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Diplomacy in Action

2012 Investment Climate Statement - India


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to, and Restrictions Upon, Foreign Investment

India's sizeable and rapidly growing domestic market, English-speaking population, and stable democratic government contribute to its being one of UNCTAD's 2010-12 top five destinations for foreign investment. Stock and commodity exchanges generally are well regulated by the relevant authorities. Despite these positive attributes, India continues to fare poorly in international business rankings. The International Finance Corporation ranked India 132 out of 183 world economies in its “Doing Business 2012 " report, and the World Bank ranks it the world’s sixth slowest country in terms of the number of days it takes to resolve a commercial investment dispute. The heightened concerns of domestic investors about India’s business climate are seen in declining capital formation and growing outbound foreign direct investment (FDI). The UN noted in its December 2011 report that India's 2010 FDI inflows declined approximately 30 percent to USD 25 billion from USD 36 billion in 2009. The Goldman Sachs employee who coined the phrase “BRIC” recently commented that India was the most disappointing of the BRIC countries, due to its poor record on productivity, foreign direct investment, and economic reforms. Companies with operations in India often say that, in viewing the domestic investment climate, one has to focus at the state-level and on medium- to long-term returns on investment.

Investors should be prepared to face varying conditions among India's 28 states and seven union territories. Many policies are implemented at the sub-national level and are subject to differences in local-level political governance, regulations, taxation, labor relations, infrastructure, and quality of education. Although India prides itself on its rule of law, its courts have cases backlogged for years. There is a strong Indian cultural and historical preference toward economic self-sufficiency and a corresponding tendency toward industrial and trade policies that protect domestic production and manufacturing, agriculture, and other sectors. Indian conglomerates and high technology companies are gaining sophistication and prominence on the world stage. Certain industrial sectors, such as information technology, telecommunications, and engineering are widely recognized for their innovation and competitiveness in the global market.

There are two channels for foreign investment: the “automatic route" and the “government route.” Under the “automatic route,” the foreign investor or Indian company is not required to seek approval from the relevant central government agency or department (e.g., coal and lignite mining, power, industrial parks, petroleum and gas, and non-banking finance). Instead, the investor is expected to notify the Reserve Bank of India (RBI) of its investment via Form “FC (RBI)” within 30 days of inward receipts and the issuance of shares (www.rbi.org.in/scripts/BS_ViewForms.aspx). Investments subject to government approval are described as taking the “government route,” and approval from vested ministries and agencies is required prior to the investment being transacted. The rules regulating government approval for investment in selected sectors vary from industry to industry and change frequently. The approving entity also varies depending on the applicant and the product:

-- The Ministry of Commerce and Industry’s (MOCI) Department of Industrial Policy and Promotion (DIPP) oversees single-brand product retailing investment proposals, as well as proposals made by Non-Resident Indians (NRIs), and Overseas Corporate Bodies (OCBs). An OCB is a company, partnership firm, or other corporate entity that is at least 60 percent owned, directly or indirectly, by NRIs, including overseas trusts.

-- The MOCI’s Department of Commerce oversees proposals from export-oriented units (i.e., industrial companies that intend to export their entire production of goods and services from India abroad).

-- The Ministry of Finance’s Foreign Investment Promotion Board (FIPB) oversees all other applications.

India has taken gradual steps toward FDI liberalization but the process has slowed in recent years. Industrial policy reforms have also stagnated. The GOI released its long-awaited National Manufacturing Policy in the fall of 2011. The policy framework is intended to be implemented by the states and line ministries and establishes National Investment and Manufacturing Zones (NIMZ) in an effort to better enable manufacturing and attract foreign investment. FDI policy is governed by the Foreign Exchange Management Act of 1999 and the RBI. Details on current caps and procedures are available in a comprehensive policy document released by DIPP in October 2010, and available here: http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf.

In India, an NRI can invest in the capital of a resident entity in certain sectors, but is subject to investment limits. According to MOCI, a company with foreign investment that is majority-owned or controlled by resident Indians is authorized “downstream” investment without the transaction counting toward FDI caps on the part of the receiving entity or sector. In contrast, downstream investment by a foreign-owned and foreign-controlled entities counts pro-rata towards FDI caps. [Note: For this purpose, NRIs are considered foreign.] This regulation results in the government counting foreign shareholding as domestic shareholding, so long as the investment is transacted via a shell company with only 49 percent foreign ownership. Of note is that the GOI no longer differentiates between portfolio and direct investment in calculating foreign ownership. As a result, several large firms, particularly banks that have low FDI but high foreign portfolio holdings now find themselves in possible breach of foreign ownership limits. Under this definition, MOCI maintains that India’s two largest banks, ICICI Bank and HDFC Bank, cannot be called Indian-owned banks. Foreign investors hold 77 percent equity in ICICI and 64 percent in HDFC. MOCI maintains that ICICI and HDFC Bank have violated the norms governing FDI in the country; however, banking analysts say the rules are confusing.

Foreign investment is prohibited in many areas or subsectors such as: agriculture, real estate, multi-brand retailing, legal services, security services, atomic energy, railway transport, gambling, casinos, lotteries, cigars, cigarettes and tobacco substitutes, and trading in transferable development rights. In November 2011, the Cabinet decided to lift the ban on multi-brand retail and raise the cap on single brand retail from 51 percent to 100 percent. Some of the political parties within the ruling United Progressive Alliance joined the opposition to oppose the decision, resulting in senior officials within the Congress party pledging not to move forward on the decision until greater political consensus is achieved. The Prime Minister, in late December, said the GOI will take up the multi-brand retail issue again after the Uttar Pradesh state elections end in March 2012. In January 2012, DIPP announced it will now allow up to 100 percent FDI in single-brand retail, as long as companies source at least 30 percent of the total value of their products sold from Indian small- or micro-sized enterprise (SMEs). In July 2010, the DIPP issued a discussion paper regarding a proposal to raise the FDI cap in the defense sector from 26 percent to 74 percent. No change appears imminent.

The GOI’s privatization and disinvestment policy permits foreign investors to bid on the sale of state-owned enterprises. Foreign investors are given national treatment at the time of initial investment. Obligations and local content requirements are imposed on foreign investors in certain industries.

Existing foreign and domestic companies can also use the automatic route for additional FDI, provided the sector falls under the automatic route. These companies need to notify the relevant authorities of their expansion plans and must use funds from abroad rather than funds leveraged from the domestic market. The Indian company’s Board of Directors must approve such investments.

Sector-Specific Guidelines for FDI in key industries

-- Advertising and Film: One hundred percent FDI via the automatic route is allowed in the advertising and film industries, which includes film production, exhibition, distribution, and related services and products.

-- Agriculture: No FDI is permitted in farming, except tea plantations. Foreigners are not authorized to own farmland. FDI in agriculture-related activities such as the seed industry, floriculture, horticulture, animal husbandry, aquaculture, fish farming, and cultivation of vegetables and mushrooms is permitted without limits under the automatic route. For tea plantations, 100 percent FDI is allowed via the government route. However, there is a compulsory divestment of 26 percent equity in favor of the Indian partner or potential Indian investors within five years from the date the FDI enters the country. In other plantation sectors, no FDI is allowed.

-- Airline Carriers: With domestic airlines experiencing financial difficulties, the Indian government is reportedly considering allowing foreign air carriers to invest up to 26 percent in Indian air carriers. The policy has yet to be formally notified. FDI by foreign carriers currently stands at zero.

-- Airport Infrastructure: One hundred percent FDI is allowed in greenfield projects through the automatic route. FDI up to 74 percent is allowed in existing projects through the automatic route; FDI greater than 74 percent requires FIPB approval. Foreign companies can own up to 74 percent of the ground-handling businesses at airports, with 49 percent via the automatic route; FDI from 49 percent to 74 percent is permitted via the government route. NRIs are allowed 100 percent FDI in ground-handling services. One hundred percent FDI is allowed through the automatic route for maintenance and repair operations, flight training institutes, and technical training institutes.

-- Airport Transport Services: FDI is limited to 49 percent under the automatic route for air transport services, including domestic scheduled passenger airlines. For non-scheduled, chartered, and/or cargo airlines, the FDI limit is 74 percent. For helicopter and seaplane services, 100 percent FDI is allowed on automatic approval – meaning FIPB is not involved – but requires formal approval by the Directorate General of Civil Aviation. NRIs may own 100 percent of a domestic airline. Although frequently debated, India has yet to open its state-run international airlines to outside investment. The U.S.-India “Open Skies” agreement, signed in April 2005, allows unrestricted access by U.S. carriers to the Indian market and vice-versa.

-- Alcoholic Distillation and Brewing: One hundred percent FDI is allowed through the automatic route but still requires a license via DIPP under the provisions of the Industries (Development and Regulation) Act, 1951.

-- Asset Reconstruction Companies: FDI is limited to 49 percent via the government route. No portfolio investment is allowed. Where any individual investment exceeds 10 percent of the equity, the approval is subject to the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

-- Automobiles: No FDI caps, local content requirements, or export obligations apply. FDI in automobile manufacturing is allowed under the automatic approval route.

-- Banking: Aggregate foreign investment from all sources in all private banks is capped at 74 percent. For state-owned banks, the foreign ownership limit is 20 percent. According to the 2011 road map for foreign bank entry, there are three distinct ways to enter the Indian banking sector. The first is by establishing a branch in India. The second is to establish a wholly-owned subsidiary, though it is important to note that foreign banks are permitted to have either branches or subsidiaries but not both. The third is to establish a subsidiary with total foreign investment of up to 74 percent. Foreign investors are also allowed to acquire an ailing bank, except the RBI has never authorized this type of transaction. Institutional investors (FII) can invest in a bank up to 10 percent of the total paid-up capital and 5 percent in cases where the FII is a foreign bank/bank group. Voting rights in private banks and state-owned banks are currently capped at 10 percent and 1 percent, respectively, and do not represent ownership. The Banking Regulation (Amendment) Bill, which would align voting rights in private banks with shareholding, remains in a Parliamentary committee and has yet to be introduced.

-- Broadcasting: Foreign investment – FDI, NRI, persons of Indian origin, and portfolio investment – is limited to 20 percent in frequency modulation terrestrial broadcasting, via the government approval route, and is subject to guidelines issued by the Ministry of Information and Broadcasting. For direct-to-home broadcasting, foreign investment from all sources is limited to 49 percent, with an additional caveat limiting the maximum FDI component to 20 percent with the remainder provided by NRI and/or portfolio investment. In satellite broadcasting, foreign investment – FDI, NRI, persons of Indian origin and portfolio investment – is limited to 49 percent via the government approval route. TV channels, irrespective of ownership or management control, have to up-link from India and comply with the broadcast code issued by the Ministry of Information and Broadcasting. FDI is limited to 26 percent, including portfolio investment, in news and current affairs channels up-linking from India. One hundred percent FDI is permitted in entertainment and general interest channels. FDI up to 49 percent is permitted via the government approval route for establishing up-linking hub/teleports.

-- Business Services: One hundred percent FDI is allowed under the automatic route in data processing, software development, and computer consultancy services. One hundred percent FDI is allowed for call centers and business processing outsourcing (BPO) organizations, subject to certain conditions.

-- Cable Network: FDI and portfolio investment is limited to 49 percent, including both FDI and portfolio investment. Prior approval is required, subject to Cable Television Networks Rules, 1994.

-- Coal/Lignite: FDI up to 100 percent is allowed, via the automatic route, in private Indian companies that have captive coal or lignite mines for either direct power generation or for captive consumption in their iron/steel/cement production plants. Similarly, 100 percent foreign investment in the equity of either an Indian company or the Indian subsidiary of a foreign company is allowed for setting up coal processing plants, subject to the conditions that the equity recipient shall not engage in coal mining or sell washed (processed) coal from such plants in the open market.

-- Coffee and Rubber Processing and Warehousing: One hundred percent FDI is permitted under the automatic route with no conditions.

-- Commodity Exchanges: Foreign ownership up to 49 percent, with portfolio investment limited to 23 percent and FDI limited to 26 percent, is allowed via the government route. FII purchases shall be restricted to secondary markets only and no single foreign investor/entity can hold more than five percent of the total paid-up capital. (dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf)

-- Construction Development Projects: FDI is permitted up to 100 percent in the construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, townships, housing, commercial buildings, resorts, educational institutions, and infrastructure. Automatic approval is subject to certain minimum capitalization and minimum area-of-development requirements. Since 2010, the minimum capitalization requirement has been USD 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners. In the case of serviced housing plots, a minimum of 10 hectares (25 acres) must be developed, while in the case of construction-development projects, the minimum built-up area must be 50,000 square meters (approx. 538,000 square feet). At least 50 percent of the project must be developed within five years from the date of obtaining all statutory clearances.

-- Credit Information Companies: Foreign investment is permitted up to 49 percent and is subject to FIPB and RBI approval. Portfolio investment is limited to 24 percent and no single investor/entity can hold more than 10 percent of the total paid-up capital. Furthermore, any acquisition in excess of one percent requires mandatory reporting to RBI.

-- Courier Services (Other Than Distribution of Letters): One hundred per cent FDI is permitted; however, FIPB approval is required.

-- Defense and Strategic Industries: FDI is limited to 26 percent and is subject to a DIPP license in consultation with the Defense Ministry. Production of arms and ammunition is subject to additional FDI guidelines. There are no automatic approvals. Purchase and price preferences may be given to Public Sector Enterprises as per Department of Public Enterprise guidelines. The licensee must establish adequate safety and security procedures once the authorization is granted and production begins.

-- Drugs/Pharmaceuticals: In October 2011, FDI rules were changed for the pharmaceutical sector. For green-field investments, 100 percent FDI will continue to be allowed. However, in case of brown-field investments, FDI will be allowed through the FIPB through April 2012. It is expected that, by April 2012, regulations for mergers and acquisitions will be put in place by the Competition Commission of India (CCI) that will ensure a balance between public health concerns and FDI. Thereafter, FDI oversight for brown-field investments will be done by the CCI in accordance with India’s competition (i.e., antitrust) laws.

-- E-commerce: FDI up to 100 percent is allowed in business-to-business e-commerce under the government approval route. No FDI is allowed in retail e-commerce.

-- Education Services: FDI is permitted up to 100 percent in education services via the automatic route, but only in collaboration with an Indian partner. A bill pending in Parliament would, if passed, allow foreign universities to establish campuses independently without working with an Indian partner institution, but with conditions attached.

-- Food Processing: FDI is allowed up to 100 percent with automatic approval for: fruit and vegetable processing, dairy products, meat and poultry products, fishing and fish processing, grains, confections, consumer and convenience foods, soft bottling, food parks, cold chain, and warehousing. The exception is for alcoholic beverages and beer, where a license is required, and items reserved for the small-scale sector. FDI up to 100 percent is allowed via the automatic route for cold storage facilities.

-- Hazardous chemicals: FDI is allowed up to 100 percent via the automatic route. However, a DIPP license is required under the provisions of the Industries (Development and Regulation) Act, 1951.

-- Health Services: FDI is allowed up to 100 percent under the automatic route.

-- Hotels, Tourism, and Restaurants: FDI up to 100 percent is allowed with automatic approval.

-- Housing/Real Estate: No FDI is permitted in the retail housing sector by foreigners. However, NRIs who can obtain “Overseas Citizenship of India” status are allowed to own property and invest in India as if they were citizens. NRIs may invest up to 100 percent FDI with prior government approval in the real estate sector and in integrated townships including housing, commercial premises, resorts, and hotels, as well as in projects such as the manufacture of building materials.

-- Industrial explosives: FDI at 100 percent via the automatic route is allowed, subject to licensing by the appropriate authorities.

-- Industrial Parks: FDI up to 100 percent under the automatic route is allowed, provided that the industrial park includes at least ten units with no single unit occupying more than 50 percent of the area, and at least 66 percent of the area is made available for industrial activity.

-- Information Technology: FDI of 100 percent is allowed with automatic approval in software and electronics, except in the aerospace and defense sectors.

-- Insurance: FDI is limited to 26 percent in insurance and insurance brokering. While FDI approval is automatic, the Insurance Regulatory and Development Authority (IRDA) must first grant a license. The debate over raising the cap on FDI in insurance continues, after more than four years of consideration in Parliament. It remains unclear as to whether the investment cap will increase in this sector.

-- Infrastructure Companies in the Securities Market (i.e., stock exchanges, depositories, and clearing corporations): Foreign investment is capped at 49 percent via the government route. FDI is limited to 26 percent and FIIs are limited to 23 percent. Regarding stock exchanges specifically, total foreign investment, including portfolio investment, is allowed via the government route (via FIPB) up to 49 percent.

-- Legal services: No FDI is allowed, and recent court cases have sought to limit the ability of foreign attorneys to provide legal services in India. Most foreign attorneys practice in India as legal consultants. In March 2010, a writ of petition was filed by a Chennai-based attorney on behalf of the Association of Indian Lawyers against 31 foreign law firms, the Bar Council of India, and the Ministry of External Affairs in the Madras High Court, seeking to prevent foreign law firms from practicing in India. A similar case was decided against foreign firms in December 2009, in the Bombay High Court. The Madras High Court has repeatedly delayed a decision in order to give the court more time to consult with foreign firms. The implications of these cases are unclear and the status of foreign law firms remains uncertain. The petitioner in the Madras case and other opponents to market liberalization insist U.S. attorneys should be barred from practicing law in India until there is reciprocity in the U.S. market.

-- Lottery, Gambling, and Betting: No FDI of any form is allowed.

-- Manufacturing: The new National Manufacturing Policy encourages greater local content requirements for government procurement in certain sectors (e.g., ICT, clean energy) (commerce.nic.in/whatsnew/National_Manfacruring_Policy2011.pdf). Government approval is required for any foreign investment greater than 24 percent equity when the manufacturer is not a small- or micro-sized enterprise (SME) and the entity will manufacture items reserved for the SME sector [Note: An SME is defined as a company having total investment in plant and machinery worth under USD 1 million.]. Manufacturers in this category are subject to additional licensing and minimum export requirements. Since 1997, the government has been steadily decreasing the number of industry sectors reserved under the small scale industry (SSI) policy, from a peak of 800 industries in the late 1990s, to just 21 specific goods/services today. The list can be found on the Ministry of Micro and Small and Medium Enterprises website: http://msme.nic.in/MSME_AR_ENG_2009_10.pdf.

-- Mining: FDI up to 100 percent is allowed, with automatic approval for diamonds and precious stones, gold/silver, and other mineral mining and exploration. FDI up to 100 percent is also allowed for mining and mineral separation of titanium minerals and ores, but such activity requires prior government approval.

-- Non-Banking Financial Companies (NBFC): FDI is allowed up to 100 percent via the automatic route. In India, NBFCs include: merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating agencies, housing finance, leasing and finance, credit card businesses, foreign exchange brokerages, money changers, factoring and custodial services, investment advisory services, and micro and rural credit. All investments are subject to the following minimum capitalization norms: USD 500,000 upfront for investments with up to 51 percent foreign ownership; USD 5 million upfront for investments with 51 percent to 74.9 percent ownership; USD 50 million total, with USD 7.5 million required up-front and the remaining balance within 24 months, for investments with more than 75 percent ownership. One hundred percent foreign-owned NBFCs, with a minimum capitalization of USD 50 million, are not restricted as to the number of subsidiaries established for specific NBFC activities and are not required to bring in additional capital. Joint-venture operating NBFCs with up to 75 percent foreign investment are allowed to set up subsidiaries for other NBFC activities and are also subject to the minimum capitalization norms.

-- Pensions: No FDI is allowed in the pension sector. The Pension Fund Development and Regulatory Authority Bill 2011, which cleared a Parliamentary standing committee in August 2011, would establish a regulator for pensions and empower it with the authority to set FDI caps, among other powers. The timing for passage remains unclear.

-- Petroleum: FDI limits, along with tax incentives, production sharing, and other terms and conditions apply, although investment is authorized via the automatic route with some sub-sector specific variance, such as:

- Discovered small fields: 100 percent

- Refining with domestic private company: 100 percent

- Refining by public sector company*: 49 percent

- Petroleum product/pipeline: 100 percent

- Petrol/diesel retail outlets: 100 percent

- LNG Pipeline: 100 percent

- Exploration: 100 percent

- Investment Financing: 100 percent

- Market study and formulation: 100 percent

(* Requires FIPB approval and disinvestment is prohibited.)

-- Pollution Control: FDI up to 100 percent is allowed with automatic approval for equipment manufacture and for consulting and management services.

-- Ports and harbors: FDI up to 100 percent with automatic approval is allowed in construction and manufacturing of ports and harbors. FDI up to 100 percent is allowed in the port sector to supplement domestic capital, technology, and skills, in order to accelerate economic growth. The Union Minister of Shipping clarified that security clearances from the Ministry of Defense are required for all bidders on port projects, and only the bids of cleared bidders will be considered.

-- Power: FDI up to 100 percent is permitted with automatic approval in projects related to electricity generation, transmission, distribution, power trading, and renewable energy. The exception is nuclear reactor power plants, where private sector ownership, both domestic and foreign, is currently prohibited.

-- Print Media: Foreign investment in newspapers and news periodicals is restricted to 26 percent under the government approval route. FDI is permitted up to 100 percent in printing science and technology magazines/journals, subject to prior government approval and guidelines issued by the Ministry of Information and Broadcasting.

-- Professional services: FDI is allowed up to 100 percent in most consulting and professional services, including accounting services, via the automatic route. Legal services, however, are not open to foreign investment.

-- Research and Development Services: One hundred percent FDI is allowed under the automatic route.

-- Railways: FDI is not allowed in train operations, although 100 percent FDI is permitted in auxiliary areas such as rail track construction, ownership of rolling stock, provisioning of container services, and container depots.

-- Retailing: In January 2012, DIPP announced that it will now allow up to 100 percent FDI in single-brand retail, as long as companies source at least 30 percent of the total value of their products sold from Indian SMEs. FDI in multi-brand retail continues to be prohibited. Several large multinational retailers have successfully partnered with Indian companies to form joint-venture wholesale enterprises to avoid violating FDI prohibitions. The GOI plans to reconsider allowing FDI up to 51 percent in multi-brand retail after state elections in spring 2012, and once it has gathered greater state-government and political party support for such a move.

-- Roads, Highways, and Mass Rapid Transport Systems: FDI up to 100 percent is allowed with automatic approval for construction and maintenance.

-- Satellites: FDI is limited to 74 percent for the establishment and operation of satellites, with prior government approval.

-- Security Agencies: Foreign shareholding is restricted to a maximum of 49 percent under the government approval route.

-- Shipping: FDI is limited to 74 percent with automatic approval for water transport services.

-- Special Economic Zones (SEZ): FDI up to 100 percent is allowed automatically when establishing a SEZ and an individual unit within a SEZ. Establishing the unit is subject to the Special Economic Zones Act, 2005, and MOCI regulations.

-- Storage and Warehouse Services: FDI up to 100 percent is allowed under the automatic route, including warehousing of agricultural products with cold storage.

-- Telecommunications: This sector is considered sensitive by the GOI and therefore foreign investment is carefully scrutinized and controlled. FDI in the telecom services sector can be made directly or indirectly in the operating company or through a holding company, subject to licensing and security requirements. DIPP sets the security conditions that prospective investors must follow to participate in the telecom sector. When approving investment proposals, FIPB will note whether the investment is coming from countries of concern or unfriendly countries. FDI in telecom services such as basic, cellular, access services, national/international long distance, V-Sat, public mobile radio trunked services, global mobile, unified personal communication services, ISP gateways, radio-paging, and end-to-end services is limited to 74 percent, and FDI proposals above 49 percent must go via the government route. FDI up to 100 percent is allowed in equipment manufacturing via the automatic route. FDI in internet service providers (ISP) with and without international gateways, including those for satellite and marine cables, is limited to 74 percent, of which 49 percent is allowed via the automatic route. Infrastructure providers providing fiber-optic, right-of-way, duct space, voice mail, and email are allowed up to 100 percent. In both cases, 26 percent divestment is required within the first five years of the investment.

-- Trading/Wholesale: FDI of 100 percent is allowed through the automatic route for activities such as exporting, bulk imports with export warehouse sales, and cash-and-carry wholesale trading. A wholesaler/cash-and-carry trader cannot open a retail shop to sell directly to consumers. In the case of test marketing, or if the items are sourced from the small-scale sector, FIPB approval is required. Single-brand retailing is allowed subject to FIPB approval and the FDI limit is now 100 percent, as long as companies source at least 30 percent of the total value of their products sold from Indian SMEs.

Business Environment Indices:

-- Transparency International Corruption Index (TI): India's ranking declined from 87 of 178 countries surveyed to 95 of 183 countries in December 2011. www.transparencyindia.org/resource/press_release/Corruption%20Perception%20Index%202011.pdf

-- Heritage Economic Freedom: India is ranked 123 of 179 countries and is considered to be mostly unfree because of a low economic freedom score of 54.6 in the 2011 index. India's score did rise 0.8 points over the previous year due to improvements in four out of ten economic freedom categories, including a large gain in labor freedom. India is ranked 25 out of 41 countries in the Asia–Pacific region, and its overall score is below the world average. http://www.heritage.org/index/Country/India

-- World Bank/IFC “Doing Business 2012:” India is ranked 132 of 183 countries in 2012, gaining seven spots from its 2011 ranking of 139. (www.doingbusiness.org/data/exploreeconomies/india)

-- Millennium Challenge Corporation (MCC) Government Effectiveness: India is in the 98th percentile (www.mcc.gov/documents/scorecards/score-fy12-old-india.pdf)

Category 2011 2012

-- MCC Rule of Law – 97th percentile—100th percentile

-- MCC Control of Corruption – 90th percentile—76th percentile

-- MCC Fiscal Policy – 8th percentile—4th percentile

-- MCC Trade Policy – 37th percentile—34th percentile

-- MCC Regulatory Quality – 87th percentile—78th percentile

-- MCC Business Start Up – 49th percentile—50th percentile

-- MCC Land Rights Access – 67th percentile—59th percentile

-- MCC Natural Resource Mgmt – 46th percentile—36th percentile

-- Legatum Index: This global study of the factors that drive and restrain national prosperity, ranked India 91 out of 110 countries in 2011. In 2009, India ranked 45. India's failure to maintain and improve healthcare, education, and literacy rates are a few examples that explain the country's decline in the rankings.

Conversion and Transfer Policies

The Indian rupee is fully convertible for current account transactions, which are regulated under the Foreign Exchange Management Rules, 2000. Prior RBI approval is required for acquiring foreign currency above certain limits for specific purposes (e.g., foreign travel, consulting services, and foreign studies). Capital account transactions are open for foreign investors and subject to various clearances. In recent years, with growing foreign exchange reserves, the Indian government has taken additional steps to relax foreign exchange and capital account controls for Indian companies and individuals. For example, since 2007, individuals are permitted to transfer up to USD 200,000 per year abroad for any purpose without approval. The GOI now allows all NRI proposals for conversion of non-repatriable equity into repatriable equity under the automatic approval route. On December 19, 2011, the exchange rate was Rupees 52.93 to USD 1, compared to Rupees 45.3 and 46.7 at the end of 2010 and 2009, respectively. The crisis in Europe and a worsening domestic outlook are the principal drivers of the rupee's decline. Some analysts view the rupee's two-month decline against the dollar as being cyclical and predict that next year the currency will appreciate if inflation slows and growth recovers.

Other conversion restrictions include:

-- NRI investment in real estate may be subject to a “lock-in” period. There are no restrictions on remittances for debt service or payments for imported inputs.

-- Profits and dividend remittances, as current account transactions, are permitted without RBI approval but income tax payment clearance is required. There are generally no transfer delays beyond 60 days.

-- RBI approval is needed to remit funds from asset liquidation.

-- Foreign partners may sell their shares to resident Indian investors without RBI approval, provided the shares were held on a repatriation basis.

-- Global Depository Receipts and American Depository Receipts proceeds from abroad may be retained without restrictions except for an end-use ban on investment in real estate and stock markets. FIPB approval is required for converting non-repatriable shares to repatriable ones. Up to USD 1 million per year may be remitted for transfer of assets into India.

-- Foreign institutional investors (FII) may transfer funds from rupee to foreign currency accounts and vice-versa at the market exchange rate. They may also repatriate capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, without RBI approval. The RBI authorizes automatic approval to Indian industries for foreign collaboration agreements, royalty, and lump sum fees for transfer of technology and payments for the use of trademark and brand names with no limits. Royalties and lump sum payments are taxed at ten percent.

Foreign banks may remit profits and surpluses to their headquarters, subject to the banks’ compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-rupee swaps without limits to enable customers to hedge their foreign currency liabilities. They may also offer forward cover to non-resident entities on FDI deployed after 1993.

Expropriation and Compensation

Since the 1970s, there have been few instances of direct expropriation. That said, India has had a poor track record of honoring and enforcing agreements with U.S. investors in the energy sector. In November 2008, the GOI issued a settlement payment to a U.S. company for work performed for an Indian para-statal in the 1980s, following a 2006 Supreme Court of India decision in favor of the U.S. firm. The settlement payment was significantly less than the amount awarded under the Court order.

As of December 2011, there was no change, since progress was made in 2007, toward resolving several payment disputes American power-sector investors have with the state of Tamil Nadu. The central government, which has limited jurisdiction over commercial disputes involving matters under state jurisdiction, has been helpful in convincing Tamil Nadu to settle these disputes.

The U.S. Government continues to urge the GOI to create an attractive and reliable investment climate. India and its political subdivisions need to provide a secure legal and regulatory framework for the private sector, as well as institutionalized dispute resolution mechanisms, to expedite commercial disagreements. Media reports estimate that India has between 30 and 40 million backlogged legal cases countrywide, and this slows the resolution of commercial disputes. Indian Law Minister Salman Khurshid has acknowledged the need to modernize the country’s antiquated legal system to support economic growth.

Dispute Settlement

Foreign investors frequently complain about a lack of “sanctity of contracts.” According to the World Bank, India continues to be the sixth slowest country in the world in the number of days it takes to resolve a dispute. Indian courts are understaffed and lack the technology to address the backlog of unsettled cases. According to the World Bank’s “Doing Business 2011” report, it takes about seven years to liquidate a business in India. In an attempt to align its adjudication of commercial contract disputes with the rest of the world, India enacted the Arbitration and Conciliation Act, 1996, based on the UNCITRAL (United Nations Commission on International Trade Law) model. Foreign awards are enforceable under multilateral conventions like the Geneva Convention. The Indian government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank funded ICADR to conduct training for mediators in commercial disputes settlement.

India is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. India has yet to become a member of the International Center for the Settlement of Investment Disputes. The Permanent Court of Arbitration (PCA, The Hague) and the Indian Law Ministry agreed, in 2007, to establish a regional PCA office in New Delhi to provide an arbitration forum to match the facilities offered at The Hague at a far lower cost. Since then, no further progress has been made in establishing such an office. In late November 2011, while speaking to The Indian Express on the sidelines of a special lecture he delivered at the Indian Society of International Law, Brooks W. Daly – Deputy Secretary-General and Principal Legal Counsel of the Permanent Court of Arbitration hearing the Kishanganga water dispute between India and Pakistan – said the court was seeking “more representation around the world” and also did not rule out a permanent representative in India.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels (DRPs) across the country to settle the transfer-pricing tax disputes of domestic and foreign companies in a faster and more cost-effective manner.

Performance Requirements and Incentives

The government is currently considering local content requirements to promote the development of a domestic manufacturing base, although the final policies and regulations have yet to be notified.

Plant Location: Companies are free to select the location of their industrial projects. An earlier restriction prohibiting location of factories near urban settlements was lifted in July 2008; however, projects still require clearance from the state’s pollution board environment ministry.

Employment: There is no requirement to employ Indian nationals. Restrictions on employing foreign technicians and managers were eliminated, though companies complain that hiring and compensating expatriates is time-consuming and expensive. The RBI permits remittances at a per-diem rate up to USD 1,000, with an annual ceiling of USD 200,000, for services provided by foreign workers payable to a foreign firm. Employment of foreigners in excess of 12 months requires approval from the Ministry of Home Affairs (MHA). The Department of Telecommunications under the Ministry of Communications and Information Technology regulates the employment of foreign nationals in the telecom sector due to national security concerns. Majority Directors, but not necessarily stakeholders, serving on the boards of telecom companies, including the Chairman, Managing Director, Chief Executive Officer, and Chief Financial Officer, must be Indian citizens. The Chief-Officer in charge of technical network operations and the Chief Security Officer should be resident Indian citizens. The positions of Chairman, Chief Executive Officer, and Chief Financial Officer, if held by foreign nationals, require annual security clearance vetting by MHA.

In August 2009, the government tightened employment visa and business rules for foreigners. Foreign nationals executing projects/contracts in India now require “employment” visas. The government only issues “business” visas to individuals entering India to explore business opportunities, set up a business, or sell industrial products. Furthermore, in the wake of disclosures about the abuse of tourist visas by Pakistani-American terror suspect David Headley, MHA decided that foreign nationals having a multi-entry Indian tourist visa must wait a minimum of two months between visits to India. Additional visits within the two month period may be allowed if the visa holder can provide an itinerary for a regional trip. The two-month gap restriction does not apply to Persons of Indian Origin or Overseas Citizen of India card-holders, or to foreigners holding business, employment, student, and other categories of visa. There continues to be widespread confusion and inconsistent application of these rules. In view of these concerns, the government eased tourist norms for foreign nationals from Finland, Japan, Luxembourg, New Zealand, Singapore, Cambodia, Laos, and Vietnam through the MHA-run visa-on-demand scheme. The new rules are available on the MHA website: http://mha.nic.in/foreigDiv/pdfs/TourVISA-Schm.pdf .

Taxes

The GOI provides a 10-year tax holiday for knowledge-based start-ups. Most state governments also offer fiscal concessions to almost all industries. Large fiscal deficits at the state and central government level, along with attempts to reform both the direct and indirect tax regimes throughout India, have increased uncertainty about investors’ tax liability. In a few high-profile lawsuits now pending appeal, Indian tax collectors have made significant tax assessments on mergers and acquisitions by large multinationals in cases where the acquisition was made outside of India. Press reports have noted increasing investor concern about the lack of transparency and predictability in India’s taxation of mergers and acquisitions. The central government is leaning towards rationalizing the tax structure and simplifying the tax code. The UPA government started a country-wide campaign in favor of lowering tax rates, reducing the number of exceptions, and creating greater transparency in tax administration, but has met significant opposition.

The Central and state governments continue to consider implementing a national Goods and Services Tax (GST) to rationalize the current, indirect tax system. The idea behind GST is to standardize taxes levied at all points in the supply chain concurrently by both the central and state governments. A GST would replace national and state Value-Added Taxes (VATs), central excise taxes, and a number of other state-level taxes. The central and state governments, during the Budget session of Parliament in March 2011, agreed to an initial list that did not include contentious items such as fuel and liquor in order to allow the Cabinet to clear a Constitutional amendment requirement to implement GST. As of the Parliament’s December 2011 Winter Session, the Constitutional Amendment was awaiting passage.

MOCI develops incentives for exporters to boost their exports. In August 2009, MOCI released its foreign trade policy for fiscal years 2009-14, which highlighted various incentives for exporters with a particular emphasis on employment-generating sectors such as textiles, processed foods, leather, gems and jewelry, tea, and handloom-made items. Under this policy, the GOI added 26 new markets, including 16 Latin American countries and 10 in Asia-Oceania. The duty credit extended to exporters under this scheme is three percent of the free-on-board (FOB) export value. Furthermore, exporters can import machinery and capital goods at concessional duty rates, which currently stand at zero. Exporters are allowed to use the duty cash reimbursement scheme, which neutralized duties paid on inputs by exporters through June 30, 2011. India's tax exemption for profits from export earnings has been completely phased out. More information can be found here: http://dgft.gov.in/

Right to Private Ownership and Establishment

Foreign and domestic private entities are allowed to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The GOI does not permit investment in real estate by foreign investors, except for company property used to do business and for the development of most types of new commercial and residential properties. FIIs can now invest in Initial Public Offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

To establish a business, various government approvals and clearances are required including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts. Businesses that intend to own land and build facilities are also required to: register the land; seek land use permission when the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters also need to obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, cement thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

The GOI passed the Securitization Act in 2002, to introduce bankruptcy laws. The requirement to obtain government permission before shutting down some businesses, however, makes it difficult to dispose of company assets. Parliament is currently considering the third iteration of a modernization of India's bankruptcy and corporate governance bills, The Companies Bill, 2011.

Protection of Property Rights

India has generally adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. India is a party to the Berne Convention, Geneva Phonograms Convention, and the Universal Copyright Convention, and is a member of both UNESCO and the World Intellectual Property Organization (WIPO), though the country has not yet signed and incorporated into domestic law the WIPO Internet treaties. The government has set up one exclusive bench for hearing intellectual property (IP) cases in the Karnataka High Court.

India has yet to fully modernize legislation addressing copyright and intellectual property protections. The Ministry of Human Resource Development considered and amended the draft bill based on the 2010 Parliamentary Standing Committee's recommendations and sought to re-introduce it during the 2011 November-December Winter Session of Parliament. Unfortunately, the edited bill has met with opposition based on allegations of “conflict of interest” against the Minister of Human Resource Development himself and the bill has not made much progress. The Copyright Amendment Bill, 2011, contains provisions to deal with technology issues by extending protection of copyrighted material in India over digital networks related to literary, dramatic, musical and artistic works, films, and sound recordings. The bill also seeks to provide clauses for stringent punishment for copyright violations. In October 2010, the government, along with the Federation of Indian Chambers of Commerce and Industry (FICC), set up an Anti-Piracy Coordination Cell web portal, which will function as a centralized agency to curb piracy, thus fulfilling India's "zero tolerance" commitment.

In August 2010, Parliament passed the Trade Marks (Amendment) Bill, 2009, which brings India into greater compliance with international standards for filing and granting trademarks. The law makes it easier for Indian and foreign nationals to secure simultaneous protection of trademarks in other countries. Through a single application, a person or enterprise can register a trademark in any of the 84 member countries of the Madrid Protocol. Before this law, applicants had to approach different countries in different languages, each with a separate fee. This system of trademark application filing under the Madrid Protocol is expected to be implemented by the Indian Intellectual Property Office in 2012.

Pharmaceutical and agro-chemical products can be patented in India. Software embedded in hardware may also be patented. However, the interpretation and application of the law lacks clarity, especially with regard to several important areas such as compulsory license triggers, pre-grant opposition provisions, and defining the scope of patentable inventions (e.g., whether patents are limited to new chemical entities rather than incremental innovation). India also provides protection for plant varieties through the Plant Varieties and Farmers’ Rights Act, 2001.

Indian law does not protect against the unfair commercial use of test data or other data submitted to the government during the application for market approval of pharmaceutical or agro-chemical products. The Pesticides Management Bill, 2008, which would allow data protection of agricultural chemical provisions, was introduced in Parliament in October 2008, and thereafter referred to the Standing Committee on Agriculture, which subsequently submitted recommendations to Parliament. As of December 2011, these recommendations had been examined by the Ministry of Agriculture and the amended draft is expected to be re-introduced soon in the Parliament.

Indian law provides no statutory protection of trade secrets. The Designs Act, 2000, meets India’s obligations under the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement for industrial designs. The Design Rules, 2008, which detail classification of design, conform to the international system and are intended to take care of the proliferation of design-related activities in various fields. India’s Semiconductor Integrated Circuits Layout Designs Act, 2000, is based on standards developed by WIPO. However, this law remains inactive due to the lack of implementing regulations.

Regulatory System Transparency

Despite progress, the Indian economy is still constrained by excessive rules and a powerful bureaucracy with broad discretionary powers. India has a decentralized federal system of government in which states possess extensive regulatory powers. Regulatory decisions governing important issues such as zoning, land-use, and the environment vary between states. Opposition from labor unions and political constituencies slows the pace of reform in exit policy, bankruptcy, and labor rights.

The Central government has been successful in establishing independent and effective regulators in telecommunications, securities, insurance, and pensions. The Competition Commission of India (CCI), India's antitrust body, has started using its enforcement powers and is now taking cases against cartelization and abuse of dominance, as well as conducting capacity-building programs. In June 2011, the government enacted rules governing mergers and acquisitions. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance and is well regarded by foreign institutional investors. The Satyam Computer Services’ (SCS) fraud case, in which the SCS chairman admitted that 94 percent of the company’s USD 1 billion in cash was fictitious, led to several proposals for reform measures including: rotation of audit partners, additional disclosure requirements, and granting additional powers to a company’s audit committee. Most of these proposed reforms are a part of the amendments to The Companies Bill, 2011, which was introduced in Parliament in December 2011.

Efficiency of Capital Markets and Portfolio Investment

Indian capital markets are growing. The combined market capitalizations of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) exceeded USD 2.2 trillion in mid-December 2011. As of November 2011, the Indian benchmark index Sensex had lost more than 21 percent while, at the same time, the rupee depreciated 17 percent. The combined effect of the market slide and rupee's depreciation led to a dip in India's market capitalization. Together, the NSE and BSE account for 100 percent of total stock market turnover. The NSE and BSE are the world’s fourth and fifth largest stock exchanges in terms of transaction volume. They are smaller in comparison to foreign exchanges in terms of market capitalization. Spot prices for index stocks are usually market-driven and settlement mechanisms are in line with international standards. India’s debt and currency markets lag behind its equity markets. Although private placements of corporate debt have been increasing, daily trading volume remains low.

Foreign portfolio investment and activities in India’s capital markets are regulated by a complex and onerous foreign institutional investor (FII) regime, analogous to China’s Qualified Foreign Institutional Investor regime. The FII regime sets caps on investment and the scope of business. It reflects India’ relatively closed capital account, the lack of market access for foreign firms, and the strict regulation of the financial sector.

FIIs investing in India’s capital markets must register with SEBI, India’s Securities and Exchange Commission (SEC) equivalent. They are divided into two categories: regular FIIs, which invest in both equity and debt; and 100 percent debt-fund FIIs. The list of eligible FIIs includes pension funds, mutual funds, banks, foreign central banks, sovereign wealth funds, endowment and university funds, foundations, charitable trusts and societies, insurance companies, re-insurance companies, foreign government agencies, international or multilateral organizations, broad-based funds, asset management companies, investment managers and hedge funds. FIIs must be registered and regulated by a recognized authority in their home country, meaning many US-based hedge funds cannot register as FIIs. FII registration can be made either as an investor or investor on behalf of its “accounts.” “Sub-account” means any person residing outside India on whose behalf investments are made within India by an FII. As of March 2011, there are a total of 1,722 FIIs registered in India and 5,686 sub-accounts.

FIIs now hold 15 percent of the Indian stock market. FII outflow through December 14, 2011, totaled USD 331 million compared to an inflow of USD 29.36 billion in 2010. After the global financial crisis, FIIs withdrew USD 12.18 billion when they sold their shares of Indian companies. While FIIs are allowed to invest in all securities traded on India’s primary and secondary markets, in unlisted domestic debt securities, and in commercial paper issued by Indian companies, the GOI imposes some restrictions based on investment type. In November 2011, the GOI raised the investment limit for FIIs in government securities and corporate bonds by USD five billion each to USD 15 billion and USD 20 billion respectively. In corporate bonds, the limit of USD 20 billion is separate from the USD 25 billion allowed for long-term infrastructure bonds. In the equities market, FII and sub-accounts can own up to 10 percent and 5 percent, respectively, of the paid-up equity capital of any Indian company. Aggregate investment in any Indian company by all FIIs and sub-accounts is also capped at 24 percent, unless specifically authorized by that company’s board of directors. “Naked short selling” is not permitted. FIIs are not permitted to participate in the new currency futures markets. Foreign firms and persons are prohibited from trading in commodities.

SEBI allows foreign brokers to work on behalf of registered FIIs. FIIs can also bypass brokers and deal directly with companies in open offers. FII bank deposits are fully convertible and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, may be repatriated without prior approval. NRIs are subject to separate investment limitations. They can repatriate dividends, rents, and interest earned in India and their specially designated bank deposits are fully convertible.

In August 2011, the government allowed qualified foreign investors (QFIs) to invest in the equity and debt schemes of mutual funds. In January 2012, the government announced it would allow QFIs to invest directly in equities. QFIs are defined as individuals, groups or associations, that reside in a foreign country that is compliant with the Financial Action Task Force (FATF) and that is a signatory to the International Organization of Securities Commissions’ (IOSCO) multilateral Memorandum of Understanding. Limits on individual and aggregate investment for QFIs will be 5 percent and 10 percent of the company’s paid-up capital, respectively. These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and non-resident individuals (NRIs), who can invest directly in the Indian equity market.

Foreign Venture Capital Investors (FVCIs) need to register with SEBI to invest in Indian firms. They can also set up a domestic asset management company to manage the fund. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations and FDI policy. FVCIs can invest in many sectors including software business, information technology, pharmaceutical and drugs, bio-technology, nano-technology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital market through the issuance of Indian Depository Receipts (IDRs). These transactions are subject to SEBI monitoring per the following conditions: www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5185&Mode=0 . Companies are required to have pre-issue, paid-up capital and free reserves of least USD 100 million, as well as an average turnover of USD 500 million during the three financial years preceding the issuance. In addition, they must have been profitable for at least five years preceding the issue, declaring dividends of not less than 10 percent each year and maintaining a pre-issue debt-equity ratio of not more than 2:1. Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, is the only firm to have issued IDRs. In July 2011, a SEBI directive placed restrictions on conversion of actively traded IDRs in shares. The new SEBI directive describes illiquidity as an annualized turnover for the previous six months that is less than five percent of the total numbers of IDRs issued.

External Commercial Borrowing (ECB or direct lending to Indian entities by foreign institutions and non-banking finance companies) is allowed if the funds will be used for outward FDI or domestically for investment in industry, infrastructure, hotels, hospitals, or software. ECBs may not be used for on-lending, working capital, financial assets, or acquiring real estate or a domestic firm. Generally, any non-financial firm can borrow up to USD 500 million per year through ECBs via the automatic route. As of November 2011, the all-in-costs ceilings for ECBs with an average maturity period of three to five years was capped at 350 basis points over six month LIBOR and 500 points for loans maturing after five years. As the cost of credit is significantly less in overseas markets, Indian companies have borrowed close to USD 30.5 billion in foreign currency through ECBs and FCCBs so far in 2011, compared to borrowings of USD 19.2 billion in 2010.

Takeover regulations require disclosure upon acquisition of shares exceeding five percent of total capitalization. Acquisition of 15 percent or more of the voting rights in a listed company triggers a public offer, per SEBI regulations. The public offer made by the acquiring entity (i.e., an individual, company, or other legal entity) must be for at least 20 percent of the company’s voting rights. Since October 2008, an owner holding between 55 percent and 75 percent of voting rights can acquire additional voting rights of up to five percent without making a public offer (i.e., creeping acquisition). However, the buyer can make a creeping acquisition only by open market purchases and not through bulk/block/negotiated deals or preferential allotment. Furthermore, subsequent to this acquisition, the buyer’s total shares should not cross the 75 percent threshold. RBI and FIPB clearances are required to assume a controlling stake in an Indian company. Cross shareholding and stable shareholding are not prevalent in the Indian market. SEBI regulates hostile takeovers.

Competition from State Owned Enterprises

India’s public sector enterprises (PSEs), both at the central and state levels, play an important role in the country’s industrialization. There are currently 250 Central Public Sector Enterprises (CPSEs). The manufacturing sector constitutes the largest component of investment in CPSEs (45 percent) followed by services (35 percent), electricity (12 percent), and mining (8 percent). Foreigners, including Americans, are allowed to invest in these sectors.

The Ministry of Heavy Industries and Public Enterprises’ Department of Public Enterprises oversees CPSEs. CPSEs have a Board of Directors, wherein at least one third of the directors should be externally appointed without being promoters or relatives of promoters. The chairman, managing director, and directors are appointed independently. Companies can appoint private consultants, senior retired officers, and politically affiliated individuals to their boards. Detailed guidelines for CPSEs on corporate governance is listed out in this website:

dpe.nic.in/newsite/gcgcpse2010.pdf.

In December 2009, the government established the “Maharatna” status for four CPSEs, allowing them greater financial and operational freedom to expand their operations and emerge as global giants. Maharatna CPSEs are allowed to invest up to USD 1.1 billion without government approval. The four CPSEs with Maharatna status include Indian Oil Corporation, NTPC Limited, Oil and Natural Gas Corporation, and Steel Authority of India. To qualify for Maharatna status, these CPSEs established a track record of excellent financial performance for the past three years, with a turnover of at least USD 5.5 billion, a net worth of USD 3.3 billion, and profitability of USD 1.1 billion. Nineteen other CPSEs achieved “Navratna” status, which affords them the autonomy to make investment decisions up to USD 240 million without government approval. Navratna-rated CPSEs are expected to maintain a net profit of Rs 300 million or more over three years or at least in one of the three years. The government plans to pursue disinvestment in CPSEs, but would retain at least 51 percent ownership. Americans are allowed to buy equity stakes in these Maharatna and Navratna companies via IPOs.

Although there do not appear to be systemic advantages, CPSEs in some sectors enjoy pricing and bidding advantages over their private sector and foreign competitors. The government has increased its pace for reducing its equity ownership in CPSEs, although there are no plans to sell majority shares of CPSEs to the private sector or to list more than 50 percent of the shares on any of the Indian stock exchanges. India will pose challenges for these CPSEs as the leveling of the playing-field will decrease their ability to benefit from special privileges and concessions.

Corporate Social Responsibility

Awareness of corporate social responsibility (CSR) in India is growing, especially as the private sector continues to experience positive results from influencing the areas of Indian society directly linked to their business. CSR efforts by Tata Group, Wipro, and Reliance are setting examples for the rest of the Indian private sector. U.S. companies are also doing their part, with an Indian-based U.S. company, Cargill, being named a finalist in the Secretary of State’s 2011 Award for Corporate Excellence. As a regular practice, CSR is not as widely found among SMEs in India.

In July 2011, the Ministry of Corporate Affairs released its “National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business.” These replaced April 2010 guidelines requiring Central Public Sector Enterprises (CPSE) to spend 0.5 percent to 5 percent of their net profits on CSR activities, as well as watered-down follow-up guidelines, announced in December 2010, which said companies need only adopt a policy showing how they would spend two percent of their profits on CSR and, if they did spend the money, disclose how they did so. The latest guidelines are posted on the Ministry of Corporate Affairs website: www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf

Political Violence

There were no reported politically motivated attacks on U.S. companies operating in India in 2011. There were protests in Andhra Pradesh, which led to strikes and violence over the carving out of a new state of Telengana from Andhra Pradesh. There continue to be outbursts of violence related to insurgent movements in Jammu and Kashmir and similar events in some northeastern states. Maoist/Naxalite insurgent groups remain active in some eastern and central Indian states, including the rural areas of Bihar, Jharkhand, Chhattisgarh, West Bengal, and Orissa. Travelers to India are invited to visit the Department of State travel advisory website at: travel.state.gov/travel/cis_pa_tw/cis/cis_1139.html for the latest information and travel resources.

Corruption

The anti-corruption movement has dominated Parliamentary sessions, media, and public debate, as the government seeks to pass a national ombudsman law in response to the Anna Hazare-led anti-corruption movement. Increasingly, the middle class is gathering its voice against the type of scandals seen in the 2010 Commonwealth Games, the sale of the 2G spectrum, and everyday petty corruption. India’s ranking in Transparency International’s Corruption Perception Index slipped in 2011, to 95 out of 183 countries surveyed from the previous year's ranking of 87 out of 178 countries. In the 2010 Global Corruption Barometer survey, also by Transparency International, 54 percent of respondents in India said they had paid a bribe in the past 12 months. That puts India ninth after Liberia (89 percent), Uganda (86 percent), Cambodia (84 percent), Sierra Leone (71 percent), Nigeria (63 percent), Afghanistan (61 percent), Iraq, and Senegal (both at 56 percent). Media coverage of corruption cases is expected to continue to dominate the press for the coming months. The high-profile cases that are troubling the government include questionable kickbacks on Commonwealth Games construction contracts, land development schemes in Maharashtra and Karnataka, and the dubious allocation of telecom licenses.

The legal framework for fighting corruption is addressed by the following laws: the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Companies Act, 1956; the Indian Contract Act, 1872; and the Prevention of Money Laundering Act, 2002. Anti-corruption laws amended since 2004, granted additional powers to vigilance departments in government ministries and PSEs at the central and state levels and made the Central Vigilance Commission (CVC) a statutory body. In May 2011, the GOI ratified the United Nations Convention against Corruption. The Prime Minister has set an ambitious Parliamentary agenda to pass legislation intended to curb corruption. His arsenal includes a bill to protect whistleblowers, a government procurement bill, amendments to increase and expand the prevention of money laundering act, and a bill to channel grievances against poor delivery of government services.

The national Right to Information Act, 2005, and equivalent state acts function similarly to the U.S. Freedom of Information Act, requiring government officials to furnish information requested by citizens or face punitive action. The increased computerization of services, coupled with central and state government efforts to establish vigilance commissions, is opening up avenues to seek redress for grievances. In November 2010, then-Corporate Affairs Minister Salman Khurshid said the government may review the act’s scope to ensure greater transparency in corporate lobbying. This would require Parliamentary approval and hence may take some time.

U.S. firms continue to identify corruption as a major obstacle to FDI, citing lack of transparency in the rules of governance, extremely cumbersome official procedures, and excessive and unregulated discretionary power in the hands of politicians and bureaucrats.

Bilateral Investment Agreements

As of December 2010, India concluded 76 bilateral investment agreements, including with the United Kingdom, France, Germany, Switzerland, Malaysia, and Mauritius. The complete list can be found at: (http://www.commerce.nic.in/trade/international_ta.asp?id=2&trade) In 2009, India concluded a Comprehensive Economic Cooperation Agreement (CEPA) with ASEAN and a free trade agreement (FTA) in goods, services, and investment with South Korea. In February 2011, India signed CEPAs with Japan and Malaysia. FTA negotiations with the EU and Canada are still under way and India is negotiating a CEPA with Thailand. India is also keen to engage the United States in a Bilateral Investment Treaty (BIT) or Comprehensive Economic Partnership Agreement (CEPA).

The United States and India resumed technical discussions towards a Bilateral Investment Treaty (BIT) in October 2011. India continues to express interest in negotiating a social security totalization agreement with the United States. It already has totalization agreements with Belgium, France, Germany, Switzerland, the Netherlands, Hungary, the Czech Republic, Denmark, Luxembourg, and Canada. The U.S. Department of Commerce’s International Trade Administration’s “Invest in America” program and “Invest India,” a joint venture between DIPP and the Federation of Indian Chambers of Commerce and Industry, signed a Memorandum of Intent in November 2009, to facilitate FDI in both countries.

India and the United States already have a double taxation avoidance treaty. Several tax disputes are pending that are being addressed during regular meetings between the two countries’ competent authorities.

OPIC and Other Investment Insurance Programs

The United States and India signed an Investment Incentive Agreement in 1987, which covers Overseas Private Investment Corporate (OPIC) programs. OPIC is currently operating in India in the areas of renewable energy and power, telecommunications, manufacturing, housing, services, and education, and plans to invest more than USD 212 million dollars in 2011, in clean energy and energy efficiency projects. India is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA). The Export-Import Bank of the United States has also increased its activities in India, which is now Ex-Im’s second largest market after Mexico.

Labor

Although there are more than seven million unionized workers in India, unions represent less than one-seventh of the workers in the formal economy – primarily state entities – and less than two percent of the total work force. Most unions are linked to political parties. According to provisional figures from the Ministry of Labor, 17.9 million work-days were lost to strikes and lockouts during 2010, as opposed to 13.5 million work-days lost in 2009.

Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. In 2011, foreign companies in the manufacturing sector, such as General Motors, experienced labor problems in Gujarat, while others in the same sector report excellent labor relations. Some labor problems are the result of workplace disagreements, including pay, working conditions, and union representation, but other unrest may be related to local political conditions beyond the companies’ control. The states of Gujarat, Kerala, Andhra Pradesh, Karnataka, and Rajasthan experience the most strikes and lockouts, according to government statistics. Sectors with the most labor unrest include banks, excluding insurance and pension, and the automobile industry. As of December 2011, the GOI continues to consult with state governments on ratifying the International Labor Organization (ILO) convention promoting worker rights in terms of health and safety in mining operations. Interest peaked in this issue when trade unions representing miners in November 2009, urged the government to ratify the convention. It is a commonly held belief throughout India that accidents are under-reported.

India’s labor regulations are among the world’s most stringent and complex, and they limit the growth of the formal manufacturing sector. The payment of wages is governed by the Payment of Wages Act, 1936, and the Minimum Wages Act, 1948. Industrial wages vary by state, ranging from about USD 3.50 per day for unskilled workers to over USD 150 per month for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act, 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people. Permission is not easily obtained, resulting in a high use of contract workers in the manufacturing sector to circumvent the law. Private firms successfully downsize through voluntary retirement schemes. Foreign banks also require RBI approval to close branches.

In August 2010, Parliament passed the Industrial Disputes (Amendment) Bill, 2010, which contains several provisions that: increase the wage ceiling prescribed for supervisors; bring disputes between contractors and contracted labor under the purview of the Ministry of Labor in consultation with relevant state or central government offices; provide direct access for workers to labor courts or tribunals in case of disputes; seek more qualified officers to preside over labor courts or tribunals; establish a grievance process; and empower industrial tribunals-cum-courts to enforce decrees.

Foreign Trade Zones/Free Trade Zones

The GOI established several foreign trade zone schemes to encourage export-oriented production. These include Special Economic Zones (SEZ), Export Processing Zones (EPZ), Software Technology Parks (STP), and Export Oriented Units (EOU). These schemes are governed by separate rules and granted different benefits, details of which can be found at: www.sezindia.nic.in; www.stpi.in; and www.eouindia.gov.in/handbook_procedures.htm .

SEZs are treated as foreign territory, allowing businesses operating in SEZs to operate outside the domain of the customs authorities, avoid FDI equity caps, receive exemptions from industrial licensing requirements, and enjoy tax holidays and other tax breaks. Land acquisition concerns have led to restrictions in developing SEZs. EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. Both receive breaks on customs duties. Export Oriented Units (EOUs) are industrial companies established anywhere in India that export their entire production. They are granted: duty-free import of intermediate goods; income tax holidays; exemption from excise tax on capital goods, components, and raw materials; and a waiver of sales taxes.

Foreign Direct Investment Statistics

Table A: Inflow of FDI by top 5 countries (USD million) [FY is April 1 to March 31]

Year

2007-08

2008-09

2009-10

2010-11

2011-12*

TOTAL

24,581

27,331

25,888

19,427

19,136

Mauritius

11,096

11,229

10,376

6,987

6,463

Singapore

3,073

3,454

2,379

1,705

3,211

U.S.A.

1,089

1,802

1,943

1,170

570

U.K.

1,176

864

657

755

2,536

Netherlands

695

883

899

1,213

825

FDI/GDP(%)

2.4

3.2

3.7

1.12

 

GDP is taken at factor cost and * indicates FDI inflows for April 2011-Septemer 2011 only.

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table B: Inflow of FDI by top 5 countries (Rs billion) [FY is April 1 to March 31]

Year

2007-08

2008-09

2009-10

2010-11

2011-12*

TOTAL

987

1230

1231

885

862

Mauritius

445

508

497

318

291

Singapore

123

157

113

77

144

U.S.A.

44

80

92

53

25

U.K.

47

38

31

34

113

Netherlands

28

39

43

55

37

FDI/GDP(%)

2.4

3.2

3.7

1.12

 

GDP is taken at factor cost -- * indicates FDI inflows for April 2011-September 2011 only.

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table C: FDI Inflows by Sector - Top 5 (USD millions)

Sector

April 2000-September 2011

2011-12*

All Services (fin and non-fin)

30368

3251

Computers/Software

10842

433

Telecommunication

12456

1901

Construction - Roads/Hwys

9506

780

Housing and Real Estate

10835

453

* indicates data is for April - September 2011 only (FY is April 1 to March 31)

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table D: FDI Inflows by Sector - Top 5 (Rps billion)

Sector

April 2000-September 2011

2011-12*

All Services (fin and non-fin)

1357

146

Computers/Software

482

19

Telecommunication

566

85

Construction - Roads/Hwys

424

34

Housing and Real Estate

483

20

* indicates data is for April – September 2011 only (FY is April 1 to March 31)

Source: Secretariat for Industrial Assistance



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