An Overview on Doing Business in India

by Poorvi Chothani, Esq. LawQuest www.lawquestinternational.com

November 22, 2010

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An Overview on Doing Business in India

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 2010 stood at US$ 134,642 million Financial and non-financial 21% of the total FDI with FDI worth US$ 4.4 billion during April-March 2009-10 Construction activities US$ 2.9 billion Housing and real estate 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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An Overview on Doing Business in India

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 television channels. Rupert Murdoch-controlled Star India holdings' investment of US$ 70 million in Tata Sky. AIP Power investment of US$ 24.4 million in joint ventures. Source : India Brand Equity Foundation www.ibef.org

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An Overview on Doing Business in India

Foreign Investments in India

FOREIGN INVESTMENTS

Foreign Direct Investments

Foreign Portfolio Investments

Automatic Route

Government Route

FIIs SEBI regd. Foreign Venture Capital Investments

NRIs, PIO

SEBI regd. Persons Resident Outside India

Other Investments (G-Sec, NCDs, etc)

Investments on Repatriable / Non-Repatriable basis

FVCIs

VCF, IVCUs

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An Overview on Doing Business in India

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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An Overview on Doing Business in India

Types of Investors
A Non-Resident Individual resident outside India who is a citizen of India or 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 incorporated or not; Every artificial juridical person, not falling within any of the preceding subclauses, and Any agency, office, or branch owned or controlled by such person.

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An Overview on Doing Business in India

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 or partially 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 shares can be issued without RBI approval but in accordance with Companies Act, 1956/SEBI(ICDR) Regulations, 2009, etc.

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An Overview on Doing Business in India

Permitted Entities for Foreign Direct Investment

Indian Company; Partnership Firm

only permitted for NRIs and PIOs subject to certain limitations; only permitted for NRIs and PIOs subject to certain limitations;

Proprietary concern

Trusts other than VCF are not permitted

DIPP has released a Discussion Paper considering FDI in Limited Liability Partnership Firms

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An Overview on Doing Business in India

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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An Overview on Doing Business in India

Foreign Direct Investments

INVESTING IN INDIA

Automatic Route

Government 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 the Automatic 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 an existing 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 Finance 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 tobacco substitutes; Activities / sectors not opened to private sector investment including Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).

Besides foreign investment in any form, foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also completely prohibited for the Lottery Business and Gambling and Betting 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 be refunded immediately. Shares may be freely transferred subject to sectoral caps and prior RBI permission wherever applicable

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Prior Permission of RBI Required for the Following Transfers

Sale 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 the Securities and Exchange Board of India (SEBI); or Investments by Multinational Financial Institutions like Asian Development 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 less than 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 Information Technology sector or in the mining sector, if the existing joint venture or technology transfer/trade mark agreement of the person to whom the shares are to be issued are also in the Information Technology sector or in the mining sector for same area/mineral.
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Foreign Institutional Investor

The 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 Central Bank; (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 to make 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 Outside India) Regulations, 2000 can invest/trade in Capital of Indian Companies 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 Board of 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 FDI Policy.

FII/sub-accounts may invest in the Capital of the Indian Company either 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 permanently outside India. Other terms with the same meaning are overseas Indian and expatriate Indian. In common usage, this often includes 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 repatriation and non-repatriation upto 5% of paid-up capital and aggregate of 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 of shares. Payments from NRE/FCNR(B) account if purchase of shares and/or debentures on repatriation basis. Payments from NRO account if purchase of shares and/or debentures 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 PIO Registration 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 may also 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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Thank You

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