Entry Options

Direct Investments;

Indirect Investments;

Liaison Office/Representative Office;

Branch Office;

Project Office; Company;

Agent;

Distributor;

Franchise;

Acquisition of Shares under Scheme of Merger/Demerger/Amalgamation


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Types of Investors

A Non-Resident Individual resident outside India who is a citizen of Indiaor is a person of Indian origin;

Foreign Institutional Investor;

Foreign Venture Capital Investor;

An Individual;

A Hindu Undivided Family; A Company;

A Firm;

An Association of Persons or a Body of Individuals whether incorporatedor not;

Every artificial juridical person, not falling within any of the preceding sub-clauses, and

Any agency, office, or branch owned or controlled by such person.


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Types of Instruments

Indian Companies can issue: Equity shares;

Fully, compulsorily & mandatorily convertible Debentures;

Fully, compulsorily & mandatorily convertible Preference shares;

ADRs / GDRs; FCCBs.

Preference Shares/Debentures i.e. Non-convertible, optionally convertible orpartially convertible for issue of which funds have been received on or after May 1,

2007 are treated as Debt. OCBs are derecognised as class of investors w.e.f. September 16, 2003 but can

invest with prior approval of RBI through Government Route. Bonus/Rights sharescan be issued without RBI approval but in accordance with Companies Act,1956/SEBI(ICDR) Regulations, 2009, etc.


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Permitted Entities for Foreign Direct Investment

Indian Company;

Partnership Firm only permitted for NRIs and PIOssubject to certain limitations;

Proprietary concern only permitted for NRIs andPIOs subject to certain limitations;

Trusts other than VCF are not permitted

DIPP has released a Discussion Paper considering FDI in LimitedLiability Partnership Firms


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Company Structure in India

Private Limited Company Minimum 2 shareholders and 2 directors

Minimum Capital US$ 2500

Public Company

Minimum 7 members and 3 directors

Minimum Capital US$ 12500

Indian director and shareholder not mandatory


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Foreign Direct Investments

INVESTING

IN INDIA

Government

Route

Automatic

Route

General Rule

Inform RBI within 30 days from the date of

Receipt of Funds / Issue of shares

Pricing: FEMA Regulations Unlisted Discounted free Cash Flow

Valuation

Listed SEBI Guidelines

By Exception

Approval of Foreign Investment

Promotion Board is required

(Decision generally within 4-6 weeks)


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The Entry Process: Automatic Route

All items/activities for FDI investment up to 100% fall under theAutomatic Route except:

In Industrial and/or Banking ventures.

Where a foreign collaborator has a previous venture or

tie up in India. Where an Indian company already has foreign investors.

All proposals relating to acquisition of existing shares in anexisting Indian Company by a foreign investor.

Where sectoral policy or caps apply Where it is prohibited (list provided later in the

presentation)


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The Entry Process: Government Route

FIPB Approval / Ministry of F inance or SIA / DIPP

For all activities, which are not covered under the Automatic

Route and have investment exceeding sectoral caps;

E.g.: Defence, Mining, Air Transport, Broadcasting, Infrastructure, Petroleum, Telecom

Composite approvals involving foreign investment / foreign

technical collaboration;

Downstream Investment.


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Prohibition on Investment in India

Retail Trading (except single brand product retailing);

Lottery Business including Government /private lottery, online lotteries, etc.;

Gambling and Betting including casinos etc.;

Business of chit fund;

Nidhi Company;

Trading in Transferable Development Rights (TDRs); Real Estate Business or Construction of Farm Houses;

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobaccosubstitutes;

Activities / sectors not opened to private sector investment including Atomic Energyand Railway Transport (other than Mass Rapid Transport Systems).

Besides foreign investment in any form, foreign technology collaboration in anyform including licensing for franchise, trademark, brand name, managementcontract is also completely prohibited for the Lottery Business and Gambling andBetting activities.


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Issue and Transfer of Shares

Capital instruments be issued within 180 days from

date of receipt of inward remittance.

If shares are not issued as required, funds to berefunded immediately.

Shares may be freely transferred subject to sectoralcaps and prior RBI permission wherever applicable


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Prior Permission of RBI Required for the

Following TransfersSale of shares from Residents to Non-Residents:

Company engaged in Financial Services Sector;

Transactions attracting provisions of SEBI (Substantial

Acquisition of Shares & Takeovers) Regulations, 1997;

Activity outside Automatic Route;

Transfer at a price falling outside the pricing guidelines

specified by RBI;

Non-Resident acquirer proposes deferment of payment of

amount of consideration.


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Investments Exempt from Government Approval

Investments to be made by a Venture Capital Fund registered with theSecurities and Exchange Board of India (SEBI); or

Investments by Multinational Financial Institutions like AsianDevelopment Bank (ADB), International Finance Corporation (IFC),Commonwealth Finance Corporation (CDC), Deutsche Entwicklungs

Gescelschaft (DEG) etc.; or

Where the existing joint venture, investment by either of the parties is lessthan 3 per cent; or

Where the existing joint venture / collaboration is defunct or sick; or

For issue of shares of an Indian company engaged in InformationTechnology sector or in the mining sector, if the existing joint venture ortechnology transfer/trade mark agreement of the person to whom the sharesare to be issued are also in the Information Technology sector or in themining sector forsame area/mineral.


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Foreign Institutional InvestorThe following institution (artificial juridical person) established or incorporated

outside India, may be Registered as a FII under the SEBI (FII) Regulations, 1995:

(i) a pension fund, mutual fund, investment trust, insurance company, reinsurance

company;

(ii) an International or Multilateral Organisation or an agency thereof;

(iii)a Foreign Governmental Agency, Sovereign Wealth Fund or a Foreign CentralBank;

(iv)an asset management company, investment manager or advisor, bank or

institutional portfolio manager, established or incorporated outside India and

proposing to make investments in India on behalf of broad based funds and its

proprietary funds, if any;

(v) a trustee of a trust established outside India and proposing to make investments

in India on behalf of broad based funds (atleast 20 investors/holds >49% of

shares or units in the fund) and its proprietary funds, if any;

(vi)university fund, endowments, foundations or charitable trusts or charitable

societies.


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Foreign Venture Capital Investments

Investor established or incorporated outside India,proposes tomake investment in India and Registered under the SEBI(FVCI) Regulations, 2000.

Only Registered FII/NRI as per Schedule II and III of FEM(Transfer or Issue of Security by a Person Resident OutsideIndia) Regulations, 2000 can invest/trade in Capital of IndianCompanies in the Indian Stock Exchanges directly i.e. through

brokers, like a Person Resident in India.


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Venture Capital Fund

VCF means a Fund:

established in the form of a Trust, a company including a body

corporate and registered under Securities and Exchange Boardof India (Venture Capital Fund) Regulations, 1996, which

(i) has a dedicated pool of capital;

(ii) raised in the manner specified under the Regulations; and

(iii) invests in accordance with the Regulations


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Indian Venture Capital Undertaking

IVCU means an Indian Company:

whose shares are not listed in a recognised Stock Exchange in India;

which is engaged in the business of providing services, production

or manufacture of articles or things, but does not include such

activities or sectors which are specified in the negative list by the

SEBI, with approval of Central Government, by notification in the

Official Gazette in this behalf.


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Foreign Portfolio Investments

FVCI may

contribute up to 100% of the capital of a VCF/IVCU

set up a domestic asset management company to manage the fund such investments are allowed under the automatic route subject to SEBI &

RBI regulations and FDI Policy.

allowed to invest as non-resident entities in other companies subject to FDIPolicy.

FII/sub-accounts may invest in the Capital of the Indian Companyeither under the FDI Scheme/Policy or the Portfolio Investment

Scheme with a 10% individual limit and 24% aggregate limit. Allowed to trade in all exchange traded derivative contracts approved by RBI/SEBI


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Non Resident Indian (NRI)

is an Indian citizen who has migrated to another

country,

is a person of Indian origin who is born outside India, or

is a person of Indian origin who resides permanentlyoutside India.

Other terms with the same meaning are overseas Indian

and expatriate Indian. In common usage, this oftenincludes Indian-born individuals (and also people of other

nations with Indian ancestry) who have taken the

citizenship of other countries.


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Investments by NRIs

Invest in shares of listed companies under PIS on repatriationand non-repatriation upto 5% of paid-up capital and aggregateof all NRIs cannot exceed 10% but can be increased to 24%with special permission in the company.

Short selling is not permitted and has to take delivery ofshares.

Payments from NRE/FCNR(B) account if purchase of sharesand/or debentures on repatriation basis.

Payments from NRO account if purchase of shares and/ordebentures on non-repatriation basis.

Allowed to invest in Exchange Traded Derivative Contracts.


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Critical Issues in Foreign Investments

Shareholders Agreements

Liability of Board of Directors

Employment Laws Disputes Resolution

IP Protection

Tax


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Persons of Indian Origin (PIO)

Persons of Indian Origin (up to the fourth generation) qualify for PIORegistration

Visa free entry and the right to residence and employment

Registration card is valid for fifteen years

Renewed for additional 15-year periods

Eligible spouse of an Indian national or person of Indian origin mayalso qualify for a PIO card.

FRRO registration required in some cases


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Overseas Citizenship of India (OCI)

Eligibility - an individual* who was eligible to become a citizen of India on 26.01.1950; or

was a citizen of India on or at any time after 26.01.1950; or

belonged to a territory that became part of India after 15.08.1947;or

is a child or grand child of a person described above.

Life time validity

Permits one to live and work in India

No travel restrictions

No FRRO registration required

* Individuals who have ever been citizens of Pakistan or Bangladesh are not

eligible for OCI.


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LawQuests Areas of Practice

Global Business Migration

Employment Law

Foreign Direct Investment

Foreign Indirect Investment

Company and Commercial

Transactions

Real Estate Private Clients

Intellectual Property

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An Overview of Doing Business in India - Nov 2010

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