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This booklet has been prepared to serve as a guide for persons proposing to
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invest in India. The booklet broadly covers the relevant issues that may be
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The Indian Government has continued its focus on Foreign Direct
Investment ("FDI") into India for industrial and economic growth by further
liberalising the policies and simplifying the procedures. Today, with very
limited exceptions, foreign companies and foreign citizens are allowed to
invest directly in India under the automatic route i.e. investment without
any prior approval and only post-investment filing. This has been a
meaningful step leading to substantial FDI in sectors such as information
technology, infrastructure, ports, etc. Placing FDI in major sectors under the
automatic route has made India a more investment friendly destination, with
a conducive environment for growth of industry, technology infusion and
economic growth.

The material contained in this booklet is intended to provide general
information on the relevant issues and for guidance purpose only. Nothing
contained in the booklet should be construed as legal or professional advice
on any particular matter. It is recommended that appropriate professional
advice be sought on specific issues. While maximum care has been taken in
preparation of this booklet, no responsibility is being assumed for any

This guide is dated 31st March, 2004 and is based on the information
available at that time and it should also be borne in mind that changes in
legislation would require ascertaining the prevailing legal position at the
relevant time.
-------------------------------------------------------------------------------------------                          4.11 Hotel and Tourism Related Industries ................................. 33
Subject                                                                                       Page Nos.              4.12 Investment in Free Trade Zones ............................................ 34
-------------------------------------------------------------------------------------------                          4.13 Electronics & IT Enabled Services ......................................... 37
1. INTRODUCTION .......................................................................... 1                         4.14 Insurance .................................................................................. 41
     1.1 Geography ................................................................................. 1               4.15 Advertising and Film Sector .................................................. 42
     1.2 Population .................................................................................. 1             4.16 Agriculture ............................................................................... 42
     1.3 Languages .................................................................................. 1              4.17 Defence...................................................................................... 43
     1.4 Political System .......................................................................... 1               4.18 Non-Banking Financial Companies ("NBFCs") .................. 43
     1.5 Currency and Banking .............................................................. 1                       4.19 Banking ................................................................................ 43
     1.6 The Indian Economy ................................................................. 2
                                                                                                               5.    TAXATION ....................................................................................       44
2.    INDIA MEANS BUSINESS ............................................................ 2                            5.1 Administrative System ...........................................................               44
      2.1 Economic Reforms..................................................................... 2                    5.2 Income Tax................................................................................      44
      2.2 India, an Attractive Destination for Investment - Why? .....                               3               5.3 Wealth-tax .................................................................................    54
      2.3 The Trade Policy ........................................................................ 5                5.4 Indirect Taxes ...........................................................................      55
      2.4 The Response ............................................................................. 6
                                                                                                               6. INVESTMENT STRATEGIES ..........................................................                       56
3.    GOVERNMENT POLICIES ON FOREIGN INVESTMENT ........6                                                           6.1 Methods of Entry .....................................................................           56
      3.1 Introduction ................................................................................ 6           6.2 Joint Venture .............................................................................      56
      3.2 Foreign Equity Investment ...................................................... 6                        6.3 Technical Collaboration ..........................................................               57
      3.3 Foreign Technology Agreements ............................................ 9                              6.4 Branch .......................................................................................   58
      3.4 Non-Resident Foreign Direct Investment ............................                           10          6.5 Liaison Office ...........................................................................       60
      3.5 Foreign Institutional Investors ("FIIs") .................................                    13          6.6 Direct Sale .................................................................................    60
      3.6 Venture Capital Investments .................................................                 16          6.7 Franchising ...............................................................................      61

4.    SOME IMPORTANT AREAS OF INVESTMENT WITH A FOCUS                                                          7. IMPORTANT LEGISLATIONS.......................................................                          62
      ON INFRASTRUCTURE .............................................................. 19                           7.1 Foreign Exchange Management Act, 1999 (FEMA).......                                              62
      4.1 Infrastructure .......................................................................... . 19            7.2 The (Indian) Companies Act, 1956 .......................................                         63
      4.2 Roads and Highways..............................................................                20        7.3 Competition Act, 2002 ("the Act") .........................................                      65
      4.3 Urban Infrastructure ............................................................... 22                   7.4 Intellectual Property Laws .....................................................                 67
      4.4 Mass Rapid Transport Systems .............................................                      23        7.5 The Securities and Exchange Board of India Act, 1992
      4.5 Power ........................................................................................ 23              ("SEBI Act") ..........................................................................         69
      4.6 Oil & Gas .................................................................................. 25          7.6 Other Legislations ...............................................................                70
      4.7 Telecommunication ................................................................. 26
      4.8 Civil Aviation ........................................................................... 28
      4.9 Ports & Shipping ..................................................................... 29
      4.10 Mining ....................................................................................... 31
1. INTRODUCTION                                                               by the Reserve Bank of India ("RBI"). The commercial banking system in
                                                                              India is fully developed and consists of nearly 300 commercial banks most
1.1 Geography                                                                 of which undertake foreign exchange transactions. The large Indian
                                                                              commercial banks are State owned. Also recently RBI has licensed
India is the largest country in South Asia and the seventh largest in the     privately owned banks. Most of the major foreign banks have fully
world with an area of 3.287 million square kilometers. India's geographic     operational offices in the major cities in India. The rupee is convertible on
location makes it an ideal launching pad for exports with the fastest         current account. However, transactions on capital account continue to be
growing markets of the world.                                                 regulated.

1.2 Population                                                                1.6 The Indian Economy

India is the second most populous country in the world with a population of   India is the fifth largest economy in the world and has the second largest
over 1000 million, about 16% of the world population. The principal cities    GDP among emerging economies, based on purchasing power parity. In
of India are: Mumbai (Bombay), Kolkota (Calcutta), Delhi and Chennai          1991, India embarked on a bold economic reforms programme, with a view
(Madras). Other cities like Ahmedabad, Bangalore, Hyderabad and Pune are      to integrate its economy with the global economy and attain the type of
gaining importance as urban and industrialised cities.                        growth that countries in the Asia Pacific have exhibited over the last two
                                                                              decades. As will be seen in the following Chapters, reforms have continued
1.3 Languages                                                                 to reshape every aspect of the country's economy and markets, making it a
                                                                              preferred destination for investors from across the world.
There are a number of languages and dialects spoken in India. The official
language is Hindi which is also the language spoken by the largest number     2. INDIA MEANS BUSINESS
of people. English is used widely especially in business and commerce.
                                                                              2.1 Economic Reforms
1.4 Political System
                                                                              2.1.1 India provides enormous opportunities for foreign investment. The
India is the world's largest democracy and has adopted a Parliamentary        process of economic liberalisation commenced with the announcement by
System of Government with two Legislative Houses.                             the Government of the New Industrial Policy in 1991. The last decade has
                                                                              seen a sea change in India's approach to foreign investment. From a
1.5 Currency and Banking                                                      restricted licensed system existing in the pre-1991 era today, India has
                                                                              achieved a milestone of a free regime of Foreign Direct Investment ("FDI")
The Indian rupee is the country's currency. The rupee is divided into one     in all, except a few sectors. Inspite of phases of political instability the
hundred paise. India's banking system is controlled and monitored             process of economic liberalisation has been continuous with each political
                                                                              party recognising and supporting the same.

                                    1                                                                              2
2.1.2        On 11th February, 2000 the Government had, as a landmark               Strategic location- access to the vast domestic and South Asian
decision for giving further boost to FDI, decided to allow automatic                 market.
clearance for FDI in all except a few sensitive sectors in the negative list.
After the enactment of the Foreign Exchange Management Act, 1999                    Government's commitment to the deregulation process and
("FEMA") on 1st June, 2000, the Government has further liberalized the               political consensus on economic liberalisation at both, the Central
FDI policy. Presently, barring few sectors, investment in almost all major           and the State levels.
sectors is under the automatic route. Investment in sectors which are not
under the automatic route would require approval of the Foreign Investment          Well balanced package of fiscal incentives.
Promotion Board ("FIPB"). Only few sensitive industries are in the negative
list i.e. in respect of which FDI is not allowed.                                   The increasing role of private and foreign investment in the Indian

2.1.3    FIPB has been set up in the Department of Economic Affairs, the            Full convertibility of the Rupee on current account.
Ministry of Finance to negotiate and clear proposals with FDI in selected
areas. Its objective is to promote the inflow of FDI into India by                  A vast and fast growing consumer market of about 300 million.
undertaking investment promotion activities and facilitating investment in
the country by international companies, Non Resident Indians (“NRIs”) and           Huge pool of skilled manpower and high quality managerial and
other foreign investors in projects which are considered to give a benefit to        technical talent available at reasonable cost.
the Indian economy but do not qualify for the automatic route and /or are
outside the parameters of the existing policy for clearance of industrial           Well developed capital markets, banking, insurance and financial
proposals. FIPB is also assuming the responsibility of considering all               services sectors.
industrial proposals with or without technical collaboration and/or industrial
                                                                                    Abundant natural resources.
licence. The Ministry of Industry has published a set of guidelines, which
the FIPB considers for these proposals of FDI.
                                                                                    An excellent and well developed accountancy, legal and
                                                                                     consultancy profession.
2.2      India, an Attractive Destination for Investment - Why?                     A well established legal system with an independent judiciary.
The following factors have contributed to India today being one of the              English is widely spoken and understood.
most preferred and attractive locations for foreign investments:
                                                                                    Free and full repatriation of capital, technical fee, royalty and
        One of the largest economies in the world.                                  dividends.

                                                                                    Foreign brand names are freely used.

                                        3                                                                          4
The result of the above is seen in the following:                                 2.4     The Response

        India has posted higher returns in the post - 1991 period after the      Many multinational corporations and banks have been present in India for
         reforms were introduced, as compared to most of the emerging             decades. Since the start of the reform process, a very large number of
         markets (except China).                                                  foreign investors have entered various sectors of the Indian market. They
                                                                                  range from Fortune 500 companies to small and medium enterprises from
        In 1997 most of the emerging markets except India and China              all over the world. The global network of expatriate Indians has constituted
         posted negative returns.                                                 the second largest category of investors. The leading investor countries are
                                                                                  the U.S.A., UK, South Korea, Germany, Japan, Switzerland and France.
        FDI in India has steadily increased attracting investors from all
         over the world to the vast market potential offered by India.
                                                                                  3.      GOVERNMENT POLICIES ON FOREIGN INVESTMENT
        India's Foreign Exchange Reserves have exceeded US$91 billion.

                                                                                  3.1     Introduction
2.3      The Trade Policy
                                                                                  A number of significant policy changes have been introduced to make
An outward-looking and liberal trade policy is one of the main features of        investment in India an easier and more rewarding proposition. Basic
India's economic reforms. It is characterised by rationalised tariff levels and   changes in the policy towards foreign investment and a host of other
a drastic reduction in quantitative restrictions by introducing a streamlined     initiatives have considerably improved the business environment within
and simplified system of import and export licenses.                              which foreign companies operate in India now. Use of foreign brand
                                                                                  names/trade marks for sale of goods in India has been permitted.
The Trade Policy initiatives, which have further augmented/ strengthened
the investment climate include:                                                   3.2     Foreign Equity Investment

        Simplification of import control policy with abolition of import         The enactment of FEMA, which repealed the Foreign Exchange Regulation
         licensing except for consumer goods;                                     Act, 1973, was a step forward to the liberalisation policy. FDI is now
                                                                                  regulated by guidelines issued by the Central Government, FEMA, and the
        Small negative lists of banned and restricted items;                     Foreign Exchange Management (Transfer or Issue of Security by a
                                                                                  Person Resident Outside India) Regulations, 2000 ("the Transfer or
        Duties on capital goods have been reduced further for export             Issue Regulations"). The Transfer or Issue Regulations are recently
         schemes and certain project imports.

                                          5                                                                             6
amended in keeping with the Government's liberalisation policy on foreign                        5.       Atomic Minerals
investment in India. Foreign equity participation in most areas (except a few
sectors) is now made automatic requiring only postinvestment                                     6.       Print Media
filing. Applications for foreign investment, which do not satisfy the
parameters prescribed for automatic route, are required to be made to FIPB.                      7.       Broadcasting
These reforms have resulted in speedy and substantial economic growth and
an increase in foreign investment.                                                               8.       Postal services

                                                                                                 9.       Courier Services
The current FDI Scheme is briefly explained below:
                                                                                                 10.      Establishment and operation of Satellite
(a)      FDI in case of the following activities is prohibited:
                                                                                                 11.      Development of Integrated Township
         1.       Retail Trading                                                                 12.      Tea Sector.
         2.       Atomic Energy

         3.       Lottery Business                                                      (ii)     In respect of activities not falling in the above list, the
                                                                                                 investment would be subject to the sectoral caps as
         4.       Gambling and Betting.                                                          prescribed for each industry depending upon the nature of
                                                                                                 business e.g. automatic route for banking is subject to a
(b)      The Automatic Route for FDI is available only if:
                                                                                                 limit on foreign investment of 49% of the equity.
         (i)      The Indian company is not engaged in the activity or
                                                                                        (iii)    Other conditions as stipulated are complied with and post
                  manufacture of items namely:
                                                                                                 investment filings are done with RBI.
                  1.        Domestic Airlines

                  2.       Petroleum Sector (except for private sector oil
                                                                                  (c)   If a person resident outside India is a collaborator or willing to
                                                                                        acquire the entire shareholding of a new Indian company then he
                  3.       Investing companies        in   Infrastructure   and         is required to take prior permission of the Central Government
                           Service Sector                                               (i.e. FIPB), if he has a previous venture or tie-up in India
                                                                                        through investment in shares or debentures or a technical
                  4.       Defence and strategic industries                             collaboration or a trade mark agreement or investment by
                                                                                        whatever name called in the same or allied field.            This

                                             7                                                                               8
         restriction does not apply to investments in IT Sector or to              Automatic route for technology collaboration, like in case of FDI, would
         investments by International Financial Institutions such as Asian         not be available to those who have or had any technology transfer/trade
         Development Bank, International Finance Corporation,                      mark agreement in the same or allied field in India.
         Commonwealth Development Corporation and Deutsche
         Entwicklungs Gescelschaft.
(d)      The Issue Price cannot be less than (i) the price worked out in
         accordance with the Securities and Exchange Board of India                Payment of royalty upto 2% for exports and 1% for domestic sales is
         ("SEBI") Guidelines for listed companies and (ii) fair valuation as       allowed under the automatic route on use of trade marks and brand name of
         certified by Chartered Accountant in all other cases.                     the foreign collaborator without technology transfer. Other than this,
                                                                                   remittance of foreign exchange for use and/or purchase of trademark or
(e)      Payment towards the investment is to be made either by inward             franchise in India would require prior approval of RBI except to the extent
         remittance through normal banking channels or by debiting the             specifically allowed under the Government's general permission e.g.
         amount from the Non-resident External Rupee ("NRE") account or            franchise fee upto 3% for the hotel industry.
         Foreign Currency Non-Resident ("FCNR") account maintained
         with authorised dealer or authorised bank.
                                                                                   3.4       Non-Resident Foreign Direct Investment

                                                                                   The general policy and facilities for FDI as available to foreign companies
Repatriation of Sale Proceeds
                                                                                   are fully applicable to NRIs as well. In addition, the Government has
Repatriation of Sale Proceeds is allowed net of taxes provided (i) the             extended some concessions specially for NRIs which include investment
security was held by the seller on repatriation basis; (ii) the security is sold   upto 100% per cent in the real estate sector and in high priority industries.
on a recognised stock exchange or RBI permission for sale of the security
and remittance of proceeds thereof has been obtained; and (iii) a no
objection/ tax clearance certificate from the income tax authority has been        3.4.1     Who is a Non-Resident?
                                                                                   The term non-resident is synonymous with `person resident outside
                                                                                   India' and has different meaning under various statutes. The meaning of
                                                                                   non-resident under the foreign exchange laws is quite different as
3.3      Foreign Technology Agreements                                             compared to the definition under the Income Tax Act, 1961. It is the
                                                                                   nationality and purpose of stay of an individual outside India, which is
Automatic permission is granted for foreign technology agreement when the          relevant for determining the residential status under foreign exchange
lumpsum payment for technical know-how is upto US$2 million or 5%                  laws, whereas period of stay outside India determines the residential
royalty for domestic sales and 8% for exports without any restriction on the       status of a person under Income Tax Act, 1961. Both the definitions are
duration of such payments.

                                     9                                                                                10
mutually exclusive for the purpose of operations of these acts and are valid    repatriation basis. As a general rule for all investments on repatriation basis,
for matters coming under the respective statutes.                               funds for the purposes of investment must be provided by proceeds of
                                                                                foreign exchange remittance from abroad or from the specified accounts in
The term `Non-resident' is a very broad term and includes all nonresidents      India which represent free foreign exchange in the hands of investors. For
which can be categorised as under:                                              investment on non-repatriation basis, funds from sources stated above and
                                                                                balances held in Non-Resident Ordinary ("NRO") accounts of the investors
(i)      Non-resident persons of Indian Nationality                             may be utilised. Remittances in foreign currency received in India will be
                                                                                converted in rupees at the ruling TT selling rate on the date of conversion.
(ii)     Non-resident foreign citizens

Non-resident foreign citizens are further categorised as under:                 NRIs are now permitted to invest in (a) Government securities/units (b)
                                                                                shares/debentures of Indian companies in terms of the FDI Scheme, (c)
(a)      Non-resident foreign citizens of Indian origin.                        shares/debentures of Indian companies through stock exchange under
                                                                                Portfolio Investment Scheme. All these are with repatriation rights.
(b)      Non-resident foreign citizens of non-Indian origin.                    Additionally, NRIs can invest in shares or convertible debentures of Indian
                                                                                companies without any limit on non-repatriation basis.
Non-resident persons of Indian origin are given special treatment in respect
of investment in India.
                                                                                Portfolio Investment Scheme for NRIs

3.4.2    Overseas Corporate Bodies ("OCBs")
                                                                                Investment under the Portfolio Investment Scheme is subject to the
These are corporates predominantly owned by individuals of Indian               following:
nationality or origin resident outside India and include overseas companies,
partnership firms, societies and other corporate bodies which are owned
directly or indirectly, to the extent of atleast 60% by individuals of Indian           NRIs are required to route the purchase/sale transactions through
nationality or origin resident outside India as also overseas trusts in which            approved designated branch of an authorised dealer.
atleast 60% of the beneficial interest is irrevocably held by such persons.
Such ownership interest should be actually held by them and not in the                  NRIs can purchase shares upto 5% of the paid up capital of an
capacity as nominees.                                                                    Indian company. The total NRI holding cannot exceed 10% of the
                                                                                         paid up capital of the company. (This limit can be increased by the
3.4.3    General Policy On Investment by NRIs and OCBs                                   Indian company to 24% by passing a general body resolution).

Investment by NRIs are permitted on repatriation as well as on non-                     Investment can be made both on repatriation basis or non-
                                                                                         repatriation basis. For making investment on repatriation basis, it

                                 11                                                                                      12
        will be necessary to make payments by way of inward remittance            FIIs must obtain initial registration with SEBI, the nodal regulatory
        or by debit to the NRE/FCNR account of the NRI. Investment on              agency for securities markets and permission from RBI before they
        non-repatriation basis can also be made from the NRE/FCNR/NRO              make any investment in the securities of companies listed on the
        accounts.                                                                  Indian stock exchanges. RBI's permission required for the FII
                                                                                   under foreign exchange regulations, is obtained by SEBI before
                                                                                   granting registration.

       The sale proceeds of the repatriable investments can be (i) credited      Nominee companies, affiliates and subsidiary companies of the FII
        to the NRE/NRO etc. accounts of the NRIs whereas the sale                  are treated as separate FIIs for registration, and require separate
        proceeds of non-repatriable investment can be credited only to             registration with SEBI.
        NRO accounts or (ii) at the option of NRI, repatriated outside India
        in case of investment on repatriation basis. The sale proceeds of
        shares will be subject to payment of applicable taxes.                    SEBI's initial registration and RBI's general permission are valid
                                                                                   for five years, and are both renewable for a further period of five
                                                                                  RBI's general permission would enable the registered FII to buy,
                                                                                   sell and realise capital gains on investments made through initial
Earlier, the various facilities granted to NRIs were available with certain
                                                                                   corpus remitted to India, subscribe/renounce rights offerings of
exceptions to OCBs so long as the ownership/beneficial interest held in
                                                                                   shares, invest on all recognised stock exchanges through a
them by persons of Indian nationality/origin resident outside India
                                                                                   designated bank branch, and to appoint a domestic Custodian for
continued to be at or above the level of 60%. However, as per a recent
                                                                                   custody of investments held.
Notification, OCBs are de-recognised as an investor class. Accordingly,
OCBs will not be allowed to make fresh investments or open any new NRE
and FCNR(B), NRO accounts.
                                                                                  FIIs can invest in all securities in the primary and secondary
                                                                                   markets including securities of domestic mutual funds subject to
                                                                                   certain guidelines. FIIs are permitted to invest in unlisted debt
3.5     Foreign Institutional Investors ("FIIs")
                                                                                   securities. There is no restriction on the volume of investment for
                                                                                   the purpose of entry of FIIs in the primary/secondary market.
                                                                                   There is no lock-in period for the purpose of investments made by
       FIIs include pension funds, mutual funds, investment trusts, asset
        management companies, nominee companies and incorporated/
        institutional portfolio managers or their power of attorney holders.
                                                                                  FIIs are allowed to invest in shares and convertible debentures
                                                                                   of Indian companies under the Portfolio Investment Scheme

                                        13                                                                       14
    as per the prescribed terms and conditions, viz.                             20% on dividend and interest income and a tax rate of 10% on long
                                                                                 term (one year or more) capital gains.
            No individual FII/sub-account can acquire more than 10%
             of the paid up capital of an Indian company.
                                                                           3.6   Venture Capital Investments
            All FIIs and their sub-accounts taken together cannot
             acquire more than 24% of the paid up capital of an Indian          A Foreign Venture Capital Investor ("FCVI") is an investor
             company.                                                            incorporated and established outside India, which proposes to
                                                                                 make investment in Venture Capital Fund ("VCF") or Venture
            Indian companies can raise the abovementioned 24%                   Capital Undertaking ("VCU") in India, and is registered with SEBI
             ceiling to the sectoral cap/statutory ceiling as applicable         under SEBI (Foreign Venture Capital Investors) Regulations,
             by passing a board resolution followed by a special                 2000 ("the FVCI Regulations").
             resolution by its general body.
                                                                                VCF is a fund established in the form of a trust or, a company
   FIIs are also permitted to purchase shares and convertible                   including a body corporate and registered under the SEBI (Venture
    debentures of an Indian company through public offer/private                 Capital Fund) Regulations, 1996 which has a dedicated pool of
    placement and the Indian company is permitted to issue such                  capital raised in a manner specified under the said Regulations and
    shares, subject to the ceilings specified above and also subject to          which invests in VCUs in accordance with the said Regulations.
    adherence to prescribed pricing norms. The above aggregate limits
    do not include FDI by a foreign collaborator and investments by
    FIIs through off-shore funds, global depository receipts and Euro           VCU is a company incorporated in India whose shares are not
    convertible bonds.                                                           listed on a recognised stock exchange in India and which is not
                                                                                 engaged in an activity under the negative list specified by SEBI
                                                                                 such as undertakings engaged in real estate business, nonbanking
   Disinvestment in listed securities is permitted only through stock           financial services.
    exchanges in India, including the Over the Counter Exchange of
    India. In exceptional cases, SEBI permits sales other than through
    stock exchanges.                                                             Investment by FVCI

   FIIs are permitted to hedge their foreign exchange exposure at 15%           A registered FCVI may make investments in a VCF or a VCU or
    of their outstanding investments in India.                                   in the units of schemes/funds set up by a VCF, in the manner and
                                                                                 subject to the terms and conditions specified in the Transfer or
                                                                                 Issue Regulations, such as:
   FIIs are subject to a concessional tax regime of a flat tax rate of

                                   15                                                                          16
                                                                                              (a)      subscription to the IPOs of a VCU whose shares
(i)     FVCI should abide by the relevant regulations/guidelines issued by                             are proposed to be listed subject to a lock-in
        SEBI;                                                                                          period of one year;

(ii)    The consideration is to be paid out of inward remittance from                         (b)      debt or debt instrument of a VCU in which the
        abroad through normal banking channels or out of funds held in an                              FVCI has already made an investment by way of
        account maintained with the designated branch of an authorised                                 equity.
        dealer in India;
                                                                                    A FVCI is required to appoint a domestic custodian and to enter
(iii)   Investment can be in equity/equity linked instruments/debt/debt              into an arrangement with a designated bank for the purpose of
        instruments, debentures of a VCU or of a VCF through IPO or                  opening a special non-resident Indian rupee or foreign currency
        Private Placement or in units of schemes/funds set up by a VCF.              account.

                                                                                    Certain reporting and disclosure requirements are required to be
The FVCI Regulations                                                                 satisfied on a continuing basis.

All investments to be made by a FVCI would be subject to the following       FVCIs would be entitled to the following benefits:

       FVCI is permitted to invest its entire corpus in domestic VCFs.      (i)     FVCIs can freely remit monies into India for making investments
                                                                                     in VCUs.
       FVCI cannot invest more than 25% of the funds committed for
        investments in India in a single VCU.                                (ii)    FVCIs can acquire or sell Indian securities or any other investment
                                                                                     at a price that is mutually acceptable to both the buyer and the
                                                                                     seller. Thus, there are no entry or exit pricing restrictions
       Investments in VCUs are subject to the following restrictions:               applicable to FVCIs.

        (i)     atleast 75% of the investible funds have to be invested in   (iii)   Transfer of shares from FVCIs to promoters is exempted from the
                unlisted equity shares or equity linked instruments;                 public offer provisions under the SEBI (Substantial Acquisitions of
                                                                                     Shares and Takeover) Regulations, 1997, if the portfolio company
        (ii)    not more than 25% of the investible funds can be invested            gets listed on a stock exchange post investment.
                by way of:

                                          17                                                                         18
(iv)    FVCIs are regarded as Qualified Institutional Buyers and are                   financing. VCFs investing in power or telecommunications
        accordingly eligible to subscribe to the securities under IPO of a             projects are exempted from taxes on dividend income and long-
        VCU through the book-building route.                                           term capital gains. Infrastructure capital funds do not have to pay
                                                                                       income tax on dividend or interest income, or long-term capital
(v)     The pre-IPO share capital of FVCIs in a company is exempted                    gains.
        from the lock-in restriction.
                                                                                      Ten years tax holiday is provided to Build-Own-Operate- Transfer
4.      SOME IMPORTANT AREAS OF INVESTMENT WITH A                                      ("BOOT") and Build-Own-Transfer ("BOT") projects in the
        FOCUS ON INFRASTRUCTURE                                                        following areas: power, roads, highways, bridges, airports, ports,
                                                                                       rail systems, water supply, irrigation, sanitation and sewerage
4.1     Infrastructure                                                                 systems.

4.1.1   The New Agenda -                                                              There are significant import duty concessions available on
                                                                                       equipment and raw material being imported by projects in several
       Till the advent of economic reforms, Indian infrastructure was                 infrastructure sectors like power, mining, oil exploration, port and
        dominated by public sector agencies and government departments.                road development.
        Since 2000, the Central Government has taken several fiscal and
        capital market-related measures designed to channel private                   Infrastructure projects have been permitted to avail of External
        investments into infrastructure sectors.                                       Commercial Borrowings ("ECBs") to the extent of 50 per cent of
                                                                                       total project cost.
       The Investment Promotion and Infrastructure Development Cell in
        the Ministry of Industry arranges the facilitation and monitoring of          Customs duty rates have also been reduced.
        investments and co-ordination of infrastructural requirements.
                                                                                       The specifics of the current FDI policy for this Sector are dealt
       The functions of the Cell are to promote private investment                    with in the following paragraphs 4.2 to 4.4:
        including foreign investment in the infrastructure sector; liaising
        with State Governments regarding investment promotion; and             4.2     Roads and Highways
        coordination of progress of projects approved for investment or
        technology transfer.                                                   Industrialisation in India has brought in its wake considerable demand for
                                                                               more and better roads. A better road network will result in enormous
4.1.2   Incentives                                                             savings as also enable commercial vehicles to cover far greater per day
                                                                               average distance than presently.
       Keeping in view the large volumes of investments and long
        gestation periods that characterise infrastructure projects, various
        tax concessions are available to institutions engaged in their

                                        19                                                                                  20
Under the present Guidelines 100% FDI is allowed under the automatic                   Exempting such projects from the purview of the Public
route in projects for construction and maintenance of roads, highways,                  Investment Board ("PIB") and Cabinet Committee on Economic
vehicular bridges, toll roads, vehicular tunnels, ports and harbours.                   Affairs ("CCEA").

The Government has announced a set of guidelines for development of                    Debt equity ratio of 4:1 is allowed.
highways, including a series of measures to attract private investment in this
sector. The following are the highlights of the Road and Highways Policy.              Constituting Standing Empowered Committees for expeditious
                                                                                        approval at State and Central level.
        Road sector has been declared as an industry. This facilitates
         borrowing on easy terms.
                                                                                  4.3   Urban Infrastructure
        National Highways Act has been amended to enable levy of fee on
         National Highways, bridges and tunnels.
                                                                                       According to the census of India the contribution of urban sector to
        Road sector has been declared as an infrastructure to permit                   GDP is 60% and accounts for more than 90% of the Government
         floating of bonds.                                                             revenues. It is estimated that on account of increasing urbanisation
                                                                                        estimated investment of over US$80 billion would be required
        The cost of land acquisition, preliminary project preparation and              during the period 1995 to 2005 in basic urban amenities and
         removal of utilities in relation to such projects will be borne by the         facilities and US$11.2 billion for housing in urban areas.
                                                                                       Presently, NRIs are allowed to invest upto 100% under the
        Customs duties on import of construction equipment have been                   automatic route in development of serviced plots and construction
         considerably reduced and procedures streamlined.                               of built-up residential premises, development of townships, city
                                                                                        and regional level urban infrastructure facilities including both
        Repatriation of profit in foreign exchange will be allowed.                    roads and bridges. FDI upto 100% is permitted to all foreign
                                                                                        investors for development of integrated townships, including
        Vesting of highway construction activity with private sector.                  housing, commercial premises, hotels, resorts, city and regional
                                                                                        level urban infrastructure facilities such as roads and bridges, mass
        Evolving mechanism, for fixation of viable road user charges.                  rapid transit systems and manufacture of building materials.
                                                                                        Development of land and providing allied infrastructure will form
        Setting up of a Standing Tribunal with full powers to resolve all              an integrated part of township's development. This will be subject
         disputes.                                                                      to certain prescribed conditions.

        Evolving mechanism for permitting collection of fee directly by
         the private sector.

                                   21                                                                                              22
4.4      Mass Rapid Transport Systems                                              The customs duty for import of power equipment has been reduced
                                                                                    to 20% and this rate has also been extended to machinery required
Rapidly growing urban population coupled with higher trip lengths and per           for modernisation and renovation of power plants.
capita trip rate has resulted into an ever-increasing demand for fast urban
transport systems. To attract private players in development of effective          Tax holiday in respect of 100% taxable profits for ten years has
Mass Rapid Transport Systems in metro cities, FDI upto 100% is permitted            been allowed for power plants commencing commercial operations
through the automatic route in this Sector in all metros including associated       between April 1, 1995 and March 31, 2006.
real estate development.
                                                                                   16% rate of return on equity has been provided. For the portion of
4.5      Power                                                                      foreign equity, returns upto 16% can be designated in the currency
                                                                                    of the subscribed capital to protect it from foreign exchange
4.5.1    The New Agenda                                                             fluctuations.

         India's large power requirement arises due to the need to sustain         The rates for depreciation in respect of assets have been
         the projected growth of the economy. Prior to the reforms,                 liberalised.
         generation, transmission and distribution of power were almost
         wholly the preserve of the Central and State Governments. In
                                                                                   Central Electricity Authority ("CEA") concurrence is no longer
         1991, the Government decided to allow private participation,
                                                                                    required for various schemes for power generating stations
         both Indian and foreign, in the sector, creating tremendous
                                                                                    complying certain conditions.
         investment opportunities. Since the 1991 Power Policy, the
         Government has announced a wide range of policy measures that             Selection of Independent Power Producers ("IPPs") through the
         seek to further liberalise the power sector and facilitate private         competitive bidding is not mandatory for certain projects.
         investment. Foreign investment in the power sector is actively
         encouraged and can take place either in the form of a joint venture       Private Sector Companies can set up enterprises to operate either
         with an Indian partner or as a wholly-owned entity with 100%               as licensees for distributing electricity in a specified area or as
         foreign equity. According to the new liberalized policy, foreign           generating companies.
         equity upto 100% in the field of electricity generation,
         transmission and distribution except in atomic reactor power plants       Generating companies can sell power on the basis of a suitably
         can be held by a company through automatic route.                          structured two part tariff one part to cover fixed costs and the other
                                                                                    part to cover variable costs at a prescribed level of performance.
4.5.2    Incentives
                                                                                   For coal based power projects, development of captive mines is
                 Import of equipment for power projects is permitted.              permitted as per the guidelines of Ministry of Coal in this regard.

                                  23                                                                                      24
                Specific incentives are also prescribed for licensees.        primarily aimed at the petroleum sector. The salient features of relaxations
                                                                               introduced are as follows:
4.6     Oil & Gas
                                                                                      Earlier 100 % FDI was permitted only in small oil fields and FDI
In the pre-1991 era the activity in this industry for exploration,                     upto 51% was allowed for incorporated joint ventures with a No
development, production, refining, marketing, distribution was controlled              Objection Certificate for medium size fields, subject to prior
by the various national oil companies. Since India's economic liberalisation           government approval. FDI upto 100% is now permitted via the
programme started, however, the Indian oil and gas sector has gone through             automatic route in oil exploration in both small and medium sized
some very fundamental changes.                                                         fields subject to and under the government’s policy on private
                                                                                       participation in (a) exploration of oil and (b) the discovered fields
       The entire Indian petroleum sector has been opened to the private              of national oil companies.
        sector, both domestic and foreign, for investments through joint
        ventures and strategic alliances.                                             FDI upto 100 % is now permitted via the automatic route in
                                                                                       petroleum product marketing.
       In exploration and production, Indian oil and natural gas fields
        have been opened up to the private sector as well as to foreign               FDI upto 100 % is now permitted through the automatic route for
        participation under production sharing contracts.                              petroleum product pipelines subject to and under the government
                                                                                       policy and regulations thereof.
       In marketing and distribution, the private sector is now permitted
        to import most petroleum products. Pipelines, terminals and                   FDI upto 100 % is also permitted for Natural Gas/LNG Pipelines
        tankages have also been cleared for private investment.                        with prior government approval.

FDI upto 100% is allowed under the automatic route for petroleum refining      4.7     Telecommunication
in private sector.
                                                                               4.7.1   New Agenda
Further Liberalisation of investment in Oil & Gas
                                                                                               Indian business needs better quality of service and more
The Ministry of Commerce and Industry (the "Ministry") has notified                             value-added services such as cellular telephony, radio
further relaxations in the Foreign Direct Investment ("FDI") policy vide                        paging, e-mail and data transmission. The community
Press Note No.1 (2004) dated 28th January 2004, which modifies the                              needs dependable-quality basic telephones.
relevant provisions of Press Note No. 2 (2000). The Ministry has revised
the sectoral guidelines and equity cap on FDI, including investment by                         Demand for e-mail is directly dependent upon sales of
Non-Resident Indians and Overseas Corporate Bodies. The relaxations are                         computers, which is rising fast in India. With access to
                                                                                                worldwide networks like the Internet available at a

                              25                                                                                            26
    reasonable cost, e-mail demand is projected to exceed         4.7.2   Incentives
    37.5 million subscribers by 2005.
                                                                                 The telecommunications sector has been granted
   India's liberalised policies and vast base of educated                        infrastructure status making investors eligible for fiscal
    manpower         offers     great   opportunities   in                        benefits such as tax holidays. Companies providing basic
    telecommunication equipment manufacturing.                                    and cellular services are allowed a tax holiday for a period
                                                                                  of 10 years.
   Sweeping changes over the past decade have contributed
    to the rapid growth of the Indian telecommunication                          The Government has reduced the import duties on
    system. Among these are the adoption of advanced                              telecommunications equipment and parts.
    switching and transmission technologies; permitting
    private entry into equipment manufacture; liberalization                     ECB norms are relaxed.
    of equipment imports and the lowering of import tariffs.
    In the last ten years, the reforms have accelerated, aiming   4.8     Civil Aviation
    at a total transformation of the market.
                                                                  4.8.1   The New Agenda
   The Government has proposed the Communication
    Convergence Bill, 2001 to promote, facilitate and develop
                                                                                 Domestic and international passenger traffic and domestic
    in an orderly manner, the carriage and content of
                                                                                  and international cargo traffic in India is projected to
    communications            (including         broadcasting,
                                                                                  grow significantly at 15-20 per cent annually.
    telecommunications and multi-media) and to facilitate
    development of national infrastructure for an information
    based society. This legislation when enacted will have far                   Economic liberalisation has seen radical changes in
    reaching effects on the national economy as well as                           India's civil aviation sector, the most significant of which
    development of rapidly increasing use of communication                        are, a rapid increase in capacity and a dramatic
    mediums.                                                                      improvement in service quality.

   49% FDI is allowed in telecommunication sectors such as                      The regulatory and development functions are looked
    cellular, value added services, and global mobile personal                    after by the Ministry of Civil Aviation and the offices of
    communication by satellite, subject to certain prescribed                     the Directorate General of Civil Aviation ("DGCA").
                                                                                 In order to provide clear rules and procedures for
   FDI upto 100% is allowed under the automatic route for                        investment as well as management of civil aviation sector,
    activities such as electronic mail, voice mail, ISPs not                      the Government has formulated draft Civil Aviation
    providing gateways subject to prescribed conditions.

                             27                                                                             28
                 Policy. Some of the major provisions prescribed under          FDI upto 100% under the automatic route is now permitted in
                 this draft Policy are (i) privatisation of Air India and       projects for construction and maintenance of ports and harbours.
                 Indian Airlines and (ii) privatisation in construction, up
                 gradation- operation of new as well as existing air ports is   The Ministry of Surface Transport has released the revised
                 encouraged. As a further step towards FDI liberalisation,      guidelines to be followed by the Port Trusts for private sector
                 the Government has allowed investment in airports upto         participation in the development of major ports. The following
                 74% under automatic route and in case of investment            areas have been identified for privatisation, or investment by the
                 beyond 74%, Government approval is required. However,          private sector:
                 foreign equity in domestic airlines is not permitted under
                 the automatic route and accordingly, prior approval of
                                                                                       Leasing out existing port assets
                 FIPB would be necessary for such investment.

                                                                                       Construction /Creation of additional assets like -
4.8.2   Incentives

                                                                                       Construction or operation of container terminals ï
                Ten years tax holiday is given for construction of new
                                                                                        Construction or operation of bulk, break bulk,
                                                                                        multipurpose and specialised cargo berths
                Liberalised trade and customs duty policies are available
                                                                                       Warehousing, container freight stations, storage facilities
                 for this sector.
                                                                                        and tank farms
4.9     Ports & Shipping
                                                                                       Carnage and handling equipment
        India enjoys a strategic location in the Indian Ocean and has a vast
        coastline of around 6,000 km. India's economic strategy has been               Setting up captive power plants
        changing radically in the last few years. As India globalises its
        economy fast, it will need to handle a growing volume of                       Dry docking and ship repair facilities
        international trade. Hence, the upgradation and expansion of its
        ports would be a key success factor for India's economic                       Leasing of equipment and floating craft from the private
        development programme.                                                          sector

        Recognising the need for major expansion of India's port                       Pilotage

        infrastructure to handle increased foreign and coastal trade, the              Captive facilities for port-based industries.
        Government has thrown open this sector to private participation.

                                      29                                                                                    30
                 The shipping, shipbuilding and ship repair sectors offer a                   Local producers have been attempting to integrate their
                  number of incentives and opportunities to investors.                          operations with the global industry, most successfully
                  Facilities at par with 100% Export Oriented Units                             accomplished in the aluminium sector.
                  ("EOUs") are also available for the ship repair industry.
                                                                                4.10.2   The New Agenda
                 Some of the recent projects for foreign participation in
                  ports are Gujarat Pipavav Port Limited, Kakinada Port,                       Under the Tenth Five Year Plan (2002-07) major thrust is
                  Jawaharlal Nehru Port Trust and Kandala Port.                                 given to the mineral exploration and development activity
                                                                                                in North Eastern region and other far off places in
4.10     Mining                                                                                 Himalayas, coastal regions and desert areas. It is also
                                                                                                proposed to encourage re-cycling industry for obtaining
4.10.1   Prospects                                                                              secondary metal at low cost to meet domestic demand. To
                                                                                                boost the development of the mining sector, the
                 India is an emerging world player in industrial minerals.                     procedures have been simplified for approval of mining
                  There exists immense scope for exploration of known                           plant.
                  deposits and discoveries of new ones. Both the
                  Government of India and various State governments are                        The present guidelines under the automatic route for FDI
                  aware of the potential, and have been consistently                            in coal and lignite sectors allow (i) 100% FDI in private
                  opening up the mining sector to private investors with                        Indian companies setting up or operating power projects
                  funds, technology, managerial expertise and commitment.                       as well as coal or lignite mines for captive consumption,
                                                                                                (ii) 100% FDI for setting up coal processing plant subject
                 Within India, with increasing levels of consumption,                          to certain conditions and (iii) FDI upto 74% for
                  infrastructural development and growth of the economy,                        exploration or mining of coal or lignite for captive
                  mineral demand is expected to grow very fast. The                             consumption. In these cases, FDI is allowed upto 50%
                  emergence of a vibrant middle class has created robust                        under the automatic route subject to the condition that
                  demand for base metal products, in addition to the                            such investment shall not exceed 49% of the equity of a
                  traditional demand for gold and silver.                                       public sector undertaking.

                 India offers an unmatched opportunity to multinational                       Now 100% FDI is allowed under automatic route for
                  corporations to set up production facilities based on lower                   exploration and mining of gold, silver and minerals other
                  wage costs to tap its large domestic market and export                        than diamonds and precious stones, metallurgy and
                  prospects.                                                                    processing. For exploration and mining of diamonds and
                                                                                                precious stones FDI is allowed upto 74% under the
                                                                                                automatic route.

                                         31                                                                                  32
                                                                               (v)      Convention/seminar units and organisations.

4.10.3   Incentives                                                            FDI norms for this sector have been liberalised to allow 100% foreign
                                                                               equity participation by foreign investor under the automatic route.
         The Government of India has announced a wide range of
         concessions to investors in the mining sector:
                                                                               For foreign technology agreements in this sector, no approval is required if:
         Operators in specified backward areas, subject to certain             (i)      not more than 3% of the capital cost of the project is proposed to
         conditions, are eligible for a complete tax holiday for a period of            be paid for technical and consultancy services including fees for
         seven years from commencement of production. Minerals in their
                                                                                        architects, design, supervision, etc.
         finished form have been exempted from excise duties.

         The opening up of the mining sector has received positive response    (ii)     not more than 3% of the net turnover is payable for franchising and
         from leading global players with inflow of Rs.39.63 billion.                   marketing/publicity support fee, and

                                                                               (iii)    not more than 10% of gross operating profit is payable for
4.11     Hotel and Tourism Related Industries                                           management fee, including incentive fee.

The term "Hotels" includes, among others, restaurants, beach resorts and       4.12     Investment in Free Trade Zones
other tourist complexes providing accommodation and /or catering and food
facilities to tourists. The term "Tourism Related Industry" includes, among    Units undertaking to export their entire production of goods and services
others, following:                                                             may be set up under the EOU Scheme, Export Processing Zone ("EPZ")
                                                                               Scheme, Electronic Hardware Technology Park ("EHTP") Scheme or
(i)      Travel agencies, tour operating agencies and tourist transport        Software Technology Park ("STP") Scheme. Such units may be engaged in
         operating agencies;                                                   manufacture, services, development of software, agriculture, including
                                                                               agro-processing, aquaculture, animal husbandry, bio-technology,
(ii)     Units providing facilities for cultural or wildlife experience and    floriculture, horticulture, pisciculture, viticulture, poultry and sericulture
         adventure to tourists;                                                and may export all products except goods mentioned as prohibited items of
                                                                               exports in ITC (HS) Classifications of Export and Import items.
(iii)    Surface, air and water transport facilities for tourists;
                                                                               Commensurate with the policy to give a special thrust to export of computer
                                                                               software, such units would be encouraged to be set up under any of the
(iv)     Leisure, entertainment, amusement, sports and health unit for
                                                                               aforementioned export oriented schemes. Software units may undertake
         tourists; and
                                                                               exports using data communication links or in the form of physical exports

                                  33                                                                              34
(which may be through courier service also), including export of                      Tax holiday for 90% of the profits is available for the initial period
professional services.                                                                 of 10 years under the Indian Income Tax Act.

The Indian Government has established seven EPZs at Mumbai (Santacruz                  EOUs/EPZ units have to achieve specified value addition norms,
Electronics Export Processing Zone); at Kandla in Gujarat, at Cochin in                which are expressed in terms of the difference between the FOB
Kerala, at Chennai in Tamil Nadu, at Falta in West Bengal, at Noida in                 value realised and the cost of all inputs.
Uttar Pradesh and Vishakhapatnam in Andhra Pradesh to promote exports
and provide investment opportunities. EOU may be set up anywhere in                   Advance licences are available exempting exporters from payment
India.                                                                                 of customs duty on goods required for export production.

Some of the salient features of investment in EOUs/ EPZs are as follows:              Application to concerned authorities for setting up EOUs/EPZ
                                                                                       units are cleared within 45 days under a single point clearance
       The industrial units set up in these zones have to export the entire           system.
        production subject to sale in Domestic Tariff Area ("DTA") in
        certain conditions.                                                            As part of the ongoing economic reforms, the Government has
                                                                                       delegated substantial powers to Development Commissioners of
       EOUs/EPZ units in agriculture, aquaculture, animal husbandry,                  EPZs, which amongst others include merger of two or more
        floriculture, horticulture, sericulture, pisciculture, poultry are             EOU/EPZ units;
        allowed to sell up to 50% of their output in DTA.
                                                                                      100% FDI is permitted under automatic route for EOU/EPZ units.
       EHTP/EOU/EPZ units engaged in electronic hardware are
        permitted to sell one half of the value of their products in the       Investment in Special Economic Zones ("SEZs")
        domestic market on payment of excise duty.
                                                                               At present 100% FDI is allowed under the automatic route for units in SEZs
       Full repatriation benefits available in respect of capital invested    undertaking manufacturing activities except (i) Arms and ammunition,
        and income earned thereon.                                             Explosives and allied items of defence equipments, Defence aircrafts and
                                                                               warships; (ii) Atomic substances, Narcotics and Psychotropic Substances
       Capital equipment, raw materials and components can be freely          and Hazardous Chemicals, (iii) Distillation and brewing of Alcoholic
        imported.                                                              drinks, and (iv) Cigarette/Cigars and manufactured tobacco substitutes.

                                                                               Incentives for Units in Special Economic Zones
       General exemption is available from excise duty, central taxes as
        well as reduction in certain local taxes.                              Under FEMA, several permissions have been given to SEZ units subject to
                                                                               prescribed conditions, as under:

                                      35                                                                                36
(a)      to dispatch export documents directly to the consignees outside           The electronics industry as a whole, with the exception of
         India without routing through authorised dealers;                          aerospace and defence electronics, has been fully delicensed.

(b)      to open, hold and maintain a foreign currency account with an             Fiscal investment and trade policies for the electronics sector have
         authorized dealer in India;                                                also been liberalised.

(c)      to allow hedging transactions in the international commodity/             DOE played a key role in the opening up of internet services for
         market and hedge their commodity price risk on import-export;              the private sector in order to support and stimulate the use of
                                                                                    internet in the country.
(d)      to realise the export proceeds without any condition of time limit;
                                                                                   The liberalisation of Exim Policy for electronics sector was
(e)      to undertake job work abroad and export goods from that country            continued and simplification of procedures for exports under
         itself;                                                                    various export promotion schemes for electronics sector were
                                                                                    made to accelerate the export thrust. Under the Exim Policy, 1997-
(f)      to receive payment in the form of precious metals of equivalent            2002, a new scheme of duty entitlement passbook ("DEPB") was
         value of jewellery exported;                                               introduced on post-export basis leading to simplification of
                                                                                    procedure of refund of duty on exports made. DEPB is continued
(g)      to net export receivables against import payments;                         for this sector in Exim Policy, 2002-2007 also.

(h)      to issue equity shares to non-residents against import of capital         The customs duty is reduced considerably for most items.
                                                                                   The central excise duty on computer and parts of computers and
4.13     Electronics & IT Enabled Services                                          television parts was reduced considerably.

Electronics is the fastest growing sector of the Indian industry. During the       As a significant policy measure, electronic hardware units in
Eighth Plan, the electronics industry has achieved a cumulative annual              EOU/EPZ/EHTP shall have the option to sell one-half of the value
growth of 20 per cent in production and over 40 per cent in exports. In the         of their production on an annual basis in the domestic market and
liberalised economic scenario, the Department of Electronics ("DOE") is             export the remaining half of their production in value terms,
attempting to bring the benefits of electronics to every field, and is aiming       without any minimum foreign exchange earning stipulation, on
at making the Indian electronics industry a global player. This is being            payment of applicable duties.
achieved by a three-dimensional approach, which involves (a) supporting
technology development, (b) setting up of critical infrastructure and (c)
                                                                                   Bilateral co-operation with various countries in the area of
formulating policies conducive to industrial growth.
                                                                                    electronics and information technology has been given added
                                                                                    emphasis. Recognising the potential of this sector in the growth of

                                     37                                                                                38
        the global economy, exclusive joint working groups/                       Private sector undertaking may set up a STP unit. Such STP unit
        subcommissions in this sector have been set up under the aegis of          can be an individual unit by itself or it may be one of such units
        Inter-Government Commissions with various countries.                       located in an area designated as STP Complex.

       Foreign equity participation upto 100 per cent is permitted in 100%       Under the STP Scheme a unit can be set up for the purpose of
        EOU/EPZ units engaged in activities under this sector.                     development of software, data entry or conversion, data
                                                                                   processing, data analysis and control, data management or Call
       There is no minimum value addition required for electronic                 Centre services for export.

        hardware. Access to domestic market, however, is allowed with             The entire software including software services and sale of
        minimum value addition of 15 per cent.                                     software developed by a STP unit is required to be exported except
                                                                                   the sales in the DTA. The sale in DTA is permissible upto 50% of
       Additionally the incentives for EOUs and EPZs listed in paragraph          the production in value terms made by the STP unit.
        4.12 above are also available.
                                                                                  An application in the prescribed format for establishing a STP unit
During the last five years, the information technology sector has emerged as       is required to be submitted to the Chief Executive of the concerned
one of the fastest growing sector in Indian economy by attracting lot of           STP Complex, along with the details of the project and processing
foreign investment. As India has large human resources having qualified            fees. Necessary approval/permission would be granted by the
technical knowledge combined with cost effective services, it has become           Officer designated by the Ministry of Information Technology if
an attractive location for business process outsourcing. A recent study            the application meets the prescribed parameters.
conducted by NASSCOM and McKinsey estimate Information Technology
Enabled Service ("ITES") industry to grow over US$ 17 billion in revenues
                                                                                  Various incentives are provided to STP units all over India, which
by 2008. Recognising that the information technology will have a major
                                                                                   are as under:
bearing on the economic development in future, the Indian Government and
major State Governments have given a number of incentives to industries in
this sector.                                                                       (i)     Certain goods such as, office equipment, PABX, fax
                                                                                           machines, projection systems, computers, laptops, servers,
       100% FDI is permitted in ITES sector under the automatic route.                    security systems, UPS are allowed to be imported without
                                                                                           payment of duty;
       The STP Scheme is a 100% export oriented scheme for                        (ii)    Excise Duty exemption on certain goods used for the
        undertaking software development for export using data                             activity;
        communication link or in the form of physical export including
        export of professional services under the STP Scheme.                      (iii)   Ten years Income Tax Holiday for 90% of the profits;

                                      39                                                                                    40
        (iv)     In certain cases, Central Sales Tax paid by STP unit on       4.15     Advertising and Film Sector
                 purchases made from DTA is reimbursed subject to
                 prescribed conditions.                                        The Ministry of Information and Broadcasting is the concerned ministry for
                                                                               formation of policies on FDI in films and advertising sector. The
       STP Complexes are set up in Bangalore, Manipal and Mysore              entertainment industry in India is spread across the country. The Indian film
        (Karnataka), Bhubaneshwar (Orissa), Pune and Navi Mumbai               industry is very large with high financial stakes involved. The popularity of
        (Maharashtra), Noida (Uttar Pradesh), Hyderabad and Vizag              films in the local masses coupled with increasing popularity of Indian films
        (Andhra Pradesh), Gandhinagar (Gujarat), Thiruvananthapuram            globally has made this industry an attractive investment avenue.
        (Kerala), Kolkota (West Bengal), Jaipur (Rajasthan), Mohali
                                                                               With the entry of multinationals in India, the competition for high market
        (Haryana), Chennai and Coimbatore (Tamil Nadu), Guwahati
                                                                               share in respect of Fast Moving Consumer Goods as well as White Goods
        (Assam), Indore (Madhya Pradesh).
                                                                               has become intense among such multinationals and local manufacturers. As
                                                                               a result of this, the importance of effective advertising through various
       Availability of infrastructural facilities, proximity, commercial      media has increased, which in turn has given a push to the advertising
        development has made Mumbai, Bangalore and Hyderabad as fast           industry as a whole.
        growing destinations for STP operations.
                                                                               Presently, FDI upto 100% in advertising and film sector is available under
4.14    Insurance                                                              the automatic route.

Until the enactment of the Insurance Regulatory and Development                4.16     Agriculture
Authority Act, 1999 ("IRDA Act"), the business of providing life insurance
in India was restricted by a special legislation being the Life Insurance              In partial liberalisation of extant policy, which prohibits FDI in
Corporation Act, 1956 ("LIC Act") to the Life Insurance Corporation of                  agriculture sector including plantations, the Government has
India. However, IRDA Act amended the Insurance Act, 1938 and the LIC                    decided to allow FDI upto 100% in tea sector, including tea
Act to enable private players to enter the Indian insurance industry. On                plantations.
account of this liberalisation step, many players in the international
insurance market have entered the Indian insurance industry to offer various           These proposals would require prior approval of Central
                                                                                        Government and would be subject to the conditions such as dis-
insurance products.
                                                                                        investment of 26% equity in favour of Indian partner/public within
                                                                                        a period of five years and prior approval of concerned State
FDI upto 26% in the insurance sector is allowed under the automatic route
                                                                                        Governments in case of any future land use change.
subject to obtaining licence from the Insurance Regulatory and
Development Authority.

                                  41                                                                                             42
4.17    Defence                                                                remains at 26% for insurance companies. The release said that RBI will
                                                                               separately issue guidelines for foreign banks to set up a wholly-owned
Government has allowed private sector participation upto to 100% in            subsidiary, which will be subjected to licensing requirements consistent
the defence industry sector with FDI upto 26% subject to licensing and         with those of the new private sector banks.
adherence to prescribed guidelines.
                                                                               Foreign banks will have to intimate RBI when they hike stake in a private
4.18    Non-Banking Financial Companies ("NBFCs")                              bank by over 5% of the paid-up capital.
FDI upto 100% is allowed under the automatic route for NBFC activities
such as merchant banking, underwriting, investment advisory services,          Applications for foreign investment in private banks having joint ventures
financial consultancy etc. subject to prescribed minimum capitalization        in the insurance sector will be addressed to the RBI for consideration in
norms for fund based and non-fund based NBFCs.                                 consultation with the IRDA. This is to ensure that the 26% equity cap in the
                                                                               insurance sector is not breached.
4.19    Banking
                                                                               Foreign banks regulated by a banking supervisory authority in the home
                                                                               country and meeting RBI’s licensing criteria will be allowed to hold 100%
The government has recently issued guidelines for hiking the FDI ceiling in    paid-up capital to enable them to set up a wholly-owned subsidiary in India.
private banks from 49% to 74%. It has also allowed foreign banks to set up
subsidiaries in the country, with a rider that they can either have a
subsidiary or a branch, not both.                                              Although the FDI limit has been hiked, FIPB approval will be required for
                                                                               transfer of shares from residents to NRIs under the Foreign Exchange
                                                                               Management Act, 1999. FIPB will also continue to scrutinise cases where
The overall foreign holding of 74% will include FDI, FII, NRI investment,      the foreign investor has a financial, technical or trademark collaboration in
initial public offers, private placements, ADRs and GDRs. At all times, at     the same or allied field, where transfer of share of an existing Indian
least 26% of the paid-up capital will have to be held by residents, except     company is proposed to be acquired.
with regard to a wholly-owned subsidiary of a foreign bank.
                                                                               5.       TAXATION
The guidelines clarify that individual FII holding cannot exceed 10%, while
the aggregate FII limit will be restricted to 26%, which can go up to 49%      5.1      Administrative System
via approval of the bank’s board. Foreign banks have been allowed to open
a wholly-owned subsidiary in the country, or operate through branches or a     Central Board of Direct Taxes ("CBDT") consisting of a chairman and six
private bank with a maximum holding of 74%.                                    members is part of the Finance Ministry in the Government of India and
                                                                               heads the administration of direct tax laws. The CBDT heads a large
A foreign bank can set up a subsidiary either through conversion of existing   organisation with commissioners in charge of specified areas assisted by
branches into a subsidiary, or through a fresh licence from RBI. The FDI       deputy commissioners and officers, who issue assessment orders and collect
ceiling will, however, not be applicable for PSU banks, while the limit        taxes.

                                  43                                                                                         44
5.2      Income Tax
                                                                                                  an individual who has not during the seven tax years
Legislation on Income tax is a Central subject. The Income-tax Act, 1961                           preceding that tax year been in India for a period or
and rules framed thereunder, govern the taxability of income.                                      periods aggregating 730 days or more.

5.2.1.   Factors to determine Taxability                                                  The concept of NOR is not applicable to companies.

         Residence                                                                        Business Connection

         The liability to tax under the Income-tax Act and other direct tax               Existence of a "business connection" is relevant since any profit
         laws is dependent on residential status, and the tax payer's                     earned by a non-resident is taxable if it is earned through or from
         nationality or domicile are not material.                                        any business connection in India.

         An individual is said to be resident in India in any tax year if he is           Business normally contemplates:

                 in India for a period or periods amounting to 182 days or                       a business in India;
                  more in a tax year; or
                                                                                                  a connection with the non-resident and that business;
                 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                    a direct or indirect earning of income by virtue of or
                  for an aggregate period of 365 days or more in the four                          through that connection
                  tax years preceding the tax year.
                                                                                          An element of continuity is essential to establish a "business
         A company, whether incorporated in India or abroad, is said to be                connection" and a non-recurring or isolated transaction is not
         resident in India if the control and management of its affairs is                regarded as a business connection. The determination would be
         situated wholly in India.                                                        based upon the facts and circumstances of each case.

         A foreign company will be a "non-resident" since its management          5.2.2   Taxable Income
         and control would be outside India.
                                                                                          The five heads or sources of income are: (a) Salaries, (b) Income
         A person is said to be resident but not ordinarily resident (“NOR”)              from House Property, (c) Profits and Gains of Business or
         in India in any tax year if such person is:                                      Profession, (d) Capital Gains and (e) Income from Other Sources.
                                                                                          Specific deductions are available under each head. The net income
                 an individual who has been resident in India in nine out of             is then subject to tax which is charged at the rates in force for an
                  ten tax years preceding that tax year; or                               assessment year relevant to a tax year.

                                           45                                                                             46
                                                                                                 production of articles or things or operation of cold
5.2.3   Tax Concessions                                                                          storage plant or plants between April 1, 1993 and March
                                                                                                 31, 2003.
        Several tax incentives are offered to industrial units in the country
        to encourage industrial growth and development, resulting in a                          Industrial undertakings situated in a specified industrially
        substantial reduction of tax incidence.
                                                                                        backward district and engaged in manufacture or production of
                Depreciation Allowance: Depreciation is available on                   articles or things or operation of cold storage plant or plants
                 tangible and intangible capital assets used in business,               between October 1, 1994 and March 31, 2004.
                 except land. (i.e buildings, furniture and fixtures, plant
                 and machinery and ships)
                                                                                Additionally -
                Tax Holidays and Concessions: Business profits from
                 various activities are given a ten years tax holiday or               Small Scale Undertakings which begin operations between April
                 deduction of 30% of the profits for a period of ten years.             1,1995 and March 31, 2002 are eligible for a deduction of 30% of
                 Some of these are enumerated below:                                    the profits for a period of 10 years from the year in which the
                                                                                        business commences.
                Enterprises engaged in developing, maintaining operating
                 any infrastructure facility.                                          Hotels located in certain specified spaces which begin functioning
                                                                                        between April 1, 1997 and March 31, 2001 are eligible for a
                90% profits of the 100% EOUs and STP Units derived                     deduction of 50% of the profits for a period of 10 years.
                 from the export of articles or things or computer software.
                                                                                       Undertakings engaged in developing and building housing projects
                Undertakings which begin to operate an industrial park                 which are approved by the Local Authorities before March 31,
                 notified by the Central Government or SEZs between                     2005 and which commence development and construction on or
                 April 1, 1997 and March 31, 2006.                                      after October 1, 1998 and are eligible for a deduction of 100%
                Undertakings which begin generation and distribution of
                 power between April 1, 1993 and March 31, 2006 and             5.2.4   Advance Ruling
                 those which start transmission and distribution of power
                 by laying a network of new transmission or distribution                A non-resident can seek from the Authority for Advance Ruling,
                 lines between April 1, 1999 and March 31, 2006.                        an advance ruling on questions of law or fact on a transaction or
                                                                                        proposed transaction involving the non-resident. Notified
                Industrial undertakings situated in a specified industrially           categories of residents can seek an advance ruling on any matter of
                 backward State and engaged in the manufacture or

                                             47                                                                               48
        law or fact arising out of an assessment/appeal pending before tax                     an aircraft or aircraft engine (except payments for spares,
        authorities.                                                                           facilities or services in connection with the operation of a
                                                                                               leased aircraft) are exempt from tax provided the
        An advance ruling would be binding for the specific transaction on                     agreement is approved by the Central Government.
        the applicant who has sought it and the tax authorities and would
        continue to remain in force unless there is a change in the law or in                 Interest income on specified securities/bonds is exempt
        the facts. Advance rulings are normally communicated within six                        from tax.
        months from the date of application.
                                                                                5.2.6   Capital Gains
5.2.5   Special provisions for income of non-residents engaged in
        specified business.                                                                   Profits and gains from transfer of capital assets other than
                                                                                               those held for business purposes are charged to tax as
                                                                                               "capital gains" in the year in which the transfer takes
                Taxable income of non-resident individuals and foreign
                                                                                               place. Certain specific transactions are not regarded as
                 companies is computed at a flat rate varying from 5% to
                                                                                               transfers. Short term capital gains arise on transfer of
                 10% of the amount paid or payable (whether in or outside
                                                                                               assets held for a period of not more than 12 months in
                 India) or an amount received or deemed to be received in
                                                                                               case of shares held in a company, securities and units of
                 India or on behalf of the tax payer on account of the
                                                                                               Mutual Funds listed on a recognised stock exchange in
                                                                                               India and 36 months in case of other assets, immediately
                                                                                               preceding date of transfer.
                Business of exploration for mineral oils ï Business of
                 operations of aircraft                                                       Short term capital gains are taxed as normal business
                                                                                               income in the case of all tax payers.
                Shipping business
                                                                                              Transfer of capital assets held for longer periods would
                Business of civil construction for turnkey power projects.                    attract long term capital gains tax. Long-term capital
                                                                                               gains are charged to tax at the rate of 20%. However, in
                Income from prospecting for mineral oil is, subject to                        the case of capital gains on transfer of listed securities,
                 certain conditions, eligible for special allowances in                        capital gain tax is restricted to 10% of the capital gains
                 addition to permissible deductions available under the                        before allowing cost inflation adjustments.
                 Income-tax Act.
                                                                                              Profits arising on transfer of goodwill of a business, the
                Payments made by an Indian Company engaged in the                             right to manufacture, produce or process any article or
                 business of operating aircraft, to a person who is a                          thing, tenancy rights, state carriage permits or loom hours
                 nonresident or government of a foreign state, for lease of                    are chargeable to tax as capital gains.

                                             49                                                                               50
Profits arising in the following transactions are chargeable to tax as
capital gains.                                                                   In schemes of amalgamation/demerger, benefits of unabsorbed
                                                                                 business loss and/or unabsorbed depreciation of the amalgamating
a)       gains arising on buy-back of shares;                                    company/undertaking can be availed by the amalgamated
                                                                                 company/resulting company, subject to conditions.
b)       gains arising on transfer of securities acquired under stock
         option scheme or as "sweat equity";                             5.2.7   Individual tax rates

c)       insurance compensation on account of destruction or                     Income tax rates for individuals regardless of residential status are
         damage of a capital asset;                                              as follows:

d)       profits or gains arising on sale of one or more                               Taxable Income                 Rates of Income-tax for
         undertakings as a "slump sale". For the purpose, "Net                                                              Assessment
         worth" of the undertaking considered to be the cost of                                                          Year 2003-2004
                                                                                             Rs.                Rs.                 Rs.
Business Reorganisation: Demergers and amalgamations are                                  0-50,000                            NIL
recognised as a means of business reorganisation under the tax                          50,001-60,000               10% of excess over 50,000
law.                                                                                   60,001-150,000           1,000 + 20% of excess over 60,000
                                                                                       Above 150,000            19,000+30% of excess over 150,000
Tax benefits and concessions available to an undertaking will
continue upon its transfer to the resulting company under a scheme
of demerger.                                                                     Resident individuals are required to pay surcharge of 5% if income
                                                                                 exceeds Rs.60,000.
Expenditure incurred on amalgamation or demerger can be
amortised over five years.                                               5.2.8   Corporate Tax Rates
Transfer of capital asset, in a demerger, by the demerged company                        A foreign company under the Income-tax Act is a
to the resulting Indian company, is not chargeable to capital gains                       company which is not a domestic company.
                                                                                         The rate of income tax payable by a foreign company
Transfer or issue of shares by the resulting company, in a scheme                         with income from sources other than royalty and technical
of demerger, to the shareholders of the demerged company, in
                                                                                          fees is 40%.
consideration of demerger of an undertaking, is not chargeable to
capital gains tax.

                               51                                                                                          52
               Companies are required to pay surcharge of 5% of income                         In case the income of a resident or non-resident is not
                tax for the assessment year 2003-04.                                             chargeable to tax in India or is taxable at rates lower than
                                                                                                 that prescribed for withholding taxes an application can
               Income of foreign company from royalty or fees for                               be made to the tax authorities for permission to withhold
                technical services is fixed at 20%.                                              taxes at a rate lower than that prescribed under the Income
                                                                                                 tax Act.
               Presently domestic companies are liable to pay tax on
                distributed profits at the rate of 12.5%. Accordingly, there                    In the case of offshore funds and income from notified
                is no tax payable by the assessee on income by way of                            bonds/shares, tax is required to be deducted at specified
                dividend. Even income from units of mutual funds                                 rates.
                purchased in a foreign currency is exempt from payment
                of the tax in the hands of assessee. However, the                               In case of FIIs, tax to be deducted at source is 20% on
                concerned mutual fund would be liable to pay tax on the                          income from securities and no tax is deductible at source
                total amounts of dividend distributed.                                           on capital gains.

5.2.9    Advance tax                                                           5.2.11   Double taxation relief

               Individuals are required to pay income tax in advance for               The Government of India has entered into composite agreements
                each tax year in three installments on or before specified              with various countries to avoid double taxation of income.
                                                                                        Where there is no agreement, relief is available in India from
               Companies are required to pay income tax in advance for                 double taxation under the Income-tax Act. This relief is by way
                each tax year in four installments on or before specified               of deduction from the Indian income tax of a sum which is
                dates in each quarter.
                                                                                        calculated on the doubly taxed income at the lower of Indian rate
5.2.10   Withholding taxes                                                              of tax or the rate of tax of the other country where the tax has been
               Every person other than an individual, making certain
                specified payments including salary, interest, contract        5.3      Wealth-tax
                payments, rent and fees for professional and technical
                services rendered is required to deduct tax at source at                        The Wealth-tax Act, 1957 requires wealth tax to be
                prescribed rates.                                                                payable each year on the taxable wealth depending upon
               In the case of a non-resident assessee including a foreign                       residential status and on citizenship.
                company, tax is deducted at source at the rates prescribed
                for the particular source of income.

                                          53                                                                                    54
             A foreign citizen, whether resident in India or abroad,        6.       INVESTMENT STRATEGIES
              pays wealth tax only on his net wealth in India, his
              foreign wealth being exempt.                                   6.1      Methods of Entry

5.4   Indirect taxes                                                         The important modes of entry available to overseas investors are as follows:

      These cover:                                                                   Joint Venture

             Excise duty which is levied on manufactured items on ad                Technical Collaboration
              valorem basis or at specified rates. However, under the
              Modified Value Added Tax ("MODVAT") Scheme, duty                       Branch
              levied on certain items and capital goods used for the
              production of certain finished goods is eliminated by                  Liaison office
              grant of tax credits.
                                                                                     Direct sale
             Custom duty at different rates is charged on imported
              goods.                                                                 Franchising.
             Sales tax is charged on inter-state sales as well as intra-    6.2      Joint Venture
              state sales under the Central Sales Tax Acts and statutes
              applicable to different States. Sales tax is also charged in   This is the most commonly used mode by foreign corporations and
              some states on transfer of right to use the asset.             nonresidents for their investments in India as this mode provides maximum
                                                                             visibility and presence in the country. Joint ventures normally are a
             Service tax at 8% is charged on various items, including,      combination of financial and/or technical collaboration, although a pure
              commission charged by stockbrokers, telephone charges,         financial collaboration is also possible. Joint ventures could be either in the
              insurance premium, advertising services, courier services      form of:
              and radio paging services.
                                                                                     Greenfield projects involving setting up of a new manufacturing
             Octroi duty is a tax levied on entry of goods within the                facility with an Indian and Foreign equity participation,
              city limits.
     Stamp duty is charged at varying rates for most documents
      executed in India or brought into India.                                       Takeovers or strategic alliance with existing reputed Indian
                                                                                      companies with a niche market.

                                 55                                                                                         56
        Whether it be a greenfield project, a takeover or a strategic          The limits for royalty for use of trade mark without technology transfer are
         alliance, an Indian company is required to be formed for this          2% for exports and 1% for domestic sales under the automatic route. Other
         purpose. As seen above, under the liberalised foreign investment       than this, remittance of foreign exchange for use and/or purchase of
         policies, automatic approval is available in most areas. In other      trademark or franchise in India would require prior approval of RBI except
         cases, an approval is necessary from FIPB.                             to the extent specifically allowed under the Government's general
                                                                                permission e.g. franchise fee upto 3% for the hotel industry.
        The repatriation procedure has been streamlined and now
         repatriation is normally effected within a couple of days. This has    The technology payments are subject to deduction of tax at source 20% (in
         itself simplified matters as compared to the months of waiting in      case of agreements made on or after 1st June, 1997) of the payments. This
         the past.                                                              is normally reduced to 15-20% under a tax treaty. In addition, the Indian
                                                                                company making the payments is liable to pay a Research & Development
        On the taxation aspect, the Indian joint venture is liable to tax      Cess @ 5% of the technology payments.
         whether it is a widely held (i.e. public) or a closely held (i.e.
         private) company in India.                                             An Indian company is entitled to a deduction of royalty and Research and
                                                                                Development cess while computing its taxable income. However, the lump
        Dividends received in the hands of the foreign company are totally     sum payments are deductible equally over a six years period in computing
         tax free under Section 10(34).                                         taxable income of the Indian company.

                                                                                6.4     Branch
        As such dividends will now be paid without any withholding taxes.
                                                                                Where a foreign company may not desire to enter into either a joint venture
6.3      Technical Collaboration
                                                                                or collaboration in India, it can establish a branch in India. This mode is
                                                                                normally used by foreign banks operating in India.
It may be possible that a foreign company does not intend to take the risk of
equity investment in an Indian company. In such a situation, it can instead
                                                                                Setting up a branch in India by a person resident outside India is now
enter into a technical collaboration with an Indian company. Under this
                                                                                governed by the Foreign Exchange Management (Establishment in India of
alternative, the foreign company transfers only the technology to the Indian
                                                                                Branch or Office or Other Place of Business) Regulations, 2000.
company and is entitled to the technology payments. For this purpose, no
separate entity is required unlike a joint venture.
                                                                                The opening of branches of foreign companies is permitted for the
                                                                                following purposes:
As mentioned above, the automatic route is available for technical
collaborations subject to limits of US$2 million for technical know-how
                                                                                       to represent the parent company or group companies in various
fees or 5% royalty for domestic sales and 8% for exports, and, provided the
                                                                                        matters in India such as acting as buying and selling agents in
person does not or did not have any technology transfer/trade mark
agreement in the same or allied field in India.

                                       57                                                                                  58
       to conduct the research work in which the parent company is                    (d)      for remittance of winding up proceeds, the branch shall
        engaged;                                                                                approach the authorized dealers with prescribed
       to undertake export and import of goods; and
                                                                                 6.5   Liaison Office
       to promote technical and/or financial collaborations between the
        Indian and parent or overseas group companies.                                Normally when foreign companies are desirous of getting the feel
                                                                                       of the Indian markets before expanding their operations in India,
       Also, under the Indian Companies Act, any foreign company                      establish a liaison office in India. Some foreign companies
        establishing a branch in India is required to file necessary                   establish liaison office as an intermediate step before entering into
        documents with the Registrar of Companies in the State where the               a joint venture.
        branch is situated and also with the main office at New Delhi.
        After the initial registration, every year the accounts of the branch         Like branches, the opening of liaison offices is also governed by
        should be submitted to the Registrar of Companies.                             RBI.

       The profits generated from the Indian operations can be repatriated           A liaison office in India can act only as a communication channel
        to the parent company after payment of taxes. The tax rate for                 for the parent company to supply information on the Indian market
        foreign companies is 40% of the profits from the Indian branch. No             and customers. It cannot carry on any business activities in India.
        separate repatriation tax is then levied on the dividend as in case of         As a result, the liaison office cannot generate any revenue in India.
        a joint venture.                                                               All the expenses of running and maintenance of the Indian office
                                                                                       are required to be met out of the foreign exchange remitted from
Establishing a branch/unit in SEZ                                                      abroad.

As per the recent liberalised policy, no RBI approval is necessary for a              Similar provisions of the Companies Act also apply to liaison
company to establish a branch/unit in SEZ to undertake manufacturing and               offices as they apply to branches of foreign companies.
service activities subject to conditions that:
                                                                                      Since a liaison office cannot generate any revenues in India, there
        (a)      such units are functioning in those sectors where 100%                are no tax implications on the Indian office.
                 FDI is permitted;
                                                                                 6.6   Direct Sale
        (b)      such units comply with the provisions of the Act relating
                 to foreign companies;                                                A foreign company can directly sell its goods to the end user in
                                                                                       India. For this purpose, no legal entity is required to be formed in
        (c)      such units function on a “stand alone basis”; and                     India.

                                     59                                                                                   60
        Since no income accrues or arises in India to the foreign company        Payments under a franchise arrangement would depend on the type of the
         (provided due precautions are taken to see that the title to the         business and the cost incurred by the franchisor in setting it up. The sources
         goods passes on outside India) there are no tax implications.            of revenue to a franchisor would be a one time fixed franchise fee, continual
                                                                                  payments to retain the status of Franchisee, periodical payments linked with
        The only important implication of the direct sale is the payment of      the sales or production, training expenses, advertising contribution etc. It
         appropriate import duty by the importer of goods.                        would be necessary to consider tax implications for various payments to be
                                                                                  made to the franchisor. As mentioned above, fees payable to the
6.7      Franchising                                                              international franchisor would require prior approval of RBI, except where
                                                                                  the nature and quantum of fees are within the prescribed parameters under
Franchising as a business concept is rapidly developing in India. At present      FEMA.
the concept is present in the hotel industry, fast food chains (both
international and domestic/regional brands), various retail outlets and           7.       IMPORTANT LEGISLATIONS
computer education. The scope of doing business by franchising in India
is wide, considering its vast population and other features.                      7.1      Foreign Exchange Management Act, 1999 ("FEMA")

Two factors, which make India a more favourable country for franchising as        As noted above FEMA has been made effective from 1st June, 2000 and
against other methods of distribution, are:                                       various regulations dealing with specific issues such as transfer and issue of
                                                                                  shares to persons resident outside India, borrowing and lending in foreign
(a)      Psychology of Indian businessmen who would have a strong desire          exchange have been notified.
         for retaining ownership and control which they can pass on to the
         future generations in the family thereby ensuring continuity; and                FEMA regulates and manages foreign exchange transactions.

(b)      Wide geographical spread and diversity in the Indian culture                      FEMA generally permits foreign exchange – related transactions.
         making each region different from the others.
                                                                                          The determination of residential status under FEMA is important.
India does not have any franchise specific legislation therefore the                       A person resident outside India has been defined as a person who
relationship and arrangement in a franchise network would be governed by                   is not resident in India. "Residence" is to be tested by physical
different branches of law for which specific legislations are enacted in India             presence instead of citizenship.
such as (i) general law of contract, (ii) intellectual and industrial property
law, (iii) monopolies and restrictive trade practices or competition laws, (iv)           Authorised persons including all scheduled banks, licensed money
taxation, (v) labour law, (vi) legislation regulating foreign exchange and                 changers and off-shore banking units are the only persons
foreign investments and (vii) consumer protection. Other legislations may                  authorised under FEMA to deal in foreign exchange and foreign
merit consideration depending upon the nature of franchise business and                    security.
involvement of different parties.

                                 61                                                                                           62
        Repatriation of foreign exchange on current account transaction is            determination of the State in which the registered office will be
         permitted. On the capital account such repatriation requires                   situated;
         permission of RBI except where it is covered under any class for
         which general permission is issued by RBI.                                    selection of name and getting it approved by the Registrar of
        Compliance with the FEMA is supervised by the Central
         Government and RBI.                                                           drafting of the charter documents viz. (a) the Memorandum of
                                                                                        Association which provides for, amongst other matters, the objects
        RBI is empowered to issue notifications and declarations under                 for which the company is formed and its capital; (b) the Articles of
         FEMA. Major policies would however be made in consultation                     Association setting out the regulations for its internal management;
         with the Government.
                                                                                       preparation and submission of documents to the Registrar of
7.2      The (Indian) Companies Act, 1956                                               Companies for registration along with the requisite fees and
                                                                                        completing formalities with the Registrar of Companies for
This statute would govern the entity if formed as a company. A limited                  obtaining the Certificate of Incorporation.
liability company is the most appropriate form of business organization
whether for a joint venture with an Indian partner or as a 100% owned           Commencement of Business
entity. Indian companies are classified in two categories - 'public' and
'private' companies. A private company is one which (a) restricts the                   A public company requires a Certificate for Commencement
right to transfer its shares, (b) limits the number of its members to 50; (c)
                                                                                        of Business from the Registrar of Companies before commencing
prohibits public subscription to its share capital; and (d) prohibits any               business.
invitation or acceptance of deposits from persons other than its members,
directors or their relatives. Any other company is a public company. In         Issue of Shares
certain circumstances, a private company is deemed to be a public
company. Due to greater public participation, regulations for public                   Issue of shares requires compliance of various provisions of the
companies in respect of management, borrowings and dealings with                        Companies Act and other applicable securities regulations. While
members and creditors are more wide as compared to those for private                    issue of shares by a private company is a fairly simple procedure,
companies.                                                                              issue of shares to the public involves fulfillment of various
                                                                                        requirements, most important being issue of a prospectus. A
Incorporation                                                                           prospectus is the offer document for issues to the public and
                                                                                        requires detailed disclosures. A company can issue shares to the
Company Incorporation Procedure involves the following:                                 public only after a copy of the prospectus has been filed with the
                                                                                        Registrar of Companies and atleast 90% subscription of the public
                                                                                        issue must be collected prior to allotment.

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       Additionally, guidelines issued by the SEBI and Stock Exchange         Practices Act, 1969 ("the MRTP Act"). Some of the provisions of the Act
        Regulations need to be observed wherever applicable.                   have come into force and for the remaining Government notification is
                                                                               awaited. The Act is not anti-dominant but prohibits abuse of dominant
       Specific guidelines are also prescribed for issue of "sweat equity"    position. The Act regulates combination (i.e. control by acquisition
        i.e. shares issued to employees or directors at a discount or for      resulting in having assets or turnover exceeding threshold limits) if such
        consideration other than cash for providing know how or of             combination will have an appreciable adverse effect on competition within
        intellectual property rights or value additions.                       the relevant market in India.

       An Indian company may buy-back its own shares if authorized by         Following are some of the important provisions of the Act, which would be
        its Articles of Association and approved by its shareholders subject   relevant when the said Act fully comes into force:
        to certain conditions.
                                                                               (i)     The Act prohibits anti-competition agreements i.e. the agreements
Directorships                                                                          that have an appreciable adverse effect on competition within
                                                                                       India such as agreements,        which directly or indirectly
       Non-resident directors, other than a non-resident Managing                     determine the purchase or sale price or which
        Director, can serve on the Board of an Indian Company.
                                                                                       permit or control production, supply, markets, technical
       Under the Companies Act, at least two-thirds of the directors need             development, investment or provisions of services etc. However,
        to retire by rotation. Usually foreign investors retain the right to           agreements entered into by way of joint ventures if such
        nominate directors who need not retire by rotation.                            agreements increase efficiency in production, supply distribution
                                                                                       etc. would not be presumed to have an appreciable adverse effect
                                                                                       on competition.
       Alternate directors can be appointed in place of the original
        director. This enables foreign investors to have Indian
                                                                               (ii)    Several practices adopted by enterprises such as unfair or
        representatives to act as alternate directors as their nominees to
                                                                                       discretionary conditions in purchase/sale, denial of market access
        protect their interest.
                                                                                       are presumed to be abuse of dominant position.
7.3     Competition Act, 2002 ("the Act")
                                                                               (iii)   The Competition Commission of India has been established under
                                                                                       the Act to eliminate practices having adverse effect on
In view of the globalisation, India has opened up its economy removing
                                                                                       competition, promote and sustain competition, protect interest of
controls and resorting to liberalisation. In such a scenario, it was felt
                                                                                       consumers, and ensure freedom of trade carried on by other
necessary to empower the Indian market to face competition from the
                                                                                       participants, in markets in India.
domestic as well as International markets. Accordingly, to shift the focus
from curbing monopolies to promoting competition, the Government has
                                                                               (iv)    The Competition Commission will have power to enquire into the
enacted the Act, which would repeal the Monopolies and Restrictive Trade
                                                                                       agreement or abuse of dominant position or combination, if such

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        agreement, dominant position or combination has, or is likely to               makes provisions for procedure for registration of trade marks
        have, an appreciable adverse effect on competition in relevant                 easier by providing for a single application for registration in more
        market in India. This power of the Competition Commission would                than one class. It is also envisaged that the Registrar of Trade
        be irrespective of the fact that the agreement has been entered into           Marks may publish an alphabetical index of classification of goods
        outside India or any party to such agreement is outside India or               and services. The Registrar of Trade Marks is vested with greater
        combination has taken place out of India or any party to                       powers in respect of classification of goods and services.
        combination is out of India. The provisions of the MRTP Act were
        not applicable to an agreement where neither party to the              7.4.2   Patents
        agreement is carrying business in India. However, now the
        Competition Commission will have jurisdiction on extra territorial            The current legislation is the Patents Act, 1970 as amended by the
        events as mentioned above, if such events have an appreciable                  Patents (Amendment) Act, 1999 and the Rules framed thereunder.
        adverse effect on competition in the relevant market in India.
                                                                                      The Patents (Amendment) Rules, 1999 inter alia provide for
7.4     Intellectual Property Laws                                                     International Applications under Patent Co-operation Treaty.

7.4.1   Trademarks                                                                    Owners of patent rights should register their patents in India.
        The Trade and Merchandise Marks Act, 1958 is repealed and                     Patents are granted for upto 14 years from the date of application.
        substituted by the Trade Marks Act, 1999 with effect from 15 th                There are different periods for foodstuffs, medicines, drugs and
        September, 2003. The Trade Marks Act is a consolidated effort to               chemical substances.
        bring the law at par with international practices. These changes
        were envisaged by India, well before it signed the General
                                                                                      Under the present policy, after expiry of a foreign technical
        Agreement on Trade and Tariffs and the Trade Related Intellectual
                                                                                       collaboration agreement, the Indian party should be permitted to
        Property Rights ("TRIPS") Agreements in April, 1993.
                                                                                       continue to produce the goods by use of the granted technology,
                                                                                       without further payment.
        The new legislation reflects the current trading practice as well as
        guaranteeing that India conforms to the Uruguay Final Agreement
        on TRIPS relating to trade marks. For the first time service marks            Infringement of patent can be prevented by appropriate legal
        are included in the definition of "trade mark" under the Trade                 action, including injunctions.
        Marks Act. The services for which a trade mark can be registered
        include that of advertising and amusement, insurance and finance,      7.4.3   Copyright
        construction and repair, transport and storage, material treatment,
        boarding and lodging, education and entertainment. It is also                 The law of copyright in India is regulated by the Copyright Act,
        possible to register graphic representation, shape, packaging and              1957.
        combination of colours as a trade mark. The Trade Marks Act

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     The Copyright Act provides for the registration of works, though                 SEBI has issued several guidelines, rules, regulations and
      non-registration does not generally affect the right of the owners of            clarifications governing mutual funds, merchant bankers, FIIs,
      copyright.                                                                       portfolio managers, stock brokers, sub-brokers, share transfer

     India is a member of the Universal Copyright and the Berne                       agents, bankers and registrars to the issue, underwriters,
      Conventions.                                                                     investment advisors and other intermediaries.

                                                                                       Besides regulations governing these entities, some of the important
7.5   The Securities and Exchange Board of India                                       rules, regulations and guidelines published by SEBI are:
      Act, 1992 ("SEBI Act")
                                                                                               Disclosure and Investor Protection Guidelines
      SEBI Act governs issues relating to the capital market. Under this
      statute, the Government has established the SEBI, which regulates                        SEBI (Buy Back of Securities) Regulations, 1998
      and promotes an orderly development of, and regulates the
      securities market in India and for incidental matters.                                   SEBI (Substantial Acquisition of Shares and Takeover)
                                                                                                Regulations, 1997
      The primary functions of SEBI are:
                                                                                               SEBI (Venture Capital Funds) Regulations, 1996
              to deal with all matters relating to the development and
               regulation of the securities market and investor protection,                    SEBI (Prohibition of Fraudulent and Unfair Trade
               as also advise the Government on these matters.                                  Practices relating to Securities Markets) Regulations,
              to prepare comprehensive legislation for the regulation
               and development of the securities market.                      7.6      Other Legislations

              to register and regulate the working of depositories,          In addition to the above, various sector specific legislations enacted by both
               participants, custodian of securities, FIIs, credit rating     the Central and State Governments would be applicable. As part of the
               agencies and other intermediaries associated with the          reform initiatives, the Central and State Governments have simplified most
               capital market.                                                laws and regulations.

              to carry out such functions as may be delegated by the
               Central Government for the development and regulation
               of the securities market.

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