Posted: Wed Apr 13, 2005 4:37 pm Post subject: DOING BUSINESS IN INDIA (Company Law, Tax, etc...)
SECTION I - BUSINESS AND INVESTMENT CLIMATE
A. ECONOMIC FACTORS
A foreign investor who wishes to undertake business in India will find tremendous opportunities. The industrial policy offers a great deal of freedom to business houses and entrepreneurs to make their own investment decisions.
India has gone through more than a decade of economic reforms. Continuity in the economic liberalisation process and the political consensus that economic change is imperative could place India on an industrial growth path that few countries in the world enjoy. Review of the key economic indicators for 2001-02 is given below.
The rate of growth in GDP is expected to be 5.4% during 2001-02 compared to 4% during 2000-01.
Industrial production is expected to have a lower growth rate of 2.3% compared to a growth rate of 5.0% during 2000-01.
Foreign Exchange assets were Rs. 2262 billion (USD 46,561 million) at the end of January 2002 as compared to Rs. 1845 billion (USD 39554 million) at the end of the fiscal year 2000-01. This represents of 22.6% in rupee terms and 17.7% in dollar terms.
Foreign trade front, imports during the period April'01 to December'01 have reduced by 4.5% as compared to the fiscal year 2000-01 by Rs.491 billion.
For 2001-02 the gross fiscal deficit and revenue deficit is estimated at 5.1% and 3.4% of Gross domestic product respectively.
As per the provisional estimate food grains production has increased by 13.3 million tonnes as compared to the fiscal year 2000-01 having the total production of 195.9 million tonnes.
The average annual rate of inflation in terms of the Wholesale Price Index (WPI) increased significantly from 3.3 per cent in 1999-2000 to 7.1 per cent in 2000-01 due to a substantial rise in administered prices of petroleum products. During 2001-02, the inflation rate declined in terms of the WPI. The 52 weeks average inflation rate declined from 7 per cent at the beginning of 2001-02 to 4.7 percent for the week ended January 19, 2002. The point-to-point inflation rate reached a low of 1.3 per cent by the end of January 2002, which was the lowest in over two decades.
The Finance Minister's Budget speech for 2002-03 has spelt the following broad strategy.
Continue the emphasis on agriculture and food economy reforms.
Enhance public and private investment in infrastructure.
Strength the financial sector and capital markets
Deepen structural reforms and regenerate industrial growth
Provide social security to the poor
Consolidate tax reforms and continue fiscal adjustment at both the central and state levels.
B. INDIA - AN ATTRACTIVE INVESTMENT LOCATION:
There are several good reasons for investing in India.
Stable democratic environment over 50 years of independence;
Large market size with middle class population of 250-350 million with increasing purchasing power reflected by remarkable increase in purchase of consumer durables in recent years;
Access to regional international markets through membership of regional integration frameworks such as SAARC
Foreign investment is welcome in almost all sectors barring those of strategic concern like defence and atomic energy. Large and diversified infrastructure spread across the country
Thrust on technology, innovation and knowledge base
Large manufacturing capability, spanning almost all areas of manufacturing activities
Developed banking system, commercial banking network of over 63,000 branches, supported by a number of national and state level financial institutions
Vibrant capital market comprising 23 stock exchanges with over 9000 listed companies;
Legal protection for intellectual property rights;
Import regime in conformity with WTO commitments – removal of remaining quantitative restrictions on imports of goods into India barring certain items on grounds of national security, defence and health
Increased role of private and foreign investment in the Indian Economy;
Rupee is fully convertible on current account and is being progressively liberalized on capital account;
Availability of skilled manpower and professional managers;
Well developed capital market, banking infrastructure, insurance and financial services sector;
Well developed accountancy, legal, actuarial and consultancy profession;
Well-established legal system with an independent judiciary.
C.SPECIAL INVESTMENT PROGRAMMES
(Free Trade Zones / Electronic Hardware and Software Technology Parks / Export Oriented Units and Export Processing Zones / Special Economic Zones)
1. Electronic Hardware and Software Technology parks
Salient features of investment in Electronic Hardware and Software Technology parks
Licensing is required only for manufacturing electronic aerospace and defence equipment;
100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports;
Bonded factories set up under these programs are eligible to import, free of duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipment's etc.;
Deemed export benefits are available to suppliers of these goods from the Domestic Tariff Area (DTA);
Relaxation is there to sell a part of the production from such units in the Domestic Tariff Area depending upon the level of the value addition achieved;
After 2 years of import of or indigenously procured items like computers and computer peripherals can be donated to recognised non-commercial educational institutions, registered charitable hospitals, public libraries, public funded research and development establishments, governmental organisation or to government of states or union territory without payment of any duties;
Capital goods are allowed to be re-exported;
2. Export oriented units and Export processing zones
The Indian Government has established the following eight Export Processing Zones (EPZs) to promote exports. Export Oriented Units (EOUs) may be set up anywhere in India.
Mumbai (Santacruz Electronics Export Processing Zone),
Kandla in Gujarat,
Cochin in Kerala,
Madras in Tamil Nadu,
Falta in West Bengal,
Noida in Uttar Pradesh,
Surat Export Processing Zone in Gujarat, and
Vishakhapatnam in Andhra Pradesh
Salient features of investment in EOUs/EPZs
In case where foreign technological skill and marketing capabilities are considered essential proposals for foreign ownership up to 100 per cent can be considered;
Prescribed percentage of the output is required to be exported by industrial units set up under these zones in accordance with the industry in which they operate, and the balance can be sold in the domestic tariff area (DTA) against payment of certain taxes;
One-half of the value of their products are permitted to be sold in the domestic market on payment of excise duty by Export Oriented Units /Export Processing Zone units engaged in electronic hardware;
Full repatriation benefits in respect of capital and income earned thereon is available;
Duty free import of capital equipment, raw materials and components;
General exemption is available from excise duty, central taxes as well as reduction in certain local taxes;
Tax holiday and benefits are available under the Indian Income tax Act.
Industrial plots and standard design factories are available to Export Oriented Units/Export Processing Zones at concessional rates;
Export Oriented Units /Export Processing Zone units have to achieve specified value addition norms, which are expressed in terms of the difference between the FOB value realised and the cost of all inputs;
Exporters are eligible to obtain Advance licences exempting them from payment of customs duty on goods required for export production;
3. Special Economic Zones
The Government of India introduced the concept of Special Economic Zones in 2001-02. Some of the salient features of investment in special economic zones are as follows:
Developers of Special Economic Zones are allowed duty free import/ procurement from Domestic Tariff Area for development of Special Economic Zones to give boost to development of integrated infrastructure for exports.
For setting up of factory in the zone it is permitted to procure/import goods from Domestic Tariff Area without payment of duty.
Units in Special Economic Zones are allowed to produce items without any license which are reserved for Small Scale Industries
Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency account.
Facility in respect of units in Special economic Zones to realise and repatriate export proceeds within twelve months
Write-off of unrealised export bills upto 5%
Permitted to sell goods in the Domestic Tariff Area in accordance with the import policy in force
Subcontracting of part of production abroad permitted.
Duty free goods to be utilised in five years.
The developer of the Special Economic Zone is given infrastructure status under the Income tax Act and is entitled to tax benefit.
Units established in Special Economic Zone which manufacture or produce articles or things or computer software are also entitled to the benefit of tax holiday under the Income tax Act.
D. FOREIGN DIRECT INVESTMENT
1. Industrial policy
The central government's liberalization and economic reforms program aims at rapid and substantial growth and integration with the global economy in a harmonized manner. The Industrial Policy reforms have reduced the industrial licensing requirements, removed restrictions on investments and expansion, and facilitated easy access to foreign technology and foreign direct investment.
All industrial undertakings are exempt from obtaining an industrial licence to manufacture, except for industries reserved for the Public Sector (Appendix I) and industries retained under compulsory licensing (Appendix II)
2. Foreign Direct Investment (FDI)
The declared objective of the current policy is to invite and facilitate foreign investment. The policy guidelines of the Government of India for Foreign Investment in India are reviewed on an ongoing basis. The regulations have been structured to identify the industrial sectors, with or without sectoral caps, for investments, to minimize the procedural formalities and finally to introduce an automatic route for foreign investors to bring in investment by merely informing Reserve Bank.
In view of the Government's commitment for liberalising the foreign direct investment regime, all items/ activities have been placed under the automatic route except the following:
a) All proposals that require an Industrial Licence under the Industries (Development and Regulation) Act, 1951, (Appendix II) and also items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991(Appendix III);
b) Foreign investment of more than 24% in the equity capital of units manufacturing items reserved for small scale industries;
c) All proposals in which the foreign collaborator has a previous venture/tie-up in India;
d) All proposals where the foreign investor proposes to acquire existing shares of any Indian company;
e) All proposals falling outside notified sectoral policy/caps as given in (Appendix IV) or under sectors in which
foreign direct investment is not permitted without government approval i.e., *SIA/**FIPB (Appendix V).
All items/activities not covered above will be eligible for foreign investment under the Automatic Route of the Reserve Bank up to 100% of the capital, subject to compliance of the notified conditions.
3. Foreign Investment policy for trading activities
A trading company incorporated in India may issue shares or convertible debentures to the extent of 51% of its capital under the automatic route, to non-residents subject to the condition that remittance of dividend to the shareholders outside India is made only after the company has secured registration as an Export/Trading/Star Trading/Super Trading House from the Director General of Foreign Trade, Ministry of Commerce, Government of India. However, under the FIPB route:
i) 100% FDI is permitted in the case of trading companies for the following activities:
Exports;
Bulk imports with export/expanded warehouse sales;
Cash and carry wholesale trading; and
Other imports of goods or services provided at least 75% is for procurement and the sale of goods and services among the companies of the same group, and for third party use or onward transfer/distribution/sales.
ii) The following kinds of trading are also permitted, subject to the provisions of prevalent EXIM Policy:
Companies providing after sales services (that is, not trading per se);
Domestic trading of products, permitted at the wholesale level for trading companies that wish to market manufactured products on behalf of joint ventures in which they have equity participation in India;
Trading of hi-tech items/items requiring specialized after sales service;
Trading of items sourced from the small scale sector in which, based on technology provided and established quality specifications, a company can market those items under its brand name;
Domestic sourcing of products for export; and
Test marketing of items for which a company has manufacturing approval, provided the test marketing facilities will be used for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.
FDI upto 100% for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian Public in 5 years, if these companies were listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.
4. Other modes of Foreign Direct Investment
a. Global Depository Receipts/American Depository Receipts/Foreign Currency Convertible Bonds
Foreign investment by way of Global Depository Receipts (GDRs), American Depository Receipts (ADRs) and Foreign Currency Convertible Bonds (FCCBs) is treated as FDI. Indian companies are allowed to raise equity capital in the international market by issuing rupee denominated shares to a non-resident depository for the purpose of issuing of GDRs/ADRs subject to the following conditions:
The Indian company issuing such shares:
i) has an approval from the Ministry of Finance, Government of India to issue such ADRs and GDRs or is eligible to issue ADRs/GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and
ii) is not otherwise ineligible to issue shares to non-resident persons in terms of Foreign Exchange Management Act.
iii) issues ADRs/GDRs in accordance with the scheme for issue of Foreign currency Convertible Bonds and ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time.
iv) furnish to the Reserve Bank, full details of such issue in the prescribed form within 30 days from the date of closingof the issue.
v) shall furnish a quarterly return in the prescribed form to Reserve Bank within 15 days of the close of the calendar quarter.
vi) repatriate or utilize foreign exchange resources raised for specified purpose the Indian company may invest the foreign currency funds in:
Deposits with or Certificate of Deposits or other instruments of banks who have been rated not less than A1+ by Standard and Poor or P1 by Moody's for short term obligations,
Deposits with branch outside India of an authorised dealer in India, and
Treasury bill and other monetary instruments with a maturity or unexpired maturity of the instrument of one year or less.
An applicant company seeking the central government's approval in this regard should have a consistent track record of good performance (financial and otherwise) for a minimum period of three years. This condition can be relaxed for infrastructure projects such as power generation, telecommunications, petroleum exploration and refining, ports, airports, and roads.
There is no restriction on the number of GDRs/ADRs/FCCBs that can be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under the automatic route the FDI of which, after a proposed issue of GDRs/ADRs/FCCBs, is likely to exceed the sectoral caps would need to obtain prior government clearance through the FIPB before seeking final approval from the Ministry of Finance.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real property and on the stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25% of the FCCB proceeds can be used for general corporate restructuring.
b. Preference Shares
Foreign investment by way of preference shares is treated as part of FDI. Proposals are processed either through the automatic route or the FIPB, as the case may be. The following guidelines apply to issues of such shares:
i) Foreign investment in preference shares is considered to be part of share capital and falls outside the External Commercial Borrowing (ECB) guidelines/cap;
ii) Preference shares that carry a conversion option are to be treated as foreign direct equity for purposes of sectoral caps on foreign equity, where such caps are prescribed. Preference shares structured without such a conversion option fall outside the foreign direct equity cap;
iii) The conversion duration is to be in accordance with the maximum limit prescribed under the Companies Act or the maximum limit agreed to in the shareholders' agreement, whichever is less;
iv) The dividend rate should not exceed the limit prescribed by the Ministry of Finance; and
v) Issues of preference shares should conform to guidelines prescribed by the SEBI and the RBI, and other statutory requirements.
c. Investment through rights issue
A non-resident may purchase equity or preference shares or convertible debentures on right basis by an Indian company subject to the conditions given below:
i) The offer of rights by the Indian company should not result in the increase in the percentage of foreign equity already approved, or permissible Under the FDI scheme;
ii) The existing shares or debentures against which shares or debentures are issued by the company on right basis had been acquired and are held by non-resident in accordance with the regulations;
iii) The offer price on right basis to non-resident is at a price, which is not lower than that at which the offer is made to resident shareholder.
The right shares or debentures purchased by a non-resident shall be subject to the same conditions including restrictions in regard to repatriability as are applicable to the original shares.
The amount of consideration for purchase of right shares or debentures is paid by way of inward remittance in foreign exchange through normal banking channels or by debit to NRE/FCNR account, when the shares or debentures are issued on repatriation basis. In case of shares or debentures issued on non-repatriation basis, the amount of consideration may also be paid by debit to NRO/NRSR/NRNR account.
d. Acquisition of shares on merger or demerger or amalgamation of Indian companies
Where the scheme of merger or amalgamation or reconstruction by way of demerger has been approved by a court in India, the acquiring company or the new company as the case may be issue shares to the non-resident shareholders of the transferor company subject to the following conditions:
i) The percentage of shareholding of non-resident in the transferee or new company does not exceed the percentage specified in the approval granted by the central government or Reserve Bank,
ii) Where the percentage is likely to exceed the percentage specified in the approval or the regulations, the transferor, the transferee company or the new company may, after obtaining the approval from the Central Government, apply to the Reserve Bank for its approval under Foreign Exchange Management Act.
iii) The transferor company or the transferee or the new company shall not engage in agriculture, plantation or real estate business or trading in transfer of development rights; and
iv) The transferee company or the new company files a report within 30 days with the Reserve bank giving full details of the shares held by non-residents in the transferor and the transferee or the new company, before or after the merger/amalgamation/reconstruction, and also furnishes a confirmation that all the terms and conditions stipulated in the scheme approved by the court have been complied with.
e. Issue of shares under Employee Stock Option Scheme (ESOP)
An Indian company may issue shares under ESOP Scheme to its non-resident employees or non-resident employees of its joint venture or wholly owned subsidiary abroad directly or through a trust subject to the following conditions:
i) The scheme has been drawn in terms of regulations issued under the Securities and Exchange Board of India Act, 1992 and;
ii) Face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid up capital of the issuing company.
The issuing company shall furnish to the Reserve Bank, within 30 days from the date of issue of shares under the scheme, a report giving the following information:
i) Names of persons to whom shares are issued under the scheme and number of shares issued to each of them;
ii) A certificate from the company secretary of the issuing company that the value of shares issued under the scheme does not exceed 5% of the paid up capital of the issuing company and that the shares are issued in compliance with the SEBI regulation.
5. Investments by Non-resident Indians / Overseas Corporate Body
Non-resident Indians (NRIs): The Government of India actively encourages investment in India by Indians and persons of Indian origin resident abroad.
Non-resident Indians are those who come under any of the following categories:
Indian citizens who stay abroad for employment or for carrying on business or vocation or any other purpose in circumstances indicating an indefinite period of stay outside india.
Government servants deputed abroad on assignments with foreign governments or regional/international agencies like World Bank, IBRD, IMF and WHO.
Officials of state government and public sector undertakings deputed abroad on temporary assignments or posted to their branches or offices abroad.
Non-resident Indians become residents of India only when they return to India for employment or for carrying on any business or vocation or for any other purpose indicating an indefinite stay in India, and not when they come back on short visits for holidays or business.
Facilities available to non-resident Indians are also made available to non-resident foreign citizens of Indian origin.
A person is deemed to be of Indian origin (PIO) if he at any time held an Indian passport or he or either of his parents or any of his grandparents was an Indian and a permanent resident in India at any time. A spouse of a citizen of India or of a person of Indian origin is deemed to be of Indian origin though of non-Indian origin.
Overseas Corporate Body (OCB):
The term Overseas Corporate Body 'OCB' means any overseas company, partnership firm, society and other corporate body predominantly owned directly or indirectly to the extent of at least 60% by Non-resident Indians (NRIs). It also includes overseas trust in which atleast 60% beneficial interest is irrevocably held by NRIs.
a. Portfolio investment scheme for NRI
Purchase/sale of shares and/or convertible debentures by an NRI on a stock exchange in India on repatriation and/or non-repatriation basis is permissible subject to the following conditions;
i) A non-resident Indian (NRI) may purchase/sell shares and or convertible debentures of an Indian company through a registered broker on a recognised broker on a recognised stock exchange subject to the following conditions:
ii) NRIs have to designate a branch of an authorised dealer for routing of all transactions.
iii) The paid up value of shares/each series of convertible debentures of an Indian company, purchased by each NRIs on repatriation and on non-repatriation basis does not exceed 5% of the paid-up value of shares/each series of convertible debentures issued by the company concerned.
iv) The aggregate value of shares of any company purchased by all NRIs does not exceed 10% of the paid up capital of the company and in the case of purchase of convertible debentures the aggregate paid-up value of each series of debentures purchased by all NRIs does not exceed 10% of the paid-up value of each series of convertible debentures
v) Provided that the aggregate ceiling of 10% referred to in this clause may be raised to 24% if the general body of the Indian company concerned to that effect passes a special resolution.
b. Purchase and sale of shares /convertible debentures by NRI/OCB on non-repatriation basis:
i) No purchase of shares and debentures of Indian companies shall be made if the company engaged in the following business
Chit fund or a Nidhi
Agricultural / Plantation activities;
Real estate business (does not include development of township, construction of residential/commercial premises, roads, bridges, etc);
Construction of farm houses;
Dealing in Transfer of Development Rights or is engaged in print media sector
ii) NRIs/OCBs can make investment on non-repatriation basis in shares or debentures of Indian company whether by public issue or private placement, without any limit subject to the restrictions mentioned above.
iii) The amount of consideration for purchase of shares or convertible debentures shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO/NRSR/NRNR account maintained with an authorised dealer.
c. Purchase by NRI/OCB of other securities on repatriation/non-repatriation basis:
i) A Non-resident Indian or an Overseas Corporate Body may, without limit, purchase on repatriation basis;
Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
Bonds issued by a public sector undertaking in India;
Shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions in the notice inviting bids.
ii) A non-resident Indian or an Overseas Corporate Body may, without limit, purchase on non-repatriation basis, dated Government securities (other than bearer securities), treasury bills, units of domestic mutual funds, units of Money Market Mutual funds in India, or National Plan/Savings certificates.
iii) Payment to purchase shares on repatriation basis should be either by inward remittance through normal banking channels or out of funds held in his/its NRE/FCNR account.
iv) Payment to purchase shares on non-repatriation basis should be either by inward remittance through normal banking channels or out of funds held in his/its NRE/FCNR/NRO/NRSR account.
d. Investment in non-corporate business by Non-resident Indians (NRIs)
Non-resident Indians are permitted to invest in firm/association of persons/proprietorship concerns subject to the conditions given below:
Amount invested is received either by inward remittance through normal banking channels or out of account maintained with an authorised dealer/authorised bank in accordance with relevant regulations;
The firm or the proprietary concern is not engaged in any agricultural/plantation activity or real estate business ie., dealing in land and immovable property;
The amount invested would not be eligible for repatriation outside India.
6. Foreign Technology agreements
Automatic permission is granted for foreign technology where -
a. In case of foreign technical collaboration wherein technology has been transferred.
Lump sum payment for technical know-how fees is up to US$2 million and;
Royalty payment does not exceed five percent for domestic sales and eight per cent for exports for 7 years from the date of commencement of commercial production or 10 years from the date of agreement whichever is earlier.
b. In case of transfer of rights to use trademarks and brand:
Royalty up to 2% of export sales and 1% for local sales is allowed to be paid to the foreign collaborator under the automatic route for use of his trademarks and brand name even if there is no transfer of technology.
In case of technology transfer payment of royalty subsumes the payment of royalty for use of trademark and brand name of the foreign collaborator.
E. FOREIGN INSTITUTIONAL INVESTMENTS
Registered Foreign Institutional Investors such as:
Pension Funds;
Investment Trusts
Nominee companies;
Asset Management Companies.
who have obtained registration from SEBI, are permitted to invest on full repatriation basis under the portfolio investment scheme in the Indian Primary and Secondary Stock Markets (including OTCEI) as well as in unlisted, dated Government Securities, Treasury Bills and Units of Domestic Mutual Funds without any lock-in period.
Limits on Investment in the primary and secondary markets are:
The total holdings of all foreign institutional investors in any company will be subject to a ceiling of 24% of its total issued capital. The limit of 24% may be increased up to the sectoral cap / statutory ceiling, as applicable, by the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its general body.
A single foreign institutional investor cannot hold more than 10% of the issued capital of any company.
The consideration for the purchase must be remitted by inward remittance from abroad or through normal banking channels or out of funds held in an account maintained in accordance with the regulation.
An FII is permitted to purchase shares or convertible debentures of an Indian company through private placement/arrangement subject to the ceiling specified above.
F. VENTURE CAPITAL INVESTMENT
1. Foreign Venture Capital Investor (FVCI)
The requirements for the Foreign Venture Capital Investor to operate in India is as follows:
a) A registered Foreign Venture Capital Investor (FVCI) may, through the Securities and Exchange Board of India (SEBI), apply to the RBI for permission to invest in Indian Venture Capital Undertaking (IVCU) or in Venture Capital Funds (VCF) or in a scheme floated by such Venture Capital Funds.
b) The registered FVCI may purchase equity/equity linked instruments/debt instruments, debentures of a IVCU or of a VCF through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF.
2. Venture Capital Fund (VCF) and Venture Capital Company (VCC)
a) An offshore venture capital company may contribute up to 100% of the capital of a domestic venture capital fund and may also set up a domestic asset management company to manage the fund.
b) Venture Capital Funds and Venture Capital Companies are permitted to invest only in unlisted companies and their investment shall be limited to 40% of the paid-up capital of the domestic unlisted companies.
c) However investment in a single company by a Venture Capital Funds and Venture Capital Companies shall not exceed 5% of the paid-up capital of a Venture Capital Funds and Venture Capital Companies.
G. JOINT VENTURES AND SUBSIDIARIES OUTSIDE INDIA
Reserve Bank has given general permission to Indian companies to invest abroad in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) subject to compliance of the following conditions.
1. Extent of Investment in one financial year
i. An Indian party cannot make total financial commitment for investment in Myanmar and SAARC countries in excess of US$ 75 million.
ii. In respect of investment in countries other than Myanmar, SAARC countries, Nepal, Bhutan and Pakistan the limit is US$ 100 million.
iii. In respect of investment in Nepal and Bhutan the limit is Rs.350 crores.
iv. No investment is permitted under the automatic route in Pakistan.
The term 'financial commitment' has been defined to mean the amount of direct investment by way of contribution to equity and loan and 50% of the amount of guarantees issued by the Indian party to or on behalf of JV/WOS abroad.
However, the Indian party can extend loan or guarantee only if the Indian party has made investment by way of contribution to the equity capital.
2. Other conditions
i. The investee foreign entity should be engaged in the same core activity as carried on by the Indian party.
ii. The Indian party should not have been on RBI's caution list or under investigation by Enforcement directorate.
iii. The Indian party has to designate a branch of an authorised dealer and all transactions relating to JV/WOS should be routed through the said branch only. The Indian party may designate different branches for different JV/WOS.
iv. The Indian party should submit report in prescribed form.
3. Funding of Investments
The above investments can be funded out of one or more of the following sources.
i. By utilising the balances held in Exchange Earners Foreign Currency (EEFC) Account of the Indian party. When the investment is funded through EEFC account, the Indian party has the liberty to invest in a foreign entity, even if it is not engaged in the same core activity as the Indian Party.
ii. By remittance to the extent of 50% of the networth of the Indian Party as on the date of last audited balance sheet. (For the purpose of calculating the net worth of an Indian Party, net worth of its Holding Company or Subsidiary Company [where the stake held is at least 51%] may be taken into account if the said holding or subsidiary company has not availed of the facility of Direct Investment Abroad and has furnished a disclaimer in favour of the Indian party)
iii. By utilisation of proceeds of ADR/GDR offerings by the Indian party. Investment through this mode is permitted without any monetary limit.
iv. By way of capitalisation of payments due to the Indian party from the foreign entity towards exports or for any fees, royalties, commissions, or consideration for any services. However, the amount outstanding for more than 6 months is not permitted to be capitalised.
4. Investment in foreign security by swap or exchange of shares of an Indian company
An Indian party engaged in any of the sectors ie., Information Technology and Entertainment Software, Pharmaceutical Sector, and Biotechnology is permitted to acquire shares of a foreign company engaged in the same core activity in exchange of ADRs/GDRs issued to the latter provided:
a) The investment does not exceed US$ 100 million or its equivalent or an amount equivalent to 10 times the export earnings of Indian party during preceding financial year which ever is higher.
b) The Indian party has already made an ADR/GDR issue and that such ADRs/GDRs are currently listed on any stock exchange outside India.
c) The ADR/GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian Party.
d) The total holding of the person resident outside India in the Indian party after the new issue of ADR/GDR in the expanded capital base should be in accordance and within the limits of the sectoral cap prescribed under the relevant regulations for such investment.
e) The shares of the foreign company has to be valued;
as per the recommendations of the investments banker if the shares are not listed on any stock exchange or
on the basis of monthly average price of the shares on any stock exchange abroad in the preceding 3 months in which the acquisition is committed. The premium recommended over and above the said price by the investment banker may also be considered while valuing the shares.
5. Investment by partnership firm
Outbound investment is permitted by partnership firms, registered under Indian Partnership Act, 1932 and providing the following professional services:
i. Chartered Accountancy
ii. Legal practice and related services
iii. Information technology and entertainment software related services
iv. Medical and health care services.
No permission is necessary for such investment subject to complying with prescribed conditions, failing which specific permission from the Reserve Bank is required.
H. EXCHANGE CONTROL
The Foreign Exchange Management Act, 1999 (FEMA) has been enacted 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.
It extends to the whole of India. It also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person resident in India to whom this act applies.
The following authorities govern FEMA:
Central Government has been empowered to prescribe rules;
Reserve Bank has been empowered to prescribe regulations and to issue directions to authorised persons.
Important features of FEMA are:
Primarily there are no restrictions on current account transactions related to foreign exchange and a person may sell or draw foreign exchange freely for his current account transactions, subject to certain exceptions, conditions and monetary ceiling
Capital account transactions, though freed to some extent, continue to be regulated by Reserve Bank.
I. BUSINESS FORMS
Foreign investors may establish a business presence in India through:
Joint Venture companies in collaboration with an Indian partner and/or by making a public offering.
Incorporating a wholly owned company with 100% foreign equity.
Liaison office for carrying on liaison work for normal business activities of overseas parent companies.
Project office for execution of approved project/contracts.
Foreign companies engaged in manufacturing and trading activities can open Branch offices to -- represent the foreign company in India in various matters such as acting as buying/selling agents;
- undertake export and import trading activities;
- render professional or consultancy services;
- render services in information technology and development of software in India
- render technical support to the products supplied by the parent/group companies
- promote possible technical and financial collaborations between Indian and foreign companies
Foreign shipping companies, airlines and banks are permitted to open branches in India on a reciprocal basis.
Company-Appropriate Entity
The most appropriate form of business enterprise for foreign investor is a limited liability company.
Sole proprietary and partnership are the other business forms prevalent in India but due to unlimited liability they are not normally found suitable by overseas investors.
Under the present policy of the Government, all companies have to be incorporated in India under the Companies Act to carry on in India any business/service activities.
Indian companies are classified into two categories - 'Public' and 'Private' companies. A company having a minimum paid up capital of Rs. 1 lakh restricting the right to transfer its shares, limiting the number of its members to 50, prohibiting invitation or acceptance of deposits from persons other than its members, directors or their relatives and prohibiting public subscription to its share capital, is a private company.
A Company is a public company provided it has a minimum paid up capital of Rs.5 lakhs, or is a private company, which is a subsidiary of a public company and is a company other than a private company as defined above.
The Companies Act has wider regulations for public companies in respect of management, borrowings and dealing with members and creditors due to greater public participation.
Company Formation
The formation of a company requires
selection of a name (which has to be approved by the Registrar of Companies);
determination of the state in which the registered office will be situated;
drafting a Memorandum of Association which mention the objects for which the company is formed and its capital and the Articles of Association which sets out the regulations for its internal management.
preparation of documents for submission to the Registrar of Companies for registration along with the requisite fees.
The Registrar's office verifies the documents submitted and ascertains that all the formalities necessary for formation of the company have been complied with. The Registrar then certifies under his hand that the company is formed. The company then emerges as a legal entity with limited liability.
Memorandum and Articles of Association
The Memorandum of Association of a company defines the objects for which the company is in existence. The company cannot operate beyond the scope of business activities in the Memorandum. The Memorandum of Association of a public company is signed by a minimum of seven promoters and by a minimum of two in the case of private company.
The Articles of Association are the internal regulations for the conduct of the affairs of the company. The Articles of Association cannot go beyond the scope of the Memorandum of Association.
Issue of Shares
Issue of shares requires compliance of various provisions of the Companies Act. A prospectus is a document, which offers to the public the shares of a company, requires detailed disclosure with regard to the company, its directors, its past working and future projections, contracts which it has entered into, and other details. A company can issue shares to the public only after a copy of the prospectus has been filed with the Registrar. Atleast 90% subscription of the public issue must be collected prior to allotment.
An Indian company may issue "sweat equity shares" i.e. shares issued by a company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, if approved by its shareholders, subject to certain conditions.
An Indian company may buy-back its own shares if authorised by its Articles of Association and approved by its shareholders, subject to certain conditions.
Directors and Management
Companies Act, which governs the functioning of the company, requires to have atleast two directors in the case of private companies and three directors in the case of public company.
Non-resident directors, other than a non-resident Managing Director, can serve on the Board of an Indian company. Under the Companies Act, one-third of the directors need not retire by rotation and, therefore, it is not unusual for the foreign investor to have the right to nominate directors who need not retire by rotation.
Provisions also exist in the Companies Act for the appointment of alternate directors to act in place of the original director. It is common practice for the foreign investor to have Indian legal and accounting professionals to act as alternate directors as their nominees to protect the foreign investor's interest in Indian companies.
J. MONOPOLIES AND RESTRICTIVE TRADE PRACTICES
The Monopolies and Restrictive Trade Practices Act, 1969, is an important piece of economic legislation, which in certain respect is similar to anti-trust legislation in other countries and is meant to control unfair and/or restrictive business practice.
K. INTELLECTUAL PROPERTY RIGHTS
Intellectual property rights covers the following:
Trademarks
The Trade and Merchandise Marks Act, 1958, provides for registration and protection of trademarks and protection of trademarks and prevents the use of fraudulent trademarks on merchandise. Registration of a trademark is optional.
A trademark is a visual symbol. It can be in the form of a work, or a device or a label applied to commercial articles such as goods/products with a view to indicate to the purchasing public that they are the goods manufactured or dealt in by a particular person as distinguished from similar goods. Trademark is essentially a product of competitive economy where competition is involved between the manufacturers of the similar products.
Registration of a trademark, which resembles to the existing well-known trademarks, is not permissible. A registered trademark can be protected in perpetuity subject only to the condition that it is used or renewed periodically and action is taken against the person infringing.
Foreign owned trademarks may be used for the sale of goods in India
Trademarks are registered for maximum of 7 years from the date of application at one time
Subsequent registration may be renewed for a 7-year period
Passing -off actions may protect unregistered trademark
Registered trademarks may be protected under statute or by passing off actions.
Patents
Patent is granted for the period of 7 years in respect of invention relating to food, medicine or drug and 14 years for the rest of the products.
The act provides that the following cannot be patented:
Inventions contrary to law, morality and public health
Any claim which is frivolous or claims which is obviously contrary to well established natural laws
Mere new use or mere discovery of new property or new use of known substance or property
Mere admixture resulting only in aggregation of properties
Mere arrangement and rearrangement of known integers functioning independently;
Method for agriculture/horticulture
Process for treatment on human beings, plants or animals
The Patents Act provides for grant of exclusive rights to sell or distribute an article or substance in respect of the following:
Any new invention, which is not obvious:
Any new and useful;
a) art, process, or method of manufacture;
b) Machine apparatus or other article;
c) Substance produced by manufacture.
The Patents Act provides for International Applications under Patents Co-operation Treaty.
Copyright
Copyrights in India is governed and protected by Copyrights Act, 1957. India is a member of the Universal Copyrights conventions and the Berne conventions. Indian copyright owners can protect their copyright in any country since India is the member of both these conventions. The Act provides for the registration of works. However, non-registration does not generally affect the rights of the owners of copyright. Copyright means the exclusive right to do or authorise others to do certain acts in relation to the following:
Original work involving skill, labour and judgement in respect of literary works such as books, publications including computer software;
Artistic works whether usable as trademarks or not;
Engineering drawings, industrial drawings;
Sound recording;
Musical work;
Cinematograph film;
Broadcasting Reproduction Rights.
The object of copyright law is to encourage authors, composers, artists and designers to create original works by rewarding them with the exclusive right for a limited period to exploit the work for monetary gain.
Industrial designs
The object of design registration is to ensure that the persons other than the originator are not using the design without the permission of the originator.
The right conferred by registration of a design is called 'Copyright'. Copyright in an industrial design or product design is governed by the Designs Act 1911. If a design is registered under the Act it is not eligible for protection under the Copyright Act even though it may be original artistic work.
L. FINANCE
Industrial units are financed primarily through two main sources:
internal sources i.e. capital and reserves or internal accruals;
external sources i.e., raising capital by way of debentures or bonds or term borrowings,
borrowings for working capital and
government subsidies.
Capital issue
Capital issues by companies are supervised by the Securities and Exchange Board of India which is empowered to regulate the financial structure of joint stock companies and may be a safeguard for the investing public. Minimum limits for promoter's contribution are laid down for all issues of capital to the public.
Stock Market and Listing Requirements
India has a vibrant capital market comprising of 23 stock exchanges with over 9,000 companies listed on the stock exchanges. Securities and Exchange Board of India (SEBI) monitors the stock market in India. The market capitalisation of India represented by the Bombay Stock exchange (BSE) as a percentage of Gross Domestic Product in December 2001 was 21%. The market capitalisation of the Bombay Stock Exchange has grown by 55% in 10 years, from around US$ 67 billion in end 1991 to US$ 104 billion end-December'01.
An Over the Counter Exchange of India (OTCEI) operates as an alternative to the stock market. OTCEI allows listing of companies with share capital between Rs.0.30 million and Rs.2.50 million.
National Stock Exchange has been set up in Mumbai to provide on-line nation wide trading facilities for shares and for the wholesale debt and capital markets.
Term Borrowings
India has a well-organised capital market with several financial agencies, which provide term borrowings, guarantees and underwriting facilities to the industrial sector. The principal agencies for term borrowings are the All India Financial Institutions, the Commercial Banks and State Financial Corporations.
Commercial banks provide term loans and specialise in providing working capital for the industrial sector.
State Financial Corporations are state -level financial institutions, operating as regional development banks playing crucial role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.
There are 18 State Financial Corporations in the country, of which 17 were set up under the State Finance Corporations Act 1951. State financial corporations provide financial assistance by way of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/special capital.
The State financial corporations operate a number of schemes of refinance and equity type assistance on behalf of IDBI/SIDBI in addition to special schemes for artisans and special target groups such as SC/ST, women, ex-servicemen, physically handicapped, etc.
Venture Capital
Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.
Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.
Venture capitalists generally:
Finance new and rapidly growing companies
Purchase equity securities
Assist in the development of new products or services
Add value to the company through active participation
Take higher risks with the expectation of higher rewards
Have a long-term orientation
Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously.
In India, these funds are regulated by the SEBI Regulations. According to the SEBI Regulations venture capital fund means a fund established in the form of a company or trust, which raises monies through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.
Credit Rating
Credit rating is a requirement for debenture issue, fixed deposits and commercial paper programmes. Credit rating is presently done by three agencies.
External Commercial Borrowing (ECB)
Indian companies/entities can raise money abroad through the External Commercial Borrowing (ECB) route as follows:
1. Automatic route
Fresh ECB or refinancing of existing ECB with average maturity of not less than 3 years for an amount upto US$ 50 million.
2. Approval by Reserve Bank
ECB in excess of US$ 50 million but upto US$ 100 million requires permission from Reserve Bank.
3. Approval by Government
The government of India will consider ECB in excess of US$ 100 million.
Mutual Funds
Unit Trust of India, India's first mutual fund was established in 1964. Banks, Financial Institutions, Insurance Companies, companies in the private sector including foreign companies have established mutual funds in India. Currently there are 35 Mutual Funds in India managing funds over US$ 20.4 billion.
M. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)
The Securities and Exchange Board of India (SEBI) regulates and promotes an orderly development of the capital market in India.
SEBI has primarily three functions:
to deal with all matters relating to the development and regulation of the securities market and investor protection, and advise government on these matters.
to prepare comprehensive legislation for the regulation and development of the securities market
to carry out such functions as may be delegated by the Central Government for the development and regulation of the securities market.
Mutual Funds, merchant bankers, FIIs, portfolio managers, stock brokers, sub-brokers, share transfer agents, bankers and registrars to the issue, underwriters, investment advisors and any other intermediaries who may be associated with the securities market in any manner have been brought under the purview of the regulatory powers of SEBI.
Some of the important rules, regulations and guidelines issued by SEBI are:
a. SEBI (Insider Trading) Regulations 1992;
b. SEBI (Merchant Bankers) Rules/Regulations 1992;
c. SEBI (Mutual Fund) Regulations 1996;
d. SEBI (Portfolio Managers) Rules/Regulations 1993;
e. Disclosure and Investor Protection Guidelines;
f. SEBI( Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations 1995;
g. SEBI( Depositories and Participants)Regulations 1996;
h. SEBI (Substantial Acquisition of Shares and Takeovers)Regulations 1997;
i. SEBI (Buy Back of Securities)Regulations 1998;
j. SEBI (Stock Brokers and Sub-brokers) Rules/Regulations 1992;
k. SEBI (Underwriters) Rules/Regulation 1993;
l. SEBI (Debentures Trustees) Rules/Regulation 1993;
m. SEBI (Bankers to an Issue) Rules/Regulation 1994;
n. SEBI (Registrars to an Issue and Share Transfer Agents) Rules/Regulation 1993;
o. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines 1999;
p. SEBI (Credit Rating Agencies) Regulations 1999;
q. SEBI (Collective Investment Schemes) Regulations 1999;
r. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules 1999;
s. SEBI (Custodian of Securities) Regulations 1996;
t. SEBI (Venture Capital Funds) Regulations 1996;
u. SEBI (Foreign Institutional Investors) Regulations 1995.
N. LABOUR RELATIONS
India has a pool of trained English speaking, technical and managerial personnel. Comprehensive legislation to protect staff from arbitrary dismissal, regulate working conditions, terms of employment, provision for employee benefits, collective bargaining and settlement of disputes through agencies constituted by law. There is no requirement for employee's representation on the Board of directors.
Preferential allotment to permanent employees in respect of public issue of shares or debentures can be made to the extent of 5% of public issue of shares and debentures by companies or 200 shares of Rs.10/- each per employee, of shares and debentures, which ever is higher.
SECTION II- TAXATION
A. INCOME-TAX
India has a single Income-tax law, which is the Income-tax Act, 1961 (IT Act) and rules framed there under. The Indian Constitution prohibits states from imposing tax on income other than income derived from agriculture.
B. ADMINISTRATIVE SYSTEM
At the apex of the Income-tax department is the Central Board of Direct Taxes (CBDT). The CBDT is part of the Finance Ministry in the Government of India and administers direct tax laws. Under the CBDT is a large organisation with commissioners in charge of specified areas assisted by deputy commissioners and officers, who issue assessment orders and collect taxes.
C. ASSESSMENTS
All taxpayers are required to file a Return of Income on or before specified dates each year.
Assessments of more than 90% non-corporate taxpayers are completed in a summary manner by accepting the returns furnished by them. Assessments in the remaining cases are made after requisite scrutiny and after investigation.
Assessment of a non-resident can be made either directly or through his agent. In some cases, an Income-tax officer can treat a person in India as an agent of a non-resident and collect taxes of the non-resident through such agent.
D. ADVANCE RULING
A person can seek an advance ruling on questions of law or of fact that relate to a transaction undertaken or proposed to be undertaken by a non-resident or a transaction undertaken by a resident with a non-resident.
An advance ruling would be binding for the specific transaction on the tax authorities and the applicant who has sought it. The advance ruling would be binding unless there is a change in the law or in the facts. Advance rulings are communicated within six months from the date of application.
E. RESIDENCE
The liability to tax under the 'IT Act' depends upon residential status of the taxpayer, irrespective of his nationality or domicile.
An individual is said to be resident in India in any tax year if he is
in India for a period or periods amounting to 182 days or more in a tax year; or
in India for an aggregate period of 60 days or more (182 days in certain cases) in the tax year and has been in India for an aggregate period of 365 days or more in the four tax years preceding that tax year.
A person is said to be "resident but not ordinary resident" (NOR) in India in any tax year if such person is
a) an individual
i) who has not been resident in India in nine out of ten tax years preceding that tax year; or
ii) who has not during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 730 days or more.
b) a manager of Hindu undivided family
i) who has not been resident in India in nine out of ten tax years preceding that tax year; or
ii) who has not during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 730 days or more.
A non-resident is a person who is not resident in India.
A company, whether Indian or foreign, is said to be resident in India if the control and management of its affairs is situated wholly in India.
A foreign company will have generally a part of its management and control outside India and hence, will be a 'non-resident'.
F. SCOPE OF TOTAL INCOME
A resident pays tax in India on his global income.
A non-resident is taxable on its income received in India and also on income sourced in India. There are certain provisions in the IT Act which deems the income to accrue or arise in India (ie., sourced in India).
A 'resident but not ordinary resident' is not liable to tax in respect of income which accrues or arise to him outside India unless that income is derived from a business controlled in or a profession set up in India.
G. TAXABLE INCOME
The income of the taxpayer is determined under five heads - Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Specific deductions are available under each source and there are specific rules as to what constitute income from each source. Tax charge is at the rates in force for the relevant tax year.
Income under each head is computed after adjusting any loss against any income from sources under the same head. The income for an assessment year is determined after adjusting income computed under each head against loss under any other head in the same assessment year and unabsorbed depreciation of earlier years. The only exceptions are capital losses and losses sustained in speculation business which may be set off only against capital gains or income from any other speculation business respectively. Such adjusted income is the gross total income. Gross total income less certain specified deductions and tax incentives provided under the 'IT Act' is the total taxable income of a taxpayer.
Certain types of income and receipts are fully exempt from tax and do not form part of gross total income.
H. AGRICULTURAL INCOME
Agriculture is a state subject and there is no central income tax on agricultural income. However, agricultural income is aggregated with other income for the purpose of determining the rate of tax applicable to other income.
I. TAX CONCESSIONS
The IT Act offers several tax incentives to industrial units in the country in computing taxable income from business and profession. These incentives reduce the tax incidence substantially.
Depreciation Allowance
Depreciation is available on tangible and intangible capital assets used in business, except land.
Tangible assets are classified into four blocks, i.e., buildings, furniture and fixtures, plant and machinery and ships. Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature.
Depreciation is restricted to 50% of the rates in the year of acquisition if the asset is used for less than 180 days. Depreciation can also be claimed on fractional ownership of assets.
It is mandatory to claim depreciation allowance. Unabsorbed depreciation can be carried forward and set off against income of subsequent years without any time limit.
The IT Act permits depreciation allowance on written down value method. However, in respect of assets acquired on or after 1st April 1997 by undertaking
Posted: Sat Sep 19, 2009 12:09 am Post subject: I thank you for this...
Too good and very in-depth information for any Indians to get started with business, it indeed give comprehensive information on starting new business. Specially its useful to me because I am starting my own internet company in Hyderabad.
Posted: Tue Oct 13, 2009 2:14 pm Post subject: business ideas in India
Well guys, I want to share some new business ideas in India, I have done some good research on this, the 1st idea is to start a website providing eduction information to Indians, there are not such website which provides in depth education information .... second idea is to start bill payment business, I have seen some guys in my area started this, they just take Rs.5 per/bill... so if you can pay 100bills per/day i.e. good revenues for you....
I'll share some more ideas here... soon...
Register
Log in
FAQ
Search
Memberlist
