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Applications for setting up units in designated
export-processing zones for free-trade zones (EPZs/FTZs) or Software or
Electronic Hardware Technology Parks (STPs/EHTPs) or for setting up
individual units as 100 percent export-processing units (EOUs), STPs or
EHTPs are now required to be made either to the development
commissioners of the relevant zone.
The Reserve Bank of India (RBI, the Indiana central bank) is the
exchange control authority and is also empowered to grant automatic
approval for foreign investment of up to 51 percent in specified
high-priority industries (see Chapter 4) and also approve
technical-collaboration agreements within specified parameters in all
industries. The RBI is also the approving authority for the
establishing of a branch, liaison office or project office or the
posting of a representative in India by a foreign corporation.
Regulatory legislation
India has no separate foreign investment
legislation. The Foreign Exchange Regulation Act 1973 (FETA) also
regulates the activities of foreign enterprises in India. Authorized
dealers in foreign exchange (i.e., commercial banks) are guided by the
Exchange Control Manual (two volumes) issued by the Reserve Bank For
all foreign exchange transactions.
The Indian rupee has been made fully convertible
for trade-and current-account transactions. Capital-account
convertibility for the rupee is expected in the next few years. While
trade-account transactions have been fully deregulated, the Reserve
Bank still monitors and often regulates current-account transactions
to ensure that remittances relate to current rather than capital
transactions.
Under the Exchange Control laws, permission of
the Reserve Bank is required for securities to be registered in
Indian in the name of a nonresident or to be sent out of India. In
addition, foreign corporations (i.e., companies not incorporated in
India) require approval to set up a place of business in India or
undertake a business activity in India.
The government's attitude toward foreign
investment is discussed in general terms in Chapter 3, and the
percentage restrictions on foreign equity ownership are explained
below under "Restrictions on foreign ownership."
The foreign investment approval is valid for
the specified period of time within which the collaboration
agreement must be filled with the RBI/authorized foreign exchange
dealer (i.e, a commercial bank through which the remittances under
the collaboration would be made). Copies of the agreement must also
be filed with specified authorities, which include the relevant
administrative ministry for the sector, the SIA, and the Department
of Scientific and Industrial Research.
Automatic approval received from the RBI is a
single clearance that combines the approval for the foreign
collaboration with permission to issue equity shares of the Indian
company to the nonresident foreign collaborator. However, in the
case of a discretionary approval (i.e., an FIPB approval), formal
authorization or permission to issue shares is provided by the
Reserve Bank after the collaboration proposal is approved, the
principle, by the government.
Foreign technical-collaboration agreements must
be registered with the Reserve Bank after the approval. Foreign
loans also require a discretionary approval from the Ministry of
Finance, after which the loan agreement must be registered with the
Reserve Bank.
There are no mandatory reporting requirements
for foreign capital and technology. However, the Ministry of
Industry requests investors to submit bioannual progress reports
during project implementation.
A foreign-invested Indian company is treated
on a par with other locally incorporated companies. Accordingly,
the general rules for foreign currency accounts for residents
(detailed bellow) apply to foreign-invested companies as well.
· Foreign currency accounts of residents
Resident Indians (including individuals and
corporations) are normally not allowed to open and operate foreign
currency accounts in India or abroad without prior RBI approval.
Indian firms and companies can seek permission
from the RBI to open foreign currency accounts abroad for certain
specific purposes, such as retention of foreign equity
subscriptions or proceeds of foreign currency loans raised abroad.
Such accounts, however, are permitted to be maintained only for a
limited period.
Indian exporters and other foreign exchange
earners are permitted by the RBI to open and maintain in India a
foreign-currency-denominated account called the Exchange Earners
Foreign Currency (EEFC) Account and retain upto 25 percent (up to
50 percent in a few specified cases, and even higher proportions
with special RBI approval) of their foreign currency earnings. EEFC
accounts holders are allowed to remit money aboard for a range of
bona fide payments specified by the RBI, which may otherwise
require prior approval.
Exporters falling in specific categories (such
as Export/Trading/Star Trading House) and others meeting certain
specified limits on net foreign exchange earnings can seek
permission from the RBI to open foreign currency accounts in India
or abroad to credit proceeds of export shipments.
In addition, the RBI also permits the opening
of foreign currency accounts in India by airline and shipping
companies, overseas companies executing projects in India and
overseas buyers, subject to condition laid down by it in the
approval.
Persons of Indian origin who have been
resident outside India for a continuous period of not less than one
year are permitted to open and maintain
foreign-currency-denominated accounts in India.
· Rupee accounts of nonresidents
Branches or offices in India of foreign firms,
companies or associations and foreign nationals resident but not
permanently resident in India are permitted to maintain the operate
rupee bank accounts in India only with authorized dealers. The
Reserve Bank subjects such accounts to monitoring and strict
reporting requirements. Repatriation facilities for such accounts
are governed by the conditions specified by the Reserve Bank While
permitting the account holders to operate the account in India.
The RBI has granted general permission to
authorized foreign exchange dealers to open Ordinary Nonresident
Rupee (NRO) Accounts in the names of nonresident individuals or
entities for all bona fide transactions permitted under the
exchange control regulations. Balances in NRO accounts are not
normally eligible for remittances abroad and require specific
approval from the Reserve Bank if repatriation is sought.
Nonresident Indians (NRIs) and Overseas
Corporate Bodies (OCBs - organizations with NRI holdings of at
least 60 percent) are permitted to open and maintain rupee accounts
on a repatriable basis, provided the funds are either remitted in
foreign currency into India or are legitimately due to them in
India on a repatriable basis. NRIs and OCBs are also permitted to
maintain nonrepatriable rupee deposits in India for periods ranging
from six months to three years.
The Reserve Bank has the powers to
"block" accounts in India of any person or entity
resident outside India and to direct that payment of any sums due
to that person be made to those blocked accounts. Remittances can
be effected through authorized foreign exchange dealers after
payment of the applicable withholding taxes. In consumer-goods
industries, foreign exchange outflows on account of dividend
payments must be balanced by export earnings for the first seven
years from commencement of production. Since exports need not be
the exporter's own manufactured products, most investors do not
find this commitment to be onerous.
For approved technical-collaboration
agreements, royalties and technical fees can be remitted through
normal banking channels after payment of applicable withholding
taxes. A 5 percent research and development cess (tax) is payable
by all Indian parties on technology-related fees remitted abroad
as well as associated expenses.
Repatriation of capital upon disinvestment
requires specific approval from the Reserve Bank, which is not
normally withheld if the sales price is considered to be fair and
reasonable. The sales price less the capital gains tax can be
remitted through normal banking channels.
For approved loan arrangements, repatriation
of interest and principal amounts can be effected through normal
banking channels.
For all approved branches, branch profits are
allowed to be repatriated in full after payment of the applicable
withholding taxes, although specific RBI approval is mandatory.
Repatriation of amounts abroad for other
purposes requires specific approval by the RBI unless the
remittances are covered by general permission granted by the RBI.
Such instances of general permission for remittances include those
for import of goods, short-term engagement of foreign nationals,
overseas travel, land sundry remittances within a specified limit
The RBI does not permit netting of payments
for remittances and requires that all inward receipts be first
brought into the country.
Applications to authorized dealers for making
any remittances are to be supported by the required documents,
including the auditor's certificate on calculation of the amounts
(royalties, branch profits, etc.) to be repatriated as well as on
various other matters such as adequacy of tax provision,
compliance with the Companies Act and a no-objection certificate
from the Tax authorities.
Banks that are authorized dealers in foreign
exchange may allow all non-Indian nationals temporarily resident
but no domiciled in India to make remittances to their own
countries, provided the dealer making the remittance is satisfied
that this amount does not exceed 75 percent of the remitters net
income after taxes. If an application is made for remittance of an
amount in excess of this limits, it must be refereed to the
Reserve Bank. The Reserve Bank is prepared to consider individual
cases on their merits and to allow larger remittances when it is
satisfied that the applicant has retained sufficient funds out of
monthly income to meet local expenses.
Upon departure from India, foreign nationals
who had been temporarily resident in the country are allowed to
remit in full current assets, such as savings out of salaries,
commissions, dividends, provident funds, and proceeds from sales
of personal effects. In addition, they may be permitted to
repatriate the sales proceeds of their investments,. Subject to a
limit of Rs. 1,000,000 at the time of departure. The balance, if
any, may be remitted in annual installments not exceeding Rs.
500,000 per annum.
Neither the Indian government nor the
Reserve Bank provides any guarantee against inconvertibility or
makes any advance commitment for the conversion of Indian
currency into other currencies, except for facilities for forward
contracts, which may be entered into by authorized dealers for
purchase and sale of foreign currencies in furtherance of genuine
foreign exchange transactions permitted under the current
regulations.
The Indian government has been a signatory
to the Multilateral Investment Guarantee Agency (MIGA) convention
since April 13,1992.
The Indian government has signed bilateral
investment protection treaties with various countries. These
treaties state that investment from the partner country will be
given national treatment (treated on a par with Indian
companies), and investors are given most-favored-nation status.
The treaties also provide for dispute settlement and guarantees
against nationalization, and they allow repatriation of returns
on investments without undue delay. India has a ratified treaty
with the United Kingdom and has signed treaties with Denmark,
Germany, Israel, Italy, the Republic of Korea, Malaysia, the
Netherlands and Russia.
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RESTRICTIONS ON FOREIGN
INVESTMENT
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All industries are open to private
enterprise except those on a small list that are reserved for
the public sector for security and strategic reasons (see
below). Entry of the private sector may be selectively allowed
in the reserved sectors.
The manufacture of certain specified items
is reserved for small-scale units (see Chapter 6). Large units,
including foreign companies, are permitted to hold up to 24
percent of small-scale units.
The insurance sector, although currently
reserved for the public sector, is likely to be deregulated in
the near future. Recent actions of the government provide clear
indication that private participation, both for Indian and
foreign investors, will soon be permitted. For example an
autonomous interim regulatory body ahs been set up and will soon
become a permanent statuary authority with suitable powers to
frame policies and procedures for privatization within the
insurance industry.
All sectors open to private investment are
open to foreign investors as well, although the mandatory
approval requirement for foreign investment, granted on a
discretionary basis, acts as a restriction. For certain
specified telecommunications services, the government has
imposed an upper limit of 49 percent for foreign equity
participation. While informal guidelines have been formulated
in certain sectors such financial services and mining regarding
the permissible level of foreign equity participation, they are
revised from time to time, and investors are advised to obtain
local professional advice.
As part of the initiatives being taken to
promote foreign investment, the government has constituted the
Foreign Investment Promotion Council, which will frame
transparent guidelines for foreign investment in various
sectors, with the states objective of attracting US $10
billion annually.
The Reserve Bank is empowered to grant
automatic approval for up to 51 percent foreign equity in
specified high-priority industries (see list in Chapter 4) and
for trading companies engaged primarily in export. For an
investment to qualify for automatic approval (usually granted
in two to three weeks), the imported capital goods must be new
and not secondhand. For Foreign investment in existing
companies engaged in high-priority industries, automatic
approval is available only for a fresh issue of equity shares.
The list of high-priority industries is being expanded, and it
is expected that automatic approval may be available in
certain sectors for investments with a threshold greater than
51 percent.
Foreign investment proposals not
qualifying for automatic approval are considered by the
Foreign Investment Promotion Board (FIPB) on merit. The FIPB
considers an investment proposal as a whole, free from
predetermined norms or parameters.
Some of the aspects the FIPB examines
while reviewing an investment proposal include the background
and corporate image of the foreign investor, the current stage
of development of the business sector in which the investment
is proposed to be made and the likely contribution of the
foreign investor in upgrading the sector, the type and level
of technology that will be transferred, employment potential
and export earnings associated with the proposed investment,
and the overall effect of the investment on the economy.
Guidelines, which are indicative in nature, have been frames
for foreign investment approval by the FIBP in certain sectors
such as mining, power, telecommunications, and banking. The
government is revising existing guidelines and framing new
ones for investment in certain sectors as well as certain
areas such as approval of 100 percent foreign ownership.
Approval is granted for a specified
foreign investment amount and equity level and for a specified
set of business activities. Payments (royalties, technical
fees, etc.) associated with the technical-collaboration
agreement are also approved by the FIPB along with the foreign
investment approval.
There is no specific format for
submissions to the FIPB. Foreign investors find it useful to
enlist local professional assistance to assist in the FIPB
submission process to ensure that specific benefits of the
project to the economy are highlighted and the case for
investment is made in line with the current environment.
Although the FIPB has been selective in
granting approvals for 100 percent foreign ownership, such
clearances have been granted in many cases, including in the
consumer-goods industry. There is no mandatory requirement of
a local joint venture partner. In cases where the foreign
equity is lower than 100 percent, the remaining equity can be
held by one or more Indian partners (perhaps as sleeping
partners), placed privately with mutual or venture funds or
other private equity investors, offered to the Indian public,
or placed through a combination of these options.
The FIPB approval process normally takes
6 to 12 weeks. In the future it is expected to take no longer
than 8 weeks because of changes in the approval process
recently introduced.
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Nonresident Indians (NRIs) and Overseas
Corporate Bodies (OCBs-see "Rupee accounts of
nonresidents" above) are granted concessional treatment
for foreign investment approvals. The RBI is empowered to
grant approval for NRI or OCB investment with full
repatriation benefits for up to 100 percent investment in
high-priority industries and in any other manufacturing
business and in specified service sectors like hotels,
tourism and hospitals; and up to 24 percent in any other
Indian company.
Prior approval is not required for
nonrepatriable NRI investment (where dividends are reatriable
but capital is nonrepatriable) up to 100 percent equity in
any sector, provided the equity contribution is made by
remittance in foreign currency or from funds held in
authorized nonresident bank accounts in the country. The
Indian company, however, is required to inform the RBI of
such investment with 90 days of its being made.
All the above schemes are applicable
only for a new issue of shares. NRI or OCB investments not
falling in any of the above categories are treated on a par
with other foreign investment proposals and require clearance
from the FIPB.
Automatic permission is granted by the
RBI for technical-collaboration agreements with foreign
parties up to a lump-sum payment of US$2 million and a
running royalty of 5 percent on domestic sales and 8 percent
on exports subject to total payments (lump-sum plus
royalties) of 8 percent of sales over a ten-year period from
the date of agreement or seven years from commencement of
production. The prescribed royalty rates are net of taxes
and are to be calculated according to a standard procedure
on a base figure of net ex-factory sale price less the cost
of certain specified components.
Technical-collaboration agreements not
conforming to the above conditions, as well as proposals for
extension of existing collaboration agreements, are
considered by the Secretariat for Industrial Approvals in
the Ministry of Industry.
Foreign corporations wishing to open a
branch office or a liaison or project office or to post a
representative in India require approval from the Reserve
Bank.
Other restrictions
A foreign-invested Indian Company,
irrespective of its level of foreign equity participation,
is treated on a par with a fully domestic-owned company,
and there are no restrictions on is activities except that
participation in agricultural or plantation activities is
restricted for Indian companies in which the nonresident
interest is more than 40 percent.
The measures introduced by the
government in the past few years clearly establish a trend
toward deregulation and liberalization of the economy in
favor of the private sector, including foreign investors.
There are strong indications that this process will
continue. Foreign investment will be welcome in priority
sectors and receive "nation treatment," i.e., on
a basis of equality with domestic capital, but the
government is unlikely to offer foreign investors special
incentives to invest in India.
The following is a list of
industries reserved to the state . This list is commonly
refereed to as "Annexure I industries" and
replaces the earlier, more extensive list of reserved
industries.
· Arms and ammunition and allied
items of defense equipment: defense aircraft and
warships.
· Atomic energy.
· Coal and lignite.
· Mineral oils.
· Minerals specified in the
Schedule to the Atomic Energy (Control of Production and
Use) Order 1953.
· Railway transport.
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General Section
