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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
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
------------------------------------------------------------------------------------------- 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.
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
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.
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.
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.
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
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
(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.
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
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
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
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
(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
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:
(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
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.
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.
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.
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
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.
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 -
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.
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
(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
exports using data communication links or in the form of physical exports
(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:
(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
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;
(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-
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
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.
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.
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.
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.
production of articles or things or operation of cold
5.2.3 Tax Concessions storage plant or plants between April 1, 1993 and March
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)
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
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
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.
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.
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.
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
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.
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
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.
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.
Custom duty at different rates is charged on imported
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,
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.
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.
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
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.
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.
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.
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.
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
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
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
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)
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.