shaheda foreign direct investment and its growth in india.doc

8/9/2019 Shaheda FOREIGN DIRECT INVESTMENT AND ITS GROWTH IN INDIA.doc

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FOREIGN DIRECT INVESTMENT AND ITS GROWTH IN INDIA

BY

RITIKA MAGOTRA

ROLL NO:-(011-06-152)

Under the Esteemed guidance of

Mr.Raghunadh

Lecturer of Business Management

PROECT S!BMITTED IN PARTIAL F!LFILLMENT FOR THE AWARD OF

M"#$%& ' B#*+%## A,*+*#$&"$*'+

OSMANIA !NIVERSITY HYDERABAD-50000./

(AFFILIATED TO OSMANIA !NIVERSITY)

Srinagar, colony, panjagutta, Hyderabad-73

200-200!


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DECLARATION

" #ere by declare t#at t#is project report titled $%&'(")* +"'( "*.(SM(* /*+ "S

)'&H "* "*+"/1 submitted by me to $.".(/*/*+/ SH&&L &% &S

)'/+4/( S4+"(S1, is a bonafide 5or6 underta6en by me and it is not submitted to any

ot#er uniersity or institution for t#e a5ard of any degree diploma8 certificate or publis#ed any

time before9

*ame of t#e student signature of t#e student9

+ate:


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ABSTRACT

%oreign direct inestment;%+"< in all oer t#e 5orld in general and in "ndia in particular after t#e

opening up of our mar6et 5it# t#e adoption of t#e policies namely globali=ation, priati=ation

and liberali=ation #as no doubt emerged as one of t#e most significant source and contributor of

e>ternal inflo5 of resources and is one of t#e most crucial contributors to t#e capital formation

despite t#eir s#are in t#e 5orld arena still catc#ing up9 #en 5e tal6 about t#e term %+" 5e are

tal6ing about a bundle of resources t#at usually flo5 into a country including besides capital,

production tec#nology, global managerial s6ills, innoatie mar6eting strategies and access to

ne5 mar6ets9

"n t#is project it #as been tried to proide a compre#ensie picture about t#e foreign

direct inestment ranging from its conception as a potent source of inestment t#e 5orld oer, its

arious types, t#e met#odology adopted top %+" countries and agencies engaged and ot#er

important aspects9

/ cumulatie and an e>#austie study of t#e oer all scenario of %+" in "ndia starting

from t#e introduction of %+" in t#e country, s#are of top inesting countries, sectors attracting

#ig#est %+" flo5s, sector 5ise tec#nology transfer and approals9

e 5ill also loo6 at t#e determinants for attracting %+" in t#e country and also t#e

causes for lo5 flo5 of %+" and t#e mec#anisms t#at can be underta6en to ma6e our country

attractie enoug# for inestors9 #is study entirely relies on secondary data collected after a

t#oroug# and e>#austie study of arious 5ebsites, te>t boo6s, journals, ne5spapers, maga=ines

and great inputs form arious professors and professionals speciali=ing "n t#is area9

#oug# t#e policy is reie5ed fre?uently 5e lac6 5#en compared 5it# countries li6e

c#ina, so it@s #ig# time t#e goernment ta6es steps to furt#er liberali=e t#e economy and

streamline and liberali=e t#e policies to ma6e "ndia t#e most preferred %+" destination in t#e

5orld9


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ACKNOWLEDGEMENT

" ta6e t#is opportunity to t#an6 all t#ose 5#o #ae been of #elp to me in t#e completion of t#is

project9

" 5ould li6e to appreciate t#e guidance and co-operation proided to me by our project guide Mr9

.9 '/)H4*/H ;faculty of Business Management< in t#e completion of t#is project9

" am also grateful to Mr9 9.9 '/&, +irector .".(/*/*+/ SH&&L &% &S

)'/+4/( S4+"(S and all t#e faculty members 5#o #ae directly or indirectly #elped me

in preparing t#is project report9


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TABLE OF CONTENTS:1/ LIST OF TABLES

2/ LIST OF FIG!RES

/ INTROD!CTION

/ REVIEW OF LITERAT!RE

5/ DATA ANALYSIS AND PRESENTATION

6/ S!MMARY AND CONCL!SION

./ BIBLOGRAPHY

OBECTIVES

1 T' #$, $3% $&%+,# *+ $3% *+4' ' '&%*+ ,*&%7$ *+8%#$%+$


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2 T' #$, $3% #3"&% ' $'9 *+8%#$*+ 7'+$&*%# ' FDI ,&*+ $3% 9%&*', 200-2006/

3 T3% #%7$'& "$$&"7$*+ 3*3%#$ FDI %*$ *+4'

4 F'&%*+ $%73+'4' $&"+#%&

5 C'+$& *#% $%73+'4' $&"+#%&

6 C'+$& *#% $%73+'4' $&"+#%& "99&'8"4#

7 S%7$'& *#% $%73+'4' $&"+#%& "99&'8"4#

8 T' #$, $3% 7"#%# "+, &%"#'+# '& 4' FDI *+4' *+ $3% 7'+$&

9 T' #$, $3% ,%$%&*+"+$# '& "$$&"7$*+ $3% FDI

10 T' #$, "+, +,%$"+, %73"+*# ' "99&'8"4# ' FDI ; RBI "+, FIPB

11 T' #$, $3% FDI 9'4*7 *+ ;&*%/

METHODOLOGY:

#is project is entirely based on freelance 5or6 done by t#e student and t#erefore noorganisation #as been ta6en as a base for doing t#e project9 /* e>#austie amount of dataaailable on t#e internet, from t#e te>t boo6s, ne5s papers, and arious maga=ines andsuggestions from a fe5 e>perts in t#e field #as been ta6en in doing t#is project9

/s t#is is a free lance project, t#e data #as been entirely collected from secondary sources andt#erefore its aut#enticity can be ouc#ed for only by going t#roug# t#e same literature 5#ic# #as


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been used9

SCOPE OF THE ST!DY

as t#is study is aimed to analy=e t#e trends in t#e %+" inflo5s, t#e main focus is gien on t#erecent trends in t#e in5ard %+" inflo5s, sectors attracting #ig#est %+", and t#e s#are of topinesting countries, it coers only e?uity capital components9 #e scope is limited to t#eaailability of t#e secondary data9

LIMITATIONS OF THE ST!DY

t#e study is conducted in a s#ort period, 5#ic# 5as not detailed in all aspects9

*on-aailability of accurate data to %+"

+ata in one secondary source do not matc# 5it# t#at of anot#er source9

FOREIGN DIRECT INVESTMENT

INTROD!CTION:

%oreign direct inestment ;%+"< is defined as Ainestment made to ac?uire lasting interest inenterprises operating outside of t#e economy of t#e inestor9A #e %+" relations#ip consists of a

parent enterprise and a foreign affiliate 5#ic# toget#er form a Multinational corporation;M*


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"n t#e years after t#e Second orld ar global %+" 5as dominated by t#e 4nited States, asmuc# of t#e 5orld recoered from t#e destruction broug#t by t#e conflict9 #e 4S accounted for around t#ree-?uarters of ne5 %+" ;including reinested profits< bet5een EFG and E09 Sincet#at time %+" #as spread to become a truly global p#enomenon, no longer t#e e>clusie presere of &(+ countries9 %+" #as gro5n in importance in t#e global economy 5it# %+"

stoc6s no5 constituting oer 20 percent of global )+9

TYPES OF FOREIGN DIRECT INVESTMENT:

BY DIRECTION:

I+"&,

"n5ard foreign direct inestment is 5#en foreign capital is inested in local resources9

I+"&, FDI *# %+7'&"%, ;:

a> brea6s, subsidies, lo5 interest loans, grants, lifting of certain restrictions #e t#oug#t is t#at t#e long term gain is 5ort# s#ort term loss of income

I+"&, FDI *# &%#$&*7$%, ;: &5ners#ip restraints or limits +ifferential performance re?uirements9

O!TWARD

&ut5ard foreign direct inestment, sometimes called Adirect inestment abroadA, is 5#en localcapital is inested in foreign resources9 Iet it can also be used to inest in imports and e>portsfrom a foreign commodity country9

O$"&, FDI *# %+7'&"%, ;:

)oernment-bac6ed insurance to coer ris6

O$"&, FDI *# &%#$&*7$%, ;:

a> incenties or disincenties on firms t#at inest outside of t#e #ome country or onrepatriated profits Subsidies for local businessesLeftist goernment policies t#at support t#e nationali=ation of industries ;or at least a modicumof goernment control< Self-interested lobby groups and societal sectors 5#o are supported byin5ard %+" or state inestment, for e>ample labour mar6ets and agriculture9 Security industriesare often 6ept safe from out5ards %+" to ensure t#e localised state control of t#e militaryindustrial comple>9

BY TARGET:

G&%%+*%4, *+8%#$%+$

+irect inestment in ne5 facilities or t#e e>pansion of e>isting facilities9 )reenfield inestmentsare t#e primary target of a #ost nation@s promotional efforts because t#ey create ne5 productioncapacity and jobs, transfer tec#nology and 6no5-#o5, and can lead to lin6ages to t#e globalmar6etplace9 #e &rgani=ation for "nternational "nestment cites t#e benefits of greenfieldinestment ;or insourcing< for regional and national economies to include increased employment;often at #ig#er 5ages t#an domestic firms


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include t#e loss of mar6et s#are for competing domestic firms9 /not#er criticism of greenfieldinestment is t#at profits are perceied to bypass local economies, and instead flo5 bac6 entirelyto t#e multinationalJs #ome economy9 ritics contrast t#is to local industries 5#ose profits areseen to flo5 bac6 entirely into t#e domestic economy9

M%&% "+, A7*#*$*'+#

ransfers of e>isting assets from local firms to foreign firms ta6es placeD t#e primary type of %+"9 ross-border mergers occur 5#en t#e assets and operation of firms from different countriesare combined to establis# a ne5 legal entity9 ross-border ac?uisitions occur 5#en t#e control of assets and operations is transferred from a local to a foreign company, 5it# t#e local company becoming an affiliate of t#e foreign company9 4nli6e greenfield inestment, ac?uisitions proideno long term benefits to t#e local economy-- een in most deals t#e o5ners of t#e local firm are paid in stoc6 from t#e ac?uiring firm, meaning t#at t#e money from t#e sale could neer reac#t#e local economy9 *eert#eless, mergers and ac?uisitions are a significant form of %+" and untilaround EE7, accounted for nearly E0C of t#e %+" flo5 into t#e 4nited States9 Mergers are t#emost common 5ay for multinationals to do %+"9

H'&*ample see6ing natural resources in t#e Middle (ast and /frica, or c#eap labor in Sout#east /sia and (astern (urope9

M"&=%$-S%%=*+

"nestments 5#ic# aim at eit#er penetrating ne5 mar6ets or maintaining e>isting ones9 %+" of t#is 6ind may also be employed as defensie strategyD it is argued t#at businesses are more li6elyto be pus#ed to5ards t#is type of inestment out of fear of losing a mar6et rat#er t#andiscoering a ne5 one9 #is type of %+" can be c#aracteri=ed by t#e foreign Mergers and/c?uisitions in t#e E!0@s by /ccounting, /dertising and La5 firms9

E*7*%+7-S%%=*+

"nestments 5#ic# firms #ope 5ill increase t#eir efficiency by e>ploiting t#e benefits of


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economies of scale and scope, and also t#ose of common o5ners#ip9 "t is suggested t#at t#is typeof %+" comes after eit#er resource or mar6et see6ing inestments #ae been reali=ed, 5it# t#ee>pectation t#at it furt#er increases t#e profitability of t#e firm9

S$&"$%*7-A##%$-S%%=*+

/ tactical inestment to preent t#e loss of resource to a competitor9 (asily compared to t#at of t#e oil producers, 5#om may not need t#e oil at present, but loo6 to preent t#eir competitorsfrom #aing it9

OPPOSITION:

#e late E0s and early E70s foreign direct inestment became increasingly politici=ed9&rgani=ed labor, coninced t#at foreign inestment e>ported jobs, undertoo6 a major campaignto reform t#e ta> proisions 5#ic# affected foreign direct inestment9 #e %oreign rade and"nestment /ct of E73 ;or t#e Bur6e-Hart6e Bill< 5ould #ae eliminated bot# t#e ta> credit

and ta> deferral9 #e *i>on /dministration, influential members of ongress of bot# parties,and 5ell-financed lobbying organi=ations came to t#e defense of t#e multinational9 #emassie counterattac6 of t#e multinational corporations and t#eir allies defeated t#is first major c#allenge to t#eir interests9

L*#$ ' 7'+$&*%# ; &%7%*8%, FDI:

#is is a 4*#$ ' 7'+$&*%# ; FDI in 200 mostly based on "/ fact boo6 accessed in Kanuary200!9

1 4nited states

2 4nited 6ingdom

3 Hong 6ong

4 )ermany

5 #ina

6 %rance

7 Belgium

8 *et#erlands

9 Spain

10 anada

INTERNATIONAL ACCREDITATIONS AND AGENCIES

INTERNATIONAL INVESTMENT POSITION:

/ countryJs *+$%&+"$*'+"4 *+8%#$%+$ 9'#*$*'+ ;""< is a financial statement setting out t#e alueand composition of t#at countryJs e>ternal financial assets and liabilities9 #e "" is onecomponent of t#e capital account of a countryJs balance of payments, containing for e>amplestoc6 of companies, real estate, financial instruments, and so on9 By comparison, imports ande>ports of goods and serices are part of t#e current account9


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#e difference bet5een a countryJs e>ternal financial assets and liabilities is t#e +%$*+$%&+"$*'+"4 *+8%#$%+$ 9'#*$*'+ ;*""


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brands are preferred and a presence in a specific mar6et is needed for success9 #e locationof %+" in t#at specific mar6et is essential to be able to label products $made locally1

2. TRADE BARRIERS:

#e e>istence of trade barriers is a factor t#at influences t#e c#oice of locations for %+"9rade barriers encourage companies to ma6e %+" in mar6ets t#at 5ould be too e>pensie toe>port to due to tariffs and ?uotas9

/ LABO!R COSTS:

Labor costs are affected by an imperfection in t#e international mar6et for labor9 Sinceregulations for immigration e>ist 5orld5ide, t#e mobility of labor is reduced anddifferences in 5age costs arise9 #is creates different production clusters around t#e 5orld,eac# speciali=ed in different 5age leels9 /n e>ample of t#is is t#e lo5 5age area in t#esout# east /sia producing toys and clot#ing and on t#e ot#er #and 5estern (urope 5it# its#ig# tec# production and #ig# 5age leels9

/ COST FACTORS:

ost factors are not#ing but factors t#at cause inestment cost differentials acrosscountries 9 #ey usually include factors li6e cost of labour, cost of capital and cost of infrastructure9 ost factors most significantly influence t#e c#oice of an inestmentlocation for t#e resource see6ing and efficiency- see6ing foreign direct inestment9

4sually it is seen t#at #ig#er lending rates may #ae a positie impact on t#e %+"inflo5s i9e9 #ig#er t#e cost of capital in t#e #ost country t#e more capital can be broug#t in by t#e foreign firms9 /lternatiely "t can also be said t#at t#e #ostr country@s cost of capitalimpact directly on t#e domestic consumption9 #us t#e lo5er t#e interest rates, t#e #ig#er t#e domestic consumption and #ence #ig#er t#e %+" inflo5s9 /s far as infrastructure costsare concerned, it is found t#at #ig#er t#e aailability of infrastructure lo5er is t#einfrastructure cost and #ig#er is t#e ability of t#e #ost country to attract %+"9

5. E?CHANGE RATES:

#is factor presents a rat#er ambiguous picture as far as t#e impact of depreciation of real e>c#ange rate in t#e #ost country on %+" inflo5s is concerned9 / dealuede>c#ange rate may or may not be gainful for t#e foreign inestors9 #e inestor maygain because of factors li6e #uge purc#asing po5er of t#e #ost country, c#eap production costs 5#ic# 5ould lead to easy e>ports and t#is surely catc#es t#e fancy of t#e resource and efficiency see6ing inestor9 But t#en t#e foreign firms may get ta6enabac6 if t#ey beliee t#at depreciation may continue to be too #ig# to justify t#eir inestments in t#e first place and t#eir continuation9

6. MACRO ECONOMIC STABILITY:

Macro economic ariables li6e inflation, budget deficit, balance of payments etc9 #ae a big impact on t#e %+" across countries9 #e olatility of t#e macro economic conditions presents bot# opportunities and impediments to companies inesting in t#e #ost country9#ey re?uire not only t#e ability to manage t#e ris6 in#erent in olatile countries but also present an opportunity of moing production to lo5er cost facilities9 (>c#ange rateolatility is one of t#e macro economic olatility 5#ere in if e>c#ange rate c#anges merelyoffset price moements so t#at real purc#asing po5er parity is maintained, t#e e>c#ange


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rate moements 5ould #ae little real effects9

7. RATE OF INFLATION:

Lo5 inflation is ta6en to be a sign of internal economic stability in t#e #ost country9 Hig#inflation indicates inability of t#e goernment to balance its budget and failures of t#ecentral ban6 to conduct appropriate monetary policy9

8. OVERALL ECONOMIC STABILITY:

#e financial 5ell being of t#e #ost country is gauged by e>ternal debts to (>ports9 "t ise>pected t#at lo5er t#is ratio #ig#er is t#e probability of economic stability in t#e country9

9. RESEARCH AND DEVELOPMENT:

#e location of %+" also depends a lot on t#e importance gien to t#e researc# anddeelopment actiities by t#e #ost country9 Many multi national companies 5oulddefinitely loo6 for5ard to inesting in a country 5#ic# proides ery good incenties in t#efield of researc# and deelopment in t#e form of ta> cuts and proision of abundant ra5material at affordable rates and so on as t#is 5ould #elp t#e M*S to s#ift t#eir actiities

from #ig# cost countries to lo5 cost ones910. POLICY INITIATIVES AND ENVIRONMENT:

"n t#e current era of liberali=ation 5#ere a #ost of countries are ying to attract foreigninestors to inest in t#eir respectie nations, t#e %+" policies and ot#er policy measuresadopted by t#em #ae assumed great significance9

/ multi national company or for t#at matter a country t#at 5ants to inest in acountry 5ould first of all loo6 for t#e goernments attitude to5ards %+" 5#ic# is bestreflected in its policies9 Measures li6e inestor friendly incenties, lo5er rates of ta>es or rela>ation for a particular period of time or proision of rebates, proision of land and ot#er infrastructure facilities at reasonable rates and ot#er measures 5ould surely go a long 5ay

in ma6ing a country a c#osen location for par6ing %+"9 /part from t#e aboe mentioned factors and initiaties companies ealuate t#einestment climate in t#e #ome country, meaning t#e political, social and economicenironment9 #is climate affects t#e perceied ris6 of locating operations in t#e specificlocation9

11/ INCENTIVES:

#e %+" incenties offered by t#e #ost countries can be categori=ed into t5o main types,t#ey are : fiscal incenties and 2: financial incenties9

%iscal incenties refer to t#e policies designed to reduce ta> burden of a firm and%iscal incenties include ta> concessions in t#e form of reduction of t#e standard corporate

income ta> rate, ta> #olidays, accelerated depreciation allo5ances on t#e capital ta>es,e>emption from import duties and duty dra5bac6s on e>ports9

%inancial incenties refer to t#e direct contributions to t#e firm from t#e goernmentincluding direct capital subsidies or subsidi=ed loans9 #ey also include grants, subsidi=edloans and loan guarantees, publicly funded entures capital participating in inestmentinoling #ig# commercial ris6s and goernments insurance at preferential rates9


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ELIMINATION OF RESTRICTIONS:

+eeloping countries #ae applied arious forms of restrictions to %+" in t#e preliberali=ed era mostly because of t#eir troubled past and e>ploitation by t#eir colonialrulers9 .arious controls li6e o5ners#ip and control and ot#er operational restrictions li6eclosing do5n certain sectors to priate enterprises, screening regulari=ation aut#ori=ation of inestment and minimum capital re?uirements9 %or e>ample allo5ing only fi>ed percentage of foreign o5ned capital in an enterprise, compulsory joint entures,compulsory transfer of o5ners#ip to local priate firms and restrictions on reimbursementof capital upon li?uidation9 (en 5#en t#e foreign firms enter t#e #ost country@s mar6ett#ey could face certain restrictions on t#eir operations suc# as restrictions on employing6ey foreign personnel and performance re?uirements suc# as sourcing or local contentre?uirements, training re?uirements and e>port targets9

#e best e>ample is t#e erst5#ile "ndian economy 5#ic# follo5ed t#e license permit raj before embar6ing upon economic reforms9 But t#e 5#ole scenario of controlling

t#e economy in most of t#e deeloping nations #as been done a5ay 5it#, in most of t#ecountries and t#ey #ae seriously embar6ed upon many liberal measures li6e ?uic6 licensing, many ta> incenties and so on 5#ic# #ae c#anged t#e economic scenario of many a nations9

FACTORS THAT DISCO!RAGE FDI:

ountry e>periences indicate t#at 5#ile faorable economic enironment and regulatory or policy frame5or6 #elp induce foreign direct inestment flo5s, t#ere are a number of forcest#at tend to discourage suc# flo5s9

Many deeloping countries #ae, during t#e past decade or so, begun liberali=ing t#eir national policies to establis# a #ospitable regulatory frame5or6 for foreign direct

inestment by rela>ing rules regarding mar6et entry and foreign o5ners#ip, improing t#estandards of treatment accorded to foreign firms and improing t#e functioning of mar6ets9#ese core policies are important because %+" 5ill not ta6e place 5#ere it is forbidden or strongly impeded9 Ho5eer, c#anges in policies #ae an asymmetric effect on t#e locationof foreign direct inestment, c#anges in t#e direction of greater openness allo5s firms toestablis# t#emseles in a particular location9 "n contrast, c#anges in t#e direction of lessopenness 5ill ensure a reduction in foreign direct inestment ;4*/+, EE!<

#e regulatory restrictions including tariffs, ?uotas tend to discourage cross-border ac?uisitions by multinational enterprises9 ountries t#at impose restrictions on foreignentry and o5ners#ip and foreign transactions, as 5ell as discriminatory ta> proisions, tendto #amper foreign direct inestment flo5s9 %or e>ample, in enya, foreign inestors face

multiple licensing re?uirements and #ig# 5it##olding ta>es on royalties, and foreign directinestment remained less t#an 092 percent of )+9 /lso, in Iemen 5#ere si=eable outflo5sof %+" #ae been recorded since t#e mid EE0@s, licensing re?uirements discouraged ne5inestments, despite incenties li6e ta> #olidays and customs e>emptions9

Some of t#e deeloping countries #ae not ac#ieed t#e improements in t#e inestmentclimate necessary to encourage #ig#er %+" flo5s9 #ile t#e poor prospect for gro5t# andunfaourable economic enironment #ae impeded t#e foreign direct inestment flo5s tomany countries, a number of ot#er factors ; suc# as political and structural factors < #ae


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also been t#e important discouraging factors9

%or instance, t#e economic uncertainty #as restrained )reenfield foreign direct inestmentin Bra=il, and priate sector merger and ac?uisition transactions #as slo5ed do5n 5it# t#eincreasing economic difficulties in /rgentina9 "n "ndonesia, t#e seere recession, uncertainty oer economic policies, and political disturbances t#at reduce future economic

prospects #ae discouraged foreign inestment inflo5s since EE due to concerns oer political deelopments9

"n addition, recent analysis find t#at deeloping countries 5it# stronger policyenironments attract a larger s#are of t#e total foreign inestments flo5s to deelopingcountries, 5#ereas t#e #ig#er leels of corruption acts as a deterrent ; "M% 200


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"ndiaJs economy #ad a C s#are of 5orld income, t#e second largest in t#e 5orld after Kapan

B&*$*#3 R"

!!

%irst estimation of "ndiaJs national income by +adab#ai *aoroji

!70

"ndiaJs economy #ad a 292C s#are of 5orld income under t#e Britis# (mpire9

E3

"ndiaJs economy #ad a 79C s#are of 5orld income under t#e Britis# (mpire9

EF3

%amine of Bengal

Post-Indeendence eriod

N%3&8*"+ %&"

EG2

"ndiaJs economy #ad a 39!C s#are of 5orld income

E73

"ndiaJs economy 5as OFEF9! billion, 5#ic# accounted for a 39C s#are of 5orld income

10 - 11

.irtually losed

11-9&%#%+$

EE

(conomic liberalisation 5as initiated by "ndian prime minister 9 .9 *arasim#a 'ao and#is finance minister Manmo#an Sing# in response to a macroeconomic crisis9

EE!

"ndiaJs economy 5as O,70297 trillion, 5#ic# accounted for a GC s#are of 5orld income

200G

"ndiaJs economy is O3,!G9 trillion ;purc#asing po5er parity< 5#ic# accounts for a 93C

s#are of 5orld income, t#e fourt# largest in t#e 5orld in terms of real )+9#e %7'+' ' I+,*", 5#en measured in 4S+ e>c#ange-rate terms, is t#e t5elft# largest int#e 5orld, 5it# a )+ of 4S O92G trillion ;200!


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indirect employment to more t#an GC of t#e population to t#e serices sector 5#ic#contributes about GGCof t#e )+ and still gro5ing strong9 "ndia also ran6s among t#e most promising countries in ot#er sectors li6e industry,manufacturing, telecommunications etc9

/fter independence "ndia@s economy 5as influence by t#e colonial policy t#oug#

e>ploitatie and also by t#e %abian socialist ideas of our leaders9 "ndia follo5ed a socialistic policy for most part of its independent #istory 5it# strict goernmental control oer priatesector participation, foreign trade and foreign direct inestment, 5it# a strong emp#asis onimport substitution, self sustainability and central planning 5#ic# led to a lot of bottle nec6s being created in t#e 5ay of t#e nations deelopment 5it# e>tremely lo5 gro5t# rate termed ast#e Hindu rate of gro5t#9

#e collapse of t#e soiet union as t#e major trade partner and t#e first gulf 5ar 5#ic# spi6ed t#e oil prices caused a major balance of payments crisis in "ndia 5#ic# foundt#e prospect of defaulting on its loans9 "n response, rime Minister *arasim#a 'ao along 5it##is finance minister Manmo#an Sing# initiated t#e economic liberali=ation of EE9 #ereforms did a5ay 5it# t#e Licence 'aj ;inestment, industrial and import licensing< and ended

many public monopolies, allo5ing automatic approal of foreign direct inestment in manysectors9

Since EE0 "ndia #as emerged as one of t#e 5ealt#iest economies in t#edeeloping 5orldD during t#is period, t#e economy #as gro5n constantly, but 5it# a fe5 major setbac6s9 #is #as been accompanied by increases in life e>pectancy, literacy rates and foodsecurity9 #e credit rating of "ndia #as been raised to inestment leel in 2007 by SP andMoodyJs9 "n 2003, )oldman Sac#s predicted t#at "ndiaJs )+ in current prices 5ill oerta6e%rance and "taly by 2020, )ermany, 4 and 'ussia by 202G and Kapan by 203G9 By 203G, it5as projected to be t#e t#ird largest economy of t#e 5orld, be#ind 4S and #ina9

FOREIGN DIRECT INVESTMENT


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/s t#e t#ird-largest economy in terms, "ndia is a preferred destination for foreign direct inestments ;%+"< 5it# strengt#s being information tec#nology and ot#er significant areas suc# as auto components, c#emicals, apparels, p#armaceuticals and je5ellery9But its rigid %+" policies 5ere a significant #indrance in t#is regard9 Ho5eer, as a result of aseries of ambitious and positie economic reforms aimed at deregulating t#e economy and

stimulating foreign inestment, "ndia #as positioned itself as one of t#e front-runners of t#erapidly gro5ing /sia acific 'egion9 "ndia #as a large pool of s6illed managerial and tec#nicale>pertise9 #e si=e of t#e middle-class population at 300 million e>ceeds t#e population of bot#t#e 4S and t#e (4, and represents a po5erful consumer mar6et9

"ndiaJs recently liberali=ed %+" policy ;200G< allo5s up to a 00C %+" sta6e inentures9 'eforms #ae substantially reduced industrial licensing re?uirements, remoedrestrictions on e>pansion and facilitated easy access to foreign tec#nology and %+"9 #e up5ardmoing gro5t# cure of t#e real-estate sector o5es some credit to a booming economy andliberali=ed %+" regime9

/ number of c#anges 5ere approed on t#e %+" policy to remoe t#e caps inmost sectors9 'estrictions 5ill be rela>ed in sectors as dierse as ciil aiation, construction

deelopment, industrial par6s, petroleum and natural gas, commodity e>c#anges, credit-information serices and mining9 But t#is still leaes an unfinis#ed agenda of permitting greater foreign inestment in politically sensitie areas suc# as insurance and retailing9 %+" inflo5s into"ndia reac#ed a record 4SOE9Gbn in fiscal year 200807 ;/pril-Marc#c#ange control simplification of procedures,enactment of competition and amendments in t#e intellectual property rig#ts la5s, etc9 "ndia proides a liberal, attractie, and inestor friendly inestment climate9 Main features of policy on%oreign +irect "nestment are dealt 5it# in t#is c#apter9

10 &%"#'+# $' I+8%#$ *+ INDIA

1/ YO! NEVER HAD IT SO GOOD: "ndia is t#e Ft# largest economy, in terms of purc#asing po5er parity9 ent# most

industriali=ed economy9Strong macro-economic performance9 olitical stability and broad consensus on reforms9 Liberal and transparent foreign inestment


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regime9ell deeloped ban6ing system9 .ibrant capital mar6et9 *ational Stoc6 (>c#ange t#ird

largest, Bombay Stoc6 (>c#ange fift# largest in terms of number of trades9Strong and independent judicial system9 /mong t#e #ig#est rates of returns on inestment9 rofitability of 4S inestments in "ndia:

E933C in 2000 ;according to 4S +epartment of ommerceports O2 billionD 200! e>ports target: O0 billion, to be 3GC of "ndiaJs total e>ports9 Kob creation: a million direct P 2-3 million indirect / HIGHLY COMPETITIVE ENTREPRENE!RSHIP:

realence of foreign tec#nology licensing - 'an6 in t#e 5orld9 /ailability of scientist and engineers - 'an6 29 Quality of management sc#ools - 'an6 E9

%irm leel innoation - 'an6 29 %irm leel tec#nology absorption - 'an6 9

ompany spending on 'P+ - 'an6 329 ;Source: )lobal ompetitieness 'eport, 2003 during t#e fiscal year in 2002-03: O20 billion9 "ndiaJs economic gro5t# is sustained9

#e nationJs )+ is e>pected to gro5 by oer 790 C t#is year9

5/ EASY IND!STRIAL LICENSING POLICY: 4nder t#e "ndustries ;+eelopment P 'egulation< /ct, EG, industrial license is needed only


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for items:%alling under t#e list of compulsory licensing9 'esered for small-scale sector9 "f location

attracts restriction9/ll industries e>empt from industrial licensing re?uired to file an "ndustrial (ntrepreneur

Memorandum9

*o approal is re?uiredD &nly notification need9

"ndustries retained under compulsory licensing under t#e "ndustrial ;+P'< /ct, EG:+istillation and bre5ing of alco#olic drin6s9 igars and cigarettes of tobacco and manufactured tobacco substitutes9 (lectronic aerospace and defence e?uipment9 "ndustrial e>plosiesD Ha=ardous c#emicals9

6/ MAOR FINANCIAL SECTOR REFORMS:

Setting up of t#e ompetition ommissionD /mendments to ompanies /ct, %iscal'esponsibilities, and Securiti=ation /ct for creditorsJ security9

Board for "ndustrial P %inancial 'econstruction to be repealed9 omputeri=ation of ustoms

interface9Stable ta> regime9 &nly 3 rates of indirect ta>9 rade facilitation measures introduced9 %oreign (>c#ange Management /ct, EEE proides a liberal regimeD fore> procedures eased9 Stoc6s can be sold on t#e 5it#out prior approal9 rofits, diidends and capital inestment can be repatriated9 'oyalties can be paid by 5#olly o5ned arms to parent companies9

./ TRADE POLICY RATIONALIATION:

rade policy liberali=ed9 Most items on &pen )eneral License9 olicies fully compatible 5it# &9 %unctioning of t#e +irector )eneral %oreign rade ;+)%< computeri=ed:

/ll 33 locations are eb-enabled9 70C of t#e total transactions of e>porters8importers are eb-enabled9

ransaction time #as reduced to just #ours9 &n-line ban6ing fully integrated9

/ A PROACTIVE FDI POLICY:

%+" under R/utomatic 'oute,@ e>cept in areas:/ttracting compulsory licensingD or for ac?uisition of s#ares in an e>isting company9 Sectors not open to %+"9 ;)ambling, lottery, et cetera9


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/mong top 0 tourist destinations9 Major destination for foreign enture capital funds9 iechart left bottom shows countr)$wise *DI inflows'

/ GREAT INFRASTR!CT!RE> AND A HELPING HAND: O2 billion Hig#5ays +eelopment rogramme9 &er 3,000 ms of Hig#5ays being

deeloped9#e (lectricity /ct, 2003 in place to facilitate reforms in po5er sector9 ermits trading inelectricity, captie generation freed from prior approal9

4pgradation of airports at *e5 +el#i and Mumbai9 RSagar Mala,@ a major programme aimed at deeloping ports and s#ipping sector at an

estimated inestment of O22 billion9Major adances in telecommunications sector9 Band5idt#s of terabit aailable9 S#arp decline

in telecommunications costs9%oreign "nestment "mplementation /ut#ority #elps sole foreign inestorsJ problems9 "t

meets periodically 5it# inestors to sort out operational difficulties and facilitatesimplementation9

/n (mpo5ered Sub-ommittee of t#e *ational +eelopment ouncil set up on creating an

inestor friendly climate and remoing regulatory barriers to inestments9Moderni=ation of legislations on intellectual property9 /ll "' La5s are '"S compliant9

"ntellectual roperty /ppellate ribunal functional9Simplification and re-engineering of 5or6 procedures9

More information on 5559ipindia9com

10/ BOOMING SECTORS OPPORT!NITIES GALORE:

R'",#: apacity en#ancement of #ig#5ays9 7000 6ms of *ational Hig#5ays being offeredduring t#e current year9 Many more opportunities in t#e States9 &pportunities for e?uipmentmanufacturers9 tec#nical support9 !&;"+ I+&"#$&7$&%: +eelopment of to5ns#ips for t#e rapidly gro5ing, increasinglyaffluent urban middle class9 ity leel infrastructure9 roads, bridges, " ar6s, sanitation and5ater supply, etc9 onsultancy in urban planning9 P'&$#: )oernment of "ndiaJs initiatie of deeloping ports RSagar MalaJ 5it# an inestmentof O22 billion9 +eelopment of orts9 S#ipping9 4p gradation and operation of cruise terminal9&peration of +ry ort at Mumbai9 P'%&: /ddition of 00,000 M re?uired oer t#e ne>t 0 years9 "nstalled capacity 0,000M9 Hydro-electric initiatie to deelop G0,000 M9 +etailed project reports to be prepared tofacilitate priate inestment9 T%4%7'+*7"$*'+#: ellular p#ones increasing 9G million eery mont#9 o increase by20 million t#is year9 %igure to rise to 00 million in t#e ne>t 3-F years9 elep#one connections torise to 7G million by 200G and 7G million by 2009 "nestment &pportunities9 Setting upmanufacturing base9 .alue-added serices9

/ number of studies in t#e recent past #ae #ig#lig#ted t#e gro5ing attractieness of "ndia as aninestment destination9 /ccording to t#e study R+reaming 5it# B'"S@ by )oldman Sac#s,"ndian economy is e>pected to continue gro5ing at t#e rate of GC or more till 20G09 Some of t#ese conclusions are listed belo5:T 2nd most attractie destination /9 9 (/'*(I Business onfidence "nde>, 200G


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T 2nd most attractie inestment destination among ransnational orporations 4*/+@sRorld "nestment 'eport, 200G@T Most attractie location for Aoffs#oringA of serices actiities - /99 earney )lobal SericesLocation "nde> 200G9

"ndia #as among t#e most liberal and transparent policies on %+" among t#e emergingeconomies9 %+" up to 00C is allo5ed under t#e automatic route in all actiities8sectors e>ceptt#e follo5ing 5#ic# re?uire prior approal of t#e )oernment:i9 Manufacture of igars P igarettes of tobacco and manufactured tobacco substitutesDii9 Manufacture of (lectronic aerospace and defence e?uipments: all typesiii9 Manufacture of items e>clusiely resered for Small Scale Sector 5it# more t#an 2FC %+"Di9 roposals in 5#ic# t#e foreign collaborator #as an e>isting financial 8 tec#nical collaborationin "ndia in t#e Rsame@ field U'efer ress *ote *o9 ;200G series


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placed permanently in t#e year EG79 /t t#at time t#e limited objectie of t#e /ct 5as to regulatet#e inflo5 of foreign capital in t#e form of branc#es and concerns 5it# t#e substantial non-resident interest, and t#e t#e employment of foreigners9 #e country attained freedom in EF7,after t5o centuries of foreign rule and protracted freedom struggle stretc#ed oer decades9 #e preailing mood t#en 5as one of presering and consolidating t#e freedom and not to permit

once again any type of foreign domination, political or economic9 "nitial approac# on foreigncapital 5as negatie to a not-interested attitude9 rime Minister e>plained t#at At#e stress on t#eneed to regulate, in t#e national interest, t#e scope and manner of foreign capital and control ;as per t#e "ndustrial olicy Statement F!< arose from t#e past association of foreign capital andcontrol 5it# foreign domination of t#e economy of t#e country9A

Ho5eer after initiation of a process of rapid industriali=ation of t#e country, t#e need toconsere foreign e>c#ange 5as 6eenly felt9 (>ports 5ere not pic6ing up and imports 5eresurging, putting t#e country to seere balance of trade and balance of payment crisis9 #is in trnled to t#e need to tap t#e donors or %oreign /id )iers9

#is bac6ground induced t#e )oernment of "ndia to re-focus t#e %('/ act 5it# t#e main aimof conseration of foreign e>c#ange rat#er t#an regulation of entry of foreign capital9 #e

%oreign (>c#ange 'egulation /ct, E73, ;#ereinafter referred to as %('/< 5as drafted 5it# t#eobject of introducing t#e c#anges felt necessary for t#e effectie implementation of t#e)oernment policy and remoing t#e difficulties faced in t#e 5or6ing of t#e preious enactment9%('/ is crisis-drien regulation and naturally it contained seeral draconian proisions9 /nyoffence under %('/ 5as a criminal offence liable for imprisonment9

Ho5eer in t#e early *ineties due to t#e major c#anges in "ndian economy and liberali=ation of industrial and trade policies, consistent 5it# t#e fast c#anging international economic and traderelations t#e need for a more conducie climate for increased inflo5 of foreign inestment andcapital in t#e country to accelerate industrial gro5t# and promotion of trade ;especially e>ports<5as felt9 "n order to remoe t#e special restrictions in respect of companies registered in "ndia

and to simplify t#e regulations in regard to foreign inestment to attract better flo5 of foreigncapital and inestment 5as paramount9 #e /mending /ct 2E of EE3 5as enacted in order toremoe unnecessary restrictions and simplify procedure9 #ereby certain proisions dealing 5it#emergencies of different 6inds, 5#ic# 5ere no longer releant, 5ere remoed for improing t#eclimate for inestment in "ndia9

FOREIGN E?CHANGE MANAGEMENT ACT-1

/s t#e crisis of foreign e>c#ange melted once for all and t#e country came to be endo5ed 5it#si=eable reseres of foreign e>c#ange, t#e basic aim of foreign e>c#ange policy s#ifted from oneof control and conseration to t#at of effectie management, to facilitate e>ternal trade8paymentand promote t#e orderly deelopment and maintenance of t#e fore> mar6et in "ndia9 #e /ct 5ast#oroug#ly reised and replaced by t#e by t#e %oreign (>c#ange Management /ct, EEE9 #e

latter #as dropped many of t#e stringent proisions of t#e older /ct, in t#e area of transactionsinoling foreign e>c#ange9 #e %(M/ EEE too6 effect from Kune , 20009

o inestigate due ad#erence to t#e proisions of t#e /ct by t#e mar6et participants, t#e entral)ot9 #ae establis#ed t#e +irectorate of (nforcement 5it# a +irector and ot#er officers asofficers of t#e (nforcement9 #is /ct e>tends to t#e 5#ole of "ndia and 5ill also apply to all branc#es, offices and agencies outside "ndia o5ned or controlled by a person resident in "ndia9 "t5ill also be applicable to any contraention committed outside "ndia by any person to 5#om t#is


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/ct is applicable9

INVESTMENT PROMOTION AND FACILITATION:

#e ministry of %inance, ministry of corporate affairs and t#e ministry of commerce andindustries are t#e most important ministries 5#ic# 5it# t#e #elp of 'esere ban6 of "ndia loo6 after t#e foreign direct inestment operations in t#e country9 #ese ministries #ae an elaborateset of institutions and agencies to facilitate t#e flo5 of foreign direct inestment into t#e countryand remoe t#e procedural bottlenec6s if any t#at 5ould ta6e place in t#e promotion of foreigndirect inestment9

SECRETARIAT FOR IND!STRIAL ASSISTANCE:

S"/ #as been set up by t#e )oernment of "ndia in t#e +epartment of "ndustrial olicy andromotion in t#e Ministry of ommerce and "ndustry to proide a single 5indo5 for(ntrepreneurial assistance, inestor facilitation, receiing and processing all applications 5#ic#re?uire )oernment approal, coneying )oernment decisions on applications filed, assistingentrepreneurs and inestors in setting up projects, ;including liaison 5it# ot#er organi=ations andState )oernments< and in monitoring implementation of projects9 "t also notifies all

)oernment olicy relating to inestment and tec#nology, and collects and publis#es mont#ly production data for 20E select industry groups9

FOREIGN INVESTMENT PROMOTION BOARD (FIPB):

#e %"B is t#e competent body to consider and recommend %oreign +irect "nestment proposals, 5#ic# do not come into t#e country t#roug# t#e automatic route9 #e board #as beentransferred to +epartment of economic affairs in t#e Ministry of %inance from t#e Ministry of commerce and industries9 #e functions of t#e board are:

to ensure e>peditious clearance of t#e proposals for foreign inestmentD

to reie5 periodically t#e implementation of t#e proposals cleared by t#e BoardD to reie5, on a continuous basis, t#e general and sectoral policy regimes relating to %+"

and in consultation 5it# t#e /dministratie Ministries and ot#er concerned agencies,eole a set of transparent guidelines for facilitating foreign inestment in arioussectorsD

to underta6e inestment promotion actiities including establis#ment of contact 5it# andiniting selected international companies to inest in "ndia in t#e appropriate projectsD

to interact 5it# t#e "ndustry /ssociation8Bodies and ot#er concerned goernment andnon-goernment agencies on releant issues in order to facilitate increased inflo5 of %+"D

to identify sectors into 5#ic# inestment may be soug#t 6eeping in ie5 t#e national priorities and also t#e specific regions of t#e 5orld from 5#ic# inestment may be

inited t#roug# special effortsD to interact 5it# t#e %oreign "nestment romotion ouncil ;%"< being constituted

separately in t#e Ministry of "ndustryD and o underta6e all ot#er actiities for promoting and facilitating foreign direct inestment,

as considered necessary from time to time9 #e Board 5ill submit its recommendations tot#e )oernment for suitable action 5it#in si> 5ee6s9

FOREIGN INVESTMENT IMPLEMENTATION A!THORITY (FIIA):


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%""/ 5as establis#ed in t#e +epartment of "ndustrial policy and romotion, Ministry of commerce and "ndustry to facilitate ?uic6 translation of %oreign +irect "nestment approalsin implementation, proide a proactie one- stop after care serice to foreign inestors by#elping t#em obtain necessary approals, sort out operational problems and meet 5it#

arious goernment agencies to find solution to problems of t#e inestors9 #e %""/ may co-opt ot#er secretaries to t#e )oernment of "ndia, #ief ommissioner ;*'"perts from industry and commerce,as and 5#en necessary9 #e secretariat for "ndustrial /ssistance ;S"/< functions as t#esecretariat of t#e %""/9

FOREIGN INVESTMENT PROMOTION CO!NCIL (FIPC):

/part from ma6ing t#e policy frame5or6 inestor friendly andransparent, promotional measures are also ta6en to attract %oreign +irect"nestment into t#e country9 #e )oernment #as constituted a %oreign

"nestment romotion ouncil ;%"< in t#e +epartment of "ndustrialolicy and romotion, Ministry of ommerce and "ndustry9 #is comprisesof professionals from industry and trade9 "t #as been set up to #ae a moretarget oriented approac# to5ard %oreign +irect "nestment promotion9 #e basic functions of t#e ouncil are to identify t#e sectors8projects 5it#int#e country re?uiring %oreign +irect "nestment and target specific regions8countries of t#e 5orld from 5#ere %+" can be broug#t in t#roug# special efforts9

INVESTMENT PROMOTION INFRASTR!CT!RE DEVELOPMENT CELL

(IPIDC):

onse?uent upon t#e +epartment of "ndustrial olicy and romotion #aing assumed a promotional role as against t#e regulatory one prior to t#e process of liberali=ation initiated in t#eyear EE, an "nestment romotion and "nfrastructure +eelopment ell 5as created in EE togie furt#er impetus to facilitation and monitoring of inestmentas 5ell as for better coordination of infrastructural re?uirements of industry9 #e actiities#andled by t#e ell relates to organi=ation of $+estination "ndia1eents in foreign countries in collaboration 5it# %"", dissemination of information oninestment climate in "ndia t#roug# publications, promotional films and +-'&MS9"nestment facilitation and coordination of progress made in infrastructure projects, promotion of priate inestment including foreign inestment, compilation of sectoral policy, strategies andguidelines in t#e infrastructure sector are also t#e responsibilities assigned to t#is ell9rocessing and approal of proposals pertaining to setting up of "ndustrial ar6s and "ndustrialModel o5ns is also underta6en by t#is ell9

ENTREPRENE!RIAL ASSISTANCE !NIT (EA!):


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#e (ntrepreneurial /ssistance 4nit functioning under t#e Secretariat for "ndustrial/ssistance, +epartment of "ndustrial olicy and romotion proides assistance to entrepreneurson arious subjects concerning inestment decisions9 #e unit receies all papers8applicationsrelated to industrial approals and immediately issues a computerised ac6no5ledgement, 5#ic#also #as an identity8reference number9 /ll correspondence 5it# t#e S"/ s#ould ?uote t#is

number9 "n case of papers filed by post, t#e ac6no5ledgement 5ill be sent by post9 #e 4nite>tends t#is facility to all papers8applications relating to "(Ms, "ndustrial Licenses, %oreign"nestment, %oreign ec#nology /greements, 00 per cent (&4s, (H, S Sc#emes, etc9#e4nit also attends to en?uiries from entrepreneurs relating to a 5ide range of subjects concerninginestment decisions9 "t furnis#es clarifications and arranges meetings 5it# nodal officers inconcerned Ministries8&rgani=ations9 #e 4nit also proides information regarding t#e currentstatus of applications filled for arious industrial approals9

INVESTOR ED!CATION AND PROTECTION F!ND:

INVESTMENT COMMISSION:

#e "nestment commission 5as set up in 200F 5it# a ie5 to ma6e t#e enironment in "ndiaattractie for inestors9 #e commission #as t#e broad aut#ority of t#e goernment to engage,discuss 5it# and inest in "ndia9 #e recommendations of t#e commission are to be processed int#e Ministry of finance and 5ill be put up to t#e competent aut#ority for approal9 /ll policydecisions emerging from t#e recommendations of t#e ommission 5ould be put up to abinetommittee &n (conomic /ffairs for approal9

#e commission studied 2G 6ey sectors spanning "nfrastructure, Manufacturing, Serices, *atural 'esources and t#e no5ledge (conomy9 #ese sectors are significant and 5ould re?uirean aggregate inestment of 4S O GG0 billion oer t#e ne>t fie years9

#e commission #as recommended a need to identify a fe5 *ational #rust /reas 5#ere allimpediments for gro5t# are remoed, and 5#ere appropriate incenties are proided, toencourage inestment9 #e #rust /reas could include:

1 ourism2 o5er 3 e>tiles4 /gro-processing

NRI !NIT:

Major functions of t#e *'" 4nit 5#ic# is a part of t#e "nestment +iision are as under:

(a) (uro-e?uity8foreign currency conertible bonds policy9(b) %oreign "nstitutional "nestors ortfolio "nestment olicy9(c) "nestment policy for *on-'esident "ndian9(d) olicy goerning opening up of branc#8liaison8project office by t#e foreign companies


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and coordination in respect of indiidual proposals referred to )oernment by 'B"Matters related to "ndian "nestment entre, an autonomous body under t#e Ministry of %inance9

FOREIGN DIRECT INVESTMENT POLICY:

#e goernment of "ndia #as recently underta6en a compre#ensie reie5 of t#e %+" policyand associated procedures9 /s a result, a number of rationali=ation measures li6e dispensing5it# t#e need of multiple approals from )oernment and8or regulatory agencies t#at e>ist incertain sectors, e>tending t#e automatic route to more sectors, and allo5ing %+" in ne5sectors9

/s per t#e e>tant policy, %+" up to 00C is allo5ed, under t#e automatic route in mostsectors8 actiities9 %+" under t#e automatic route does not re?uires prior approal eit#er byt#e goernment or t#e resere ban6 of "ndia9 "nestors are only re?uired to notify t#econcerned 'egional office of 'B" 5it#in 30 days of issue of s#ares to foreign inestors9

4nder t#e )oernment approal route, applications for %+" proposals, ot#er t#an by *on-'esident "ndians, and proposals for %+" in $Single Brand1 product retailing, are receied int#e +epartment of (conomic /ffairs, Ministry of %inance9 roposals for %+" in $SingleBrand1 product retailing and t#e *'"@S are receied in t#e +epartment of "ndustrial policyand romotion, Ministry of ommerce and "ndustry9

%oreign inestments in e?uity capital of an "ndian company under t#e ortfolio "nestmentSc#eme are not 5it#in t#e ambit of %+" policy and are goernment by separate regulations of 'B"8 Securities and (>c#ange Board of "ndia ;S(B"


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follo5ing 5#ic# 5ill re?uire approal of t#e follo5ing:2 /ctiities or items t#at re?uire an industrial licenseD3 roposals in 5#ic# t#e foreign collaborator #as a preious8 e>isting enture8 tie up in"ndia or allied field94 /ll proposals relating to ac?uisitions of s#ares in an e>isting "ndian company by a

foreign8 *'" inestor95 /ll proposals falling outside notified sectoral policy8 caps or under sectors in 5#ic# %+"is not permitted9

A!TOMATIC RO!TE:

/ll actiities 5#ic# are not coered under t#e automatic route according to para 29, prior approal of t#e )oernment for %+" s#all be compulsory9 /reas8 Sectors8 /ctiities #it#ertonot open to %+" inestment s#all continue to be so unless ot#er5ise decided and notified by)oernment9 /n inestor can ma6e an application for prior goernment approal een 5#ent#e proposed actiity is under t#e automatic route9

PROCED!RE TO GET GOVERNMENT APPROVAL:

#e %oreign "nestment romotion Board ;%"B< considers approing all proposals for foreigninestment, 5#ic# re?uires )oernment approal9 #e %"B also grants composite approalsinoling foreign inestment, foreign tec#nical collaboration9 %or see6ing t#e approal for %+"ot#er t#an *'" "nestments and 00C (&4, applications in form %-"L s#ould be submittedto t#e department of (conomic /ffairs ;+(/


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remittances and issue of s#ares to t#e foreign inestors9 #e companies are, #o5eer re?uired tonotify t#e 'egional office concerned of t#e 'B" of receipt of in5ard remittances 5it#in 30 daysof suc# receipt and to file t#e re?uired documents 5it# t#e concerned 'egional offices of t#e 'B"5it#in 30 days after issue to t#e foreign inestors or *'"s9

Besides ne5 companies, automatic route for %+"8*'" inestment if also aailable to t#ee>isting companies proposing to induct foreign e?uity9 %or e>isting companies 5it# an e>pansion programme, t#e additional re?uirements are as under:

1 #e increase in e?uity leel resulting from t#e e>pansion of t#e e?uity base of t#ee>isting company 5it#out t#e ac?uisition of e>isting s#ares by *'"8forign inestors

2 #e money to be remitted s#ould be in foreign currency and3 roposed e>pansion programme s#ould be in t#e sectors under t#e automatic route9

&t#er5ise, t#e proposal 5ould need )oernment approal t#roug# t#e %"B9 %or t#is a board 'esolution of t#e e>isting "ndian company must suppost t#e proposal9

%or companies already e>isting 5it#out an e>pansion programme, t#e additional re?uirementsfor eligibility for automatic approal are:

#at t#ey are engaged in t#e industries under automatic route9

#e increase in e?uity leel must be from e>pansion of t#e e?uity base and t#e foreign e?uitymust be in foreign currency9

#e earlier S(B" regulation t#at 5as applicable to public limited companies, t#at s#ares allottedon preferential basis s#all not be transferable in any manner for a period of G years from t#e dateof t#eir allotment #as no5 been modified to t#e e>tent t#at not more t#an 20 percent of t#e entirecontribution broug#t in by t#e promoter cumulatiely in public or preferential issues s#all beloc6ed in9 e?uity participation by international financial institutions suc# as /+B, "%, +,+() etc in t#e domestic companies is permitted t#roug# automatic route subject to S(B"8'B"regulations and sector specific cap on %+"9

AMERICAN DEPOSITORY RECEIPTS OR GLOBAL DEPOSITORY RECEIPTS

(ADRGDR):

/n "ndian corporate can raise foreign currency resources abroad t#roug# t#e issue of /merican+epository 'eceipts ;/+'s< or )lobal +epository 'eceipts ;)+'s< by issuing its 'upeedenominated s#ares to a person resident outside "ndia being a depository for t#e purpose of issuing )lobal +epository 'eceipts ;)+'s< and8 or /merican +epository 'eceipts ;/+'s


30/76

B< #e "ndian company issuing suc# s#ares #as an approal from t#e Ministry of %inance,)oernment of "ndia to issue suc# /+'s and8or )+'s or is eligible to issue /+'s8 )+'s interms of t#e releant sc#eme in force or notification issued by t#e Ministry of %inance, and

< "s not ot#er5ise ineligible to issue s#ares to persons resident outside "ndia in terms of t#ese

'egulations9

#ere is no limit up to 5#ic# an "ndian company can raise /+'s8)+'s9 Ho5eer, t#e "ndiancompany #as to be ot#er5ise eligible to raise foreign e?uity under t#e e>tant %+" policy9

#ere are no end-use restrictions on )+'8/+' issue proceeds, e>cept for an e>press ban oninestment in real estate and stoc6 mar6ets9#e %B issue proceeds need to conform to e>ternal commercial borro5ing end usere?uirements9 "n addition, 2G per cent of t#e %B proceeds can be used for general corporaterestructuring9

'egulation F of Sc#edule-" of %(M/ *otification *o9 20 deal 5it# t#e issue of /+'8)+' by an"ndian company9

97 / company engaged in t#e manufacture of items coered under /utomatic route, 5#osedirect foreign inestment after a proposed )+'s8/+'s8%Bs issue is li6ely to e>ceed t#ee?uity limits under t#e automatic route, or 5#ic# is implementing a project falling under )oernment approal route, 5ould need to obtain prior )oernment clearance t#roug# %"B before see6ing final approal from t#e Ministry of %inance9

FOREIGN C!RRENCY CONVERTIBLE BONDS:

%Bs are issued in accordance 5it# t#e USc#eme for issue of %oreign urrency onertibleBonds and &rdinary S#ares ;#roug# +epository 'eceipt Mec#anism< Sc#eme, EE3, andsubscribed by a non-resident in foreign currency and conertible into ordinary s#ares of t#eissuing company in any manner, eit#er in 5#ole, or in part, on t#e basis of any e?uity related5arrants attac#ed to debt instrumentsD

#e eligibility for issue of onertible Bonds or &rdinary S#ares of "ssuing ompany is asunder:

/< /n issuing company desirous of raising foreign funds by issuing %oreign urrencyonertible Bonds or ordinary s#ares for e?uity issues t#roug# )lobal +epositary 'eceipt9i9 an issue %Bs up to 4SOG0 Million under t#e /utomatic route,

ii9 %rom 4SOG0 00 Million, t#e companies #ae to ta6e 'B" approal,

iii9 %rom 4SO00 Million and aboe, prior permission of t#e +epartment of (conomic /ffairs isre?uired9


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PREFERENCE SHARES:

%oreign inestment t#roug# preference s#ares is:

W treated as %oreign +irect e?uity for t#e purposes of sectoral caps on foreign e?uity, 5#ere suc#

caps are prescribed, proided t#ey carry a conersion option9 reference s#ares structured5it#out suc# conersion option fall outside t#e foreign direct e?uity cap9

W considered as part of t#e s#are capital and fall outside t#e (>ternal ommercial Borro5ing;(B< guidelines8cap9

#e route, 5#et#er /utomatic or )oernment approal depends upon t#e actiity 8 sector of t#ecompany9

#e +uration of conersion s#all be as per t#e ma>imum limit prescribed under t#e ompanies/ct or 5#at #as been agreed to in t#e s#are#olders agreement, 5#ic#eer is less9

#e diidend rate 5ould not e>ceed t#e limit prescribed by t#e Ministry of %inance9

"ssue of preference s#ares s#ould conform to t#e guidelines prescribed by t#e S(B" and 'B"and ot#er statutory re?uirements9

IND!STRIAL LICENSING:

I+,#$&*"4 4*7%+#*+ 9'4*7:

"ndustrial Licenses are regulated under t#e "ndustries ;+eelopment P 'egulation< /ct, EG9it# progressie liberali=ation and deregulation of t#e economy t#e re?uirement of industriallicensing #ae been substantially reduced9 /t present industrial license for manufacturing isre?uired only for t#e follo5ing:i9 "ndustries retained under compulsory licensing,ii9 Manufacture of items resered for small scale sector by non-SS" unitsD andiii9 #en t#e proposed location attracts locational restriction9

I+,#$&*%# R%*&*+ C'94#'& L*7%+#*+:

#e follo5ing industries re?uire compulsory industrial license under " ;+P'< /ct 8 appropriateaut#ority:

i9 +istillation and bre5ing of alco#olic drin6s9

ii9 igars and cigarettes of tobacco and manufactured tobacco substitutesD

iii9 (lectronic /erospace and defence e?uipment: all typesD


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i9 "ndustrial e>plosies, including detonating fuses, safety fuses, gun po5der, nitrocellulose andmatc#esD

9 Ha=ardous c#emicalsDa9 Hydrocyanic acid and its deriaties

b9 #osgene and its deriatiesc9 "socyanates and di-isocyanates of #ydrocarbon, not else5#ere specified ;e>ample: Met#yl"socyanateclusie manufacture in t#e small-scale sector9;List aailable at 5559dipp9go9in


33/76

P&'7%,&% '& ';$"*+*+ I+,#$&*"4 L*7%+#%:

"ndustrial License is granted by t#e Secretariat for "ndustrial /ssistance ;S"/< on t#erecommendation of t#e Licensing ommittee9

/pplication in t#e prescribed form9 ;%orm %-"L< accompanied 5it# a crossed demand draft of 's92G008- may be submitted to t#e 'P section in S"/9+ecisions are usually ta6en 5it#in F- 5ee6s of filing t#e application999

P'4*7 '& I+,#$&*%# %%9$ &' 4*7%+#*+ - IEM

"ndustrial underta6ings e>empt from industrial license are only re?uired to file an "ndustrial(ntrepreneur Memoranda ;"(M< in art R/@, in t#e prescribed format ;%orm "(Mceed t#e inestment limit prescribedfor small-scale units9 "n suc# cases t#ese units need to obtain a arry-on-Business ;&B<License based on t#e best production in t#e preceding t#ree years9 *o e>port obligation is fi>edon t#e capacity for 5#ic# t#e &B license is granted9#e application for &B licence s#ould be submitted in reised form $((1, 5#ic# can bedo5nloaded from t#e 5eb site #ttp:885559dipp9go9in along 5it# a crossed demand draft of 's92G008-9


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Ho5eer, on furt#er e>pansion of its capacity beyond t#e capacity included in&B license, t#e unit 5ould need to obtain an industrial license9

P"%+$ ' 9&%#7&*;%, %%:

#e fee prescribed for arious applications, licenses are to be paid t#roug# crossed demand draftdra5n in faor of t#e ay P /ccounts &fficer, +epartment of "ndustrial olicy P romotion,Ministry of ommerce P "ndustry, payable at *e5 +el#i9

E+8*&'+%+$"4 C4%"&"+7%#:

(ntrepreneurs are re?uired to obtain Statutory clearances relating to ollution ontrol and(nironment as may be necessary, for setting up an industrial project for 3 categories of

industries in terms of *otification S9&9 0;(< dated 2799EF as amended from time to time, issued by t#e Ministry of (nironment P %orests under #e (nironment ;rotection< /ct, E!9 #islist includes petroc#emical comple>es, petroleum refineries, cement, t#ermal po5er plants, bul6 drugs, fertili=ers, dyes, paper, etc9Ho5eer, if inestment in t#e project is less t#an 's9 billion, suc# (nironmental clearance isnot necessary, e>cept in cases of pesticides, bul6 drugs and p#armaceuticals, asbestos andasbestos products, integrated paint comple>es, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplatingindustries9Setting up industries in certain locations considered ecologically fragile ;e9g9 /raalli 'ange,coastal areas, +oon alley, +a#anu, etc9< are guided by separate guidelines issued by t#eMinistry of (nironment and %orests9+etails can be obtained at t#e 5ebsite of Ministry of (nironment and %orests;#ttp:88enfor9nic9in


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t#roug# t#e automatic route and by t#e )oernment approal route, includes tec#nical 6no5 #o5fees, payment for design and dra5ing, payment for engineering serice and royalty9

ayments for #iring of foreign tec#nicians, deputation of "ndian tec#nicians abroad, and testingof indigenous ra5 material, products, and indigenously deeloped tec#nology in foreign

countries are goerned by separate 'B" procedures and rules pertaining to current accounttransactions and are not coered by t#e foreign tec#nology collaboration approal9 %or details please refer to t#e 5ebsite of t#e 'B"9

A$'"$*7 R'$%:

ayments for foreign tec#nology collaboration by "ndian companies are allo5ed under t#eautomatic route subject to t#e follo5ing limits:

;i< #e lump sum payments not e>ceeding 4SO2 millionD

;ii< 'oyalty payable being limited to G per cent for domestic sales and ! per cent for e>ports,5it#out any restriction on t#e duration of t#e royalty payments9 #e royalty limits are net of ta>es and are calculated according to standard conditions9Uress *ote *o9E ;EE! series< andress *ote *o9 2 ;2003 series-factory sale price of t#e product,e>clusie of e>cise duties, minus t#e cost of t#e standard boug#t-out components and t#e landedcost of imported components, irrespectie of t#e source of procurement, including ocean freig#t,insurance, custom duties, etc9

!#% ' T&",%"&=# "+, B&"+, +"%:

ayment of royalty up to 2C for e>ports and C for domestic sales is allo5ed under automaticroute for use of trademar6s and brand name of t#e foreign collaborator 5it#out tec#nologytransfer9 'oyalty on brand name8trade mar6 s#all be paid as a percentage of net sales, i=9, grosssales less agents@8dealers@ commission, transport cost, including ocean freig#t, insurance, duties,ta>es and ot#er c#arges, and cost of ra5 materials, parts and components imported from t#eforeign licensor or its subsidiary8affiliated company;ress *ote *o9 of 2002


36/76

"ndia 5it#in t#e limits prescribed under t#e automatic route9'B"@s prior approal is re?uired for remittance to5ards purc#ase of trade mar68franc#ise9

G'8%&+%+$ A99&'8"4 @ P&'%7$ A99&'8"4 B'"&, (PAB):

'oyalty payment in t#e follo5ing cases re?uires prior )ot9 approal ;t#roug# /B 5#en onlytec#nical collaboration is proposed and %"B 5#ere bot# financial P tec#nical collaboration are proposed


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iii9 Branc# &ffice

Suc# offices can underta6e actiities permitted under t#e %oreign (>c#ange Management;(stablis#ment in "ndia of Branc# &ffice of ot#er place of business< 'egulations, 20009

I+7'&9'&"$*'+ ' C'9"+:

%or registration and incorporation, an application #as to be filed 5it# 'egistrar of ompanies;'&liabilities, on its completion9

B&"+73 O*7%:

%oreign companies engaged in manufacturing and trading actiitiesabroad are allo5ed toset up Branc# &ffices in "ndia for t #e follo5ing purposes:

a9 (>port8"mport of goods

b9 'endering professional or consultancy serices

c9 arrying out researc# 5or6, in 5#ic# t#e parent company is engaged9

d9 romoting tec#nical or financial collaborations bet5een "ndian companies and parent or


38/76

oerseas group company9

e9 'epresenting t#e parent company in "ndia and acting as buying8selling agents in "ndia9

f9 'endering serices in "nformation ec#nology and deelopment ofsoft5are in "ndia9

g9 'endering tec#nical support to t#e products supplied by t#e parent8 groupcompanies9

#9 %oreign airline8s#ipping company9

Branc# &ffices establis#ed 5it# t#e approal of 'B" may remit outside "ndia profit of t#e branc#, net of applicable "ndian ta>es and subject to 'B" guidelines9 ermission for setting up branc# offices is granted by t#e 'esere Ban6 of "ndia ;'B"c#ange 5it# t#e documents re?uired as per %(M/9

/pplication for setting up Liaison &ffice8 roject &ffice8 Branc# &ffice may besubmitted to#ief )eneral Manager, (>c#ange ontrol +epartment;%oreign"nestment +iision


39/76

E?CHANGE CONTROL

F'&%*+ E73"+% M"+"%%+$ A7$:

#e 'esere Ban6 of "ndia@s (>c#ange ontrol +epartment, administers %oreign (>c#angeManagement /ct, EEE, ;%(M/c#ange 5it#out prior approal of 'B" and repatriatet#roug# a ban6 t#e sale proceeds if t#ey #old t#e s#ares on repatriation basis and if t#ey #aenecessary *&8ta> clearance certificate issued by "ncome a> aut#orities

;iii< %or sale of s#ares t#roug# priate arrangements, 'egional offices of 'B" grant permissionfor recogni=ed units of foreign e?uity in "ndian company in terms of guidelines indicated in'egulation 09B of *otification *o9 %(M/92082000 'B dated May R20009 #e sale price of s#ares on recogni=ed units is to be determined in accordance 5it# t#e guidelines prescribedunder 'egulation 0B ;2< of t#e aboe *otification9


40/76

;i< rofits, diidends, etc9,;5#ic# are remittances classified as current account transactions< can be freely repatriated9C&&%+$ A77'+$ T&"+#"7$*'+#

urrent account transactions are regulated under t#e %oreign (>c#ange Management ;urrent

/ccount ransactions< 'ules 20009 Z *o9 )9S9'9 3!;(ceeding 4SO2G,000 p9a9 ;oer and aboe ceilings prescribed for ot#er remittances mentioned aboe< by a resident indiidual for any current account or capital accounttransaction9

#e aboe figures are for t#e purpose of general guidance of t#e inestors9 "t is suggested t#atinestors must reconfirm, t#e permissible limits before underta6ing transactions9

A7*#*$*'+ ' I'8";4% P&'9%&$ B N'+-R%#*,%+$:

/ person resident outside "ndia, 5#o #as been permitted by 'esere Ban6 of "ndia to establis# a branc#, or office, or place of business in "ndia ;e>cluding a Liaison &ffice


41/76

property in "ndia ot#er t#an agricultural8 plantation 8farm #ouse9 He may transfer any immoable property ot#er t#an agricultural or plantation property or farm #ouse to a person resident outside"ndia 5#o is a citi=en of "ndia or to a erson of "ndian &rigin resident outside "ndia or a personresident in "ndia9

PORTFOLIO INVESTMENT

P'&$'4*' I+8%#$%+$ S73%%(PIS):

%oreign "nstitutional "nestors ;%""s< registered 5it# S(B" and *on-'esident "ndians are eligibleto purc#ase s#ares and conertible debentures under t#e ortfolio "nestment sc#eme9 #e %""s#ould apply to t#e designated /+ for opening a foreign currency account and8or a *on 'esident'upee /ccount9

"nestment by %""s is regulated under S(B" ;%""< 'egulations, EEG and 'egulation G;2< of %(M/ *otification *o920 dated May 3, 20009 S(B" acts as t#e nodal point in t#e entire processof %"" registration9 %""s are re?uired to apply to S(B" in a common application form in duplicate9'B" approal is also re?uired under %(M/ to enable an %"" to buy8sell securities on Stoc6 (>c#anges and open foreign currency and "ndian 'upee accounts 5it# a designated ban6 branc#9

F'&%*+ I+#$*$$*'+"4 I+8%#$' (FII):

%""s include /sset Management ompanies, ension %unds, Mutual %unds, "nestment rusts as *ominee ompanies, "ncorporated8"nstitutional ortfolio Managers or t#eir o5er of /ttorney#olders, 4niersity %unds, (ndo5ment %oundations, #aritable rusts and #aritable Societies9

P'4*7 O+ FII I+8%#$%+$#

Main features of t#e policy on inestment by %"" are:

a9 %""s are re?uired to allocate t#eir inestment bet5een e?uity and debt instruments in t#e ratioof 70:309 Ho5eer, it is also possible for an %"" to declare itself a 00C debt %"" in 5#ic# case itcan ma6e its entire inestment in debt instruments9


42/76

b9 %""s can buy8sell securities on Stoc6 (>c#anges9 #ey can also inest in listed and unlistedsecurities outside Stoc6 (>c#anges 5#ere t#e price #as been approed by 'B"9

c9 *o indiidual %""8sub-account can ac?uire more t#an 0C of t#e paid up capital of an "ndian

company9

d9 /ll %""s and t#eir sub-accounts ta6en toget#er cannot ac?uire more t#an 2FC of t#e paid upcapital of an "ndian ompany9

e9 "ndian ompanies can raise t#e aboe mentioned 2FC ceiling to t#e Sectoral ap 8 Statutoryeiling as applicable by passing a resolution by its Board of +irectors follo5ed by passing aSpecial 'esolution to t#at effect by its )eneral Body in terms of ress 'elease dated Sept920,200 and %(M/ *otification *o9FG dated Sept9 20, 2009

*o permission from 'B" is needed so long as t#e %""s purc#ase and sell on recogni=ed stoc6

e>c#ange9 /ll non-stoc6 e>c#ange sales8purc#ases re?uire 'B" permission9

P'&$'4*' I+8%#$%+$# ; NRI#

*'"s8"&s are permitted to purc#ase8sell s#ares8conertible debentures of "ndian companies onStoc6 (>c#anges under ortfolio "nestment Sc#eme9 %or t#is purpose, t#e *'"8"& #as to applyto a designated branc# of a Ban6 5#ic# deals in ortfolio "nestment9 /ll t#e sale8purc#asetransaction is routed t#roug# t#e designated branc#9

/n *'" can purc#ase s#ares up to GC of t#e paid up capital of an "ndian company9 /ll *'"sta6en toget#er cannot purc#ase more t#an 0C of t#e paid up alue of t#e company9 #is limitcan be increased by t#e "ndian company to 2FC by passing a )eneral Body resolution9"nestment can be made bot# on repatriation basis or non-repatriation basis t#e sale of s#ares5ill be subject to payment of applicable ta>es9+etails regarding portfolio inestment sc#eme aailable at t#e 5ebsites of 'B" ;5559rbi9org9in<and S(B" ;5559sebi9go9in


43/76

INCORPORATION OF COMPANY

C'9"+# A7$ 156:

"ncorporation of a company in "ndia is goerned by t#e ompanies /ct, EG9 art "" of t#e /ctdeal 5it# t#e incorporation of a company and matters related to9

P&*8"$% C'9"+:

riate company means a company 5#ic# #as a minimum paid-up capital of 's,,00,0008- or suc# #ig#er paid-up capital as may be prescribed, and by its articles,

;a< restricts t#e rig#ts to transfer its s#ares, if anyD

;b< Limits t#e number of its members to fifty, not including

i< ersons 5#o are in t#e employment of t#e companyD and

ii< persons 5#o, #aing been formerly in t#e employment of t#e company, 5ere members of t#e company 5#ile in t#at employment #ae continued to be members after t#e employmentceasedD and

;c< pro#ibits any initation to t#e public to subscribe for any s#ares in, or debentures of, t#ecompanyD

;d< ro#ibits any initation or acceptance of deposits from persons ot#er t#an its members,directors or t#eir relaties9

P;4*7 C'9"+:

/ public company is a company 5#ic# is not a priate company and #as a minimum paid-upcapital of 's,G,00,0008-or suc# #ig#er paid-up capital, as may be prescribed9

F'&"$*'+ ' " P&*8"$% L**$%, C'9"+:

/ priate ompany can be formed eit#er by

i9 incorporation of a ne5 company for doing a ne5 business , or

ii9 onersion of e>isting business of a sole proprietary concern or partners#ip firm into a

company9N"% ' C'9"+:

#e name of a corporation is t#e symbol of its personal e>istence9 /ny suitable name may beselected for registration subject to t#e follo5ing guidelines:

a9 #e promoters s#ould select t#ree to four alternatie names, ?uite distinct from eac# ot#er9

b9 #e names s#ould include, as far as possible, actiity as per t#e main objects of t#e proposedcompany9


44/76

c9 #e names s#ould not too closely resemble 5it# t#e name of any ot#er registered company9

d9 #e official guidelines issued by t#e entral )oernment s#ould be follo5ed 5#ile selectingt#e names9 Besides, t#e names so selected s#ould not iolate t#e proisions of t#e (mblemsand *ames ;reention of "mproper 4se< /ct, EG09

e9 /pply in form -/ to t#e 'egistrar of ompanies #aing jurisdiction along 5it# a filing feeof 's9 G009

M%'&"+, ' A##'7*"$*'+:

/n important step in t#e formation of a company is to prepare a document calledMemorandum of /ssociation9 "t is t#e c#arter of t#e company and it contains t#e basicconditions on 5#ic# t#e company is incorporated9

#e Memorandum contains t#e name, t#e State in 5#ic# t#e registered office is to be situated,main objects of t#e company to be pursued by t#e company on its incorporation and objectsincidental or ancillary to t#e attainment of t#e main objects, liability of t#e members and t#eaut#ori=ed capital of t#e company9 #e main purpose of t#e memorandum is to state t#e scopeof actiities and po5ers of t#e company9

A&$*74%# ' A##'7*"$*'+:

/rticles of /ssociation of t#e company contain rules, regulation and bye-la5s for t#e generalmanagement of t#e company9 "t is compulsory to get t#e /rticles of /ssociations registeredalong 5it# t#e Memorandum of /ssociation in case of a priate company9

#e /rticles are subordinate to t#e Memorandum of /ssociation9 #erefore, t#e /rticles s#ouldnot contain any regulation, 5#ic# is contrary to proisions of t#e Memorandum or t#eompanies /ct9 #e /rticles are binding on t#e members in relation to t#e company as 5ell ason t#e company in its relation to members9

R%*#$&"$*'+ ' C'9"+ "+, I##% ' C"9*$"4:

/fter completion of t#e preliminaries, as enumerated aboe, t#e application 5it# necessarydocuments are re?uired to be filed 5it# t#e 'egistrar of ompanies of t#e State in 5#ic# t#ecompany is proposed to be incorporated9 #ese include:

a9 Memorandum of /ssociation ;duly stamped< and a duplicate t#ereof9

b9 /rticles of /ssociation ;duly stamped< and a duplicate t#ereof

c9 #e agreement, if any, 5#ic# t#e company proposes to enter into 5it# any indiidual for appointments as its managing or 5#ole time director or manager9

d9 / copy of t#e letter of t#e 'egistrar of ompanies intimating t#e aailability of t#e proper name

e9 +ocuments eidencing payment of prescribed registration and filing fee, i9e9 a ban6 draft or atreasury c#allan9

f9 +ocuments eidencing t#e directors#ip and situation of 'egistered &ffice in %orm 32 and%orm ! respectiely and declaration of compliance 5it# re?uirements of t#e ompanies /ctin %orm *o9 and %orm 2E for giing consent to act as a +irector in case of public companyare also gien9

#e amount of registration fee payable is regulated 5it# reference to t#e amount of aut#ori=ed


45/76

capital of t#e proposed company9

ertificate of "ncorporation

4pon compliance 5it# all re?uirements, t#e 'egistrar 5ill register t#e company and issue aertificate of "ncorporation of company9 "t brings t#e company into e>istence as a legal entity9

I##% ' S3"&% C"9*$"4: /fter obtaining registration, t#e company proceeds 5it# its business for 5#ic# it re?uiresfunds9 "n case of a priate company, t#e capital is to be raised by 5ay of priate arrangements5#ereas a ublic Ltd9 company can raise funds from t#e public9 %irst of all, t#e company 5illissue s#ares to t#e subscribers to its memorandum and ot#er members of t#e company9 #eissued capital must not e>ceed t#e aut#ori=ed capital of t#e company9

"t is necessary for a public limited company to obtain t#e ertificate of ommencement of Business before commencing t#e business9

SPECIAL ECONOMIC ONES (SE#) AND E?PORT ORIENTED !NITS (EO!#)

P'4*7 '& S%$$*+ 9 S9%7*"4 E7'+'*7 '+% (SE):

S(X is a specifically delineated duty free enclae and is deemed to be foreign territory for t#e purposes to trade operations and duties and tariffs9 )oods and serices going into t#e S(X areaform +/ are treated as e>ports and goods coming from t#e S(X area into +/ are to betreated as if t#ese are being imported9

/ S(X may be set up in t#e ublic, riate or Koint Sector or by State goernment;s F "" & aailable at +)% 5ebsite ;#ttp:88dgft9del#i9nic9in< isconsidered by Board of /pproals and +epartment of ommerce issues t#e letter of permission9

P&'7%,&%:

#e applicant s#ould follo5 t#e follo5ing procedure:

a9 Submission of 0 copies of application along 5it# project report to #ief Secretary of t#econcerned State9

b9 %or5arding of application along 5it# comments by t#e State goernment to Board of /pproals in t#e +epartment of ommerce9

c9 "ssue of letter of permission by +epartment of ommerce9

P'4*7 '& FDINRI I+8%#$%+$ '& #%$$*+ 9 SEFTW:

00C %+" is permitted under automatic route for setting up Special (conomic Xones and %reerade are#ousing Xones subject to Special (conomic Xones /ct, 200G and t#e %oreign radeolicy9 %+" in setting up of S(Xs P units in S(X are e>empt from ress *ote *o9 2 ;200G


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;b< Location is in conformity 5it# t#e prescribed parametersD

;c< 4nits underta6e to ac#iee positie net foreign e>c#ange earningD

/n (&4 unit may be s#ifted to S(X 5it# t#e approal of +s proided t#e (&4 unit #asac#ieed pro-rata obligation under t#e (&4 sc#eme9

"f t#e 4nit is amenable to bonding by customs aut#oritiesD conersion of e>isting +omesticariff /rea ;+/< units into (&4 is also permitted under automatic route, if t#e +/ unitsatisfies t#e parameters in ara !99 "n case t#ere is an outstanding e>port commitment under t#e () sc#eme, it 5ill be subsumed in t#e e>port performance of t#e unit9 "f t#e unit is#aing outstanding e>port commitment under t#e /dance Licensing Sc#eme, it 5ill apply to/L for reducing its e>port commitment in proportion of t#e ?uantum of duty free materialactually utili=ed for production and permitted to carry for5ard t#e unutili=ed material importedagainst t#e /dance License9

P'4*7 '& S%$$*+ 9 EO!# !+*$# *+ SE +,%& G'8%&+%+$ R'$%:

roposals not coered by t#e automatic route are for5arded by t#e +eelopmentommissioner to t#e Board of /pproal ;Bo/ IND!STRIAL MODEL TOWNS AND

GROWTH CENTRES

P'4*7 +,%& A$'"$*7 R'$%:

#e )oernment notified "ndustrial ar6 sc#eme on 9F92002 ;aailable at 5559dipp9go9in<for setting up "ndustrial ar6s8 "ndustrial Model o5ns9 S"/ in +" accord approal to set upt#e "ndustrial ar6s8 "ndustrial Model o5ns, 5#ic# meet t#e criteria laid do5n for approalunder t#e automatic route 5it#in fifteen days9

A99&'8"4 ; E9'%&%, C'*$$%%:


47/76

roposals not meeting any or all of t#e parameters for automatic route re?uire approal of (mpo5ered ommittee set up in t#e +", Ministry of ommerce P "ndustry9 #e decision of t#e ommittee is usually coneyed 5it#in si> 5ee6s9

P&'7%,&% '& A99&'8"4 "+, "8"*4*+ 100 T" E%9$*'+:

/pplication in t#e %orm-"S-, aailable on t#is +epartment@s 5eb site ;#ttp:88dipp9go9in sets9 #e application must be accompanied by a fee of 'upees,0008- by a demand draft dra5n in faor of t#e ay and /ccounts &fficer, +" payable at *e5 +el#i9

P'4*7 '& FDINRI I+8%#$%+$:

00C %+" is permitted under automatic route for setting up of "ndustrial ar6s8 "ndustrialModel o5ns9 #e procedure mentioned in para 9G 5ill be applicable for see6ing re?uisiteapproal9

E4%7$&'+*7 H"&,"&% T%73+'4' P"&= (EHTP) "+, S'$"&% T%73+'4' P"&= (STP)

S73%%#:

"n order to proide impetus to t#e electronics industry, to en#ance its e>port potential and todeelop an efficient electronic component industry, (H and S sc#emes offer a pac6age of incenties and facilities li6e duty free imports on t#e lines of t#e (&4 Sc#eme, deemede>ports benefits and ta> #olidays9

A$'"$*7 R'$%:

#e +irectors of Ss in respect of S proposalsD and t#e +esignated &fficers in respect of (H proposals accord automatic approal 5it#in 2 5ee6s if:

;a< "tems do not attract compulsory licensingD;b< Location is in conformity 5it# t#e prescribed parametersD

;c< 4nits underta6e to ac#iee positie net foreign e>c#ange earningD

G'8%&+%+$ A99&'8"4:

/ll proposals for setting up of t#ese projects, 5#ic# do not meet any or all of t#e parametersfor automatic approal, need to be considered and approed by t#e Ministry of "nformationec#nology t#roug# t#e "nter-Ministerial Standing ommittee9 #e decision of t#e ommitteeis usually coneyed 5it#in si> 5ee6s9

rocedure:

/pplication, in t#e prescribed form, s#ould be submitted to t#e concerned +irectors of Ss or t#e +esignated &fficers of (Hs and to t#e Ministry of "nformation ec#nology for )oernment approal9 #e application s#ould be submitted along 5it# a crossed demand draftfor 's9 G0008- dra5n in faor of t#e $t#e ay P /ccounts &ffer, +epartment of ommerce,Ministry of ommerce P "ndustry1, payable at *e5 +el#i9 #e form is aailable in any outletdealing 5it# )oernment ublications9

P&'7%,&% '& FDINRI I+8%#$%+$:


48/76

/ll proposals for %+"8*'" inestment in (H8S 4nits are eligible for approal under automatic route subject to parameters listed in ara 939 %or proposals not coered under automatic route, t#e applicant s#ould see6 separate approal of t#e %"B, as per t#e procedureoutlined in ara 99

TA?ATION IN INDIA

T""$*'+ S#$% *+ I+,*":

"ndia #as a 5ell deeloped ta> structure "ncome a> ;e>cept ta> on agricultural income, 5#ic#t#e State )oernments can leycise and Sales a> and Sericea> are t#e main ta>es leied by t#e entral )oernment9 .alue /dded a>, ;Sales a> 5#ere./ is yet not in forcecise, Land 'eenue, and a> on rofessions aret#e principal ta>es leied by t#e State )oernments9 Local Bodies are empo5ered to ley ta>on properties, &ctroi and for utilities li6e 5ater supply, drainage, etc9

P%'+"4 I+7'% T":

#e rates of personal income ta> are:"ncome range ;'upee< a> rate;C<

0 -, 00,000 *"L , 00,000 -, G0,000 0

, G0,000 - 2, G0,000 20

2, G0,000 and aboe 30


49/76

/ surc#arge of 0C is leied on income e>ceeding 's90, 00,0009

Senior citi=ens 5it# income up to 's9, !G,000 are e>empt from "ncome a>9

R"$%# ' W*$33'4,*+ T":

C&&%+$ &"$%# '& *$33'4,*+ $" '& 9"%+$ $' +'+-&%#*,%+$# "&%:

;i< "nterest 20C

;iiation9

W F0C in t#e case of foreign companies and surc#arge 29GC of t#e ta>9

W (ducation cess is leied 2C on t#e amount of ta> and surc#arge in all cases9Special (conomic Xones ;S(Xs<

TA? CONCESSIONS:

"ndia offers attractie ta> incenties to encourage inestments in Special (conomic Xones, priority industries and to promote industriali=ation of industrially dis-adantageous areas9

S9%7*"4 E7'+'*7 '+%# (SE#):

RH( S("/L (&*&M" X&*(S /, 200G@, notified by t#e )oernment of "ndia in Kune200G, proides follo5ing concessions for t#e establis#ment, deelopment and management of t#e Special (conomic Xones for t#e promotion of e>ports9 #e ta> concessions aailable todeelopers of Special (conomic Xones and units located in suc# =ones are as follo5s:


50/76

4nits 5#ic# begin to manufacture or produce articles or t#ings or proide any serices, on or after 0-0F-200G are eligible for G year ta> benefit in relation to e>port profits, in t#e follo5ingmanner :-

;i< 00 C deduction for G years, G0 C deduction for ne>t G years, G0 C deduction of t#e profits

ploug#ed bac6 into business for t#e ne>t G years9

;ii< 00 C deduction of profits deried by an underta6ing 8 enterprise from t#e busi

shaheda foreign direct investment and its growth in india.doc

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