India

Bureau of Economic and Business Affairs
Report
June 29, 2017

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Executive SummaryShare    

India’s investment climate continues to send mixed signals, as the Bhartiya Janata Party (BJP), led by Prime Minister Narendra Modi, actively courts investment, but implementation of economic reforms to attract investors does not meet rhetoric. The economy as a whole performed well in 2016, growing over 7% with a stable rupee and political stability throughout the country. Non-performing assets continue to hold back banks’ profits and limit their lending. However, stable, relatively low inflation, weak credit demand, and strong management from India’s central bank, the Reserve Bank of India, have mitigated the negative impact on credit. Employment, while difficult to measure given the large informal economy, appears to lag growth, while a demographic boom means India must generate over ten million new jobs every year.

India has opened foreign direct investment (FDI) by particular sector, sometimes all at once and sometimes gradually reducing the FDI limitations. In 2016 the government opened FDI in private security and approved pharmaceutical projects to 74%, and increased investment in defense to 49% under the automatic route. With government clearance, defense and pharmaceutical investments can exceed the capped limit. It also allowed 100% FDI in food products, marketplace model e-commerce, broadcasting, airports on land already zoned for that use, and air transport services. In 2016, FDI into India jumped 18% to a record $46.4 billion, though Foreign Portfolio Investments (FPI) saw a net outflow of $2 billion. Multinational companies made large investment into the electronics, solar energy, automobile, defense, and railways sectors. Finance Minister Arun Jaitley, in his annual budget speech, formally proposed abolishing the Foreign Investment Promotion Board, which screens FDI, in an effort to ease investment.

On the legislative front, Parliament passed a constitutional amendment to replace the fractured, state-level tax code with a nationwide goods and services tax (GST). It also replaced myriad existing laws on the reorganization of companies, insolvency, and asset restructuring into one unified law via the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. These steps should reduce the time taken to dissolve a company, and speed up the process of debt recovery for investors.

The Modi government undertook further reforms in 2016 to formalize the large informal economy, and digitize the economy. In addition to the GST overhaul, which will result in greater tax registration and digital tax reporting, the government demonetized its INR 500 and INR 1000 notes, worth 86% of the currency in circulation, causing a shock to the economy in November-December 2016. Through demonetization, the government aimed to better track undeclared earnings (known as “black money” in India) for tax purposes, and increase the usage of digital payments which lags other major emerging economies.

India announced its intention to abrogate all bilateral investment treaties (BITs) negotiated on the basis of its 1993 model BIT. Some BITs have already lapsed and the rest will do so in 2017. India intends to renegotiate them on the basis of its new December 2015 model BIT which requires that foreign investors exhaust all domestic judicial remedies for up to five years, before entering into international arbitration, unless the claim is not judicable by Indian courts. This shift is an attempt to see investment disputes are resolved in domestic courts, as India has lost a number of recent disputes in international arbitration. The United States currently does not have a BIT with India.

In 2017, the government expects to implement its GST on July 1, which will transform the tax code and could lead to significant structural changes in the economy. Investors will also monitor how the government screens FDI following the abolition of the Foreign Investment Promotion Board (FIPB). Investors will also pay close attention to further liberalization of FDI – the government has discussed expansions of the food and insurance investment policies, while industry awaits changes to FDI policy in multi-brand retail.

Table 1

Measure

Year

Index/Rank

Website Address

TI Corruption Perceptions Index

2016

79 of 175

http://www.transparency.org/
research/cpi/overview

World Bank’s Doing Business Report “Ease of Doing Business”

2016

130 of 190

doingbusiness.org/rankings

Global Innovation Index

2016

66 of 128

https://www.globalinnovationindex.org/
analysis-indicator

U.S. FDI in partner country ($M USD, stock positions)

2015

28.335

http://www.bea.gov/
international/factsheet/

World Bank GNI per capita

2015

$1600

http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

Policies Towards Foreign Direct Investment

During this period India has continued to open its economy to FDI on a sector-by-sector basis. The government has the authority to raise FDI limits up to 100% without Parliamentary approval, outside of pensions, insurance, and defense. However, FDI remains restricted in several sectors, including multi-brand retail. The government continues to take steps to ease FDI restrictions in the defense, civil aviation, railways, construction, and medical devices sectors. During his 2017 Budget Speech, Finance Minister Jaitley announced the government’s intent to liberalize FDI policy by abolishing the FIPB, which would speed up the FDI application review process. On May 24, the Indian Cabinet approved the decision to abolish the FIPB and announced that relevant ministries will give the necessary approvals for the 11 sectors that previously required FIPB clearance. Many sectors still require a multi-step process for central and state government approval.

The Department of Industrial Policy and Promotion (DIPP), under the Ministry of Commerce and Industry, is the nodal investment promotion agency, responsible for the formulation of FDI policy and the facilitation of FDI inflows. DIPP plays a pro-active role in solving the problems faced by foreign investors in the implementation of their projects, through the Foreign Investment Implementation Authority (FIIA), which interacts directly with the concerned ministry or state government. DIPP disseminates information about the Indian investment climate to promote investments. The Department also encourages and facilitates foreign technology collaborations among Indian companies and bilateral economic cooperation agreements in the region. DIPP oftentimes consults with relevant ministries and stakeholders, but some relevant stakeholders report being left out of consultations.

Limits on Foreign Control and Right to Private Ownership and Establishment

In most sectors, foreign and domestic private entities can establish and own businesses, and engage in remunerative activities. Many sectors of the economy continue to retain equity limits for foreign capital as well as management and control restrictions, which deter investment. For example, in the insurance sector The Insurance Act 2015 raised FDI caps from 26% to 49%, but also mandated that insurance companies retain “Indian management and control.” Similarly, in 2016, India allowed up to 100% FDI in domestic airlines, however the issue of substantial ownership and effective control (SOEC) rules which mandate majority control by Indian nationals have not yet been clarified. A list of investment caps can be accessed at http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf

Screening of FDI

The FIPB, a government entity that provides single window clearance for FDI proposals, used to conduct India’s FDI screening. In pursuance with the announcement in 2017 Budget, the government abolished the FIPB in May 2017, arguing that 90% of FDI is automatically approved. The screening of the approvals will now be undertaken by relevant ministries. The Home Ministry will also review some sensitive investments.

Other Investment Policy Reviews

Business Facilitation

DIPP is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view national priorities and socio-economic objectives. While individual lead ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, DIPP is responsible for the overall industrial policy. It is also responsible for facilitating and increasing the FDI flows to the country.

Invest India is the official Investment Promotion and Facilitation Agency of the Government of India, which is managed in partnership with DIPP, state governments, and the Federation of Indian Chambers of Commerce & Industry (FICCI). Invest India maintains a web portal with links to current investment policies as well as resources for doing business in India.

Businesses can register online through the Ministry of Corporate Affairs website: http://www.mca.gov.in/. After the registration, all new investments require industrial approvals and clearances from relevant authorities, including regulatory bodies and local governments. To fast-track the approval process, especially in case of major projects, Prime Minister Modi has started the Pro-Active Governance and Timely Implementation (PRAGATI initiative) - a digital, multi-modal platform to speed the government’s approval process. As per the Prime Minister’s Office (PMO), 136 projects with investments of around $126 billion have been cleared as of March 25, 2016, with varying target completion times. Prime Minister Modi personally monitors the process to ensure compliance in meeting PRAGATI project deadlines. In December 2014, the Modi government also approved the formation of an Inter-Ministerial Committee led by DIPP to help in tracking investment proposals that require inter-ministerial approvals. Business and government sources report this committee meets informally and on an ad hoc basis as they receive reports from business chambers and affected companies of stalled projects.

Outward Investment

According to the Reserve Bank of India (RBI) the growth in magnitude and spread (in terms of geography, nature and types of business activities) of overseas direct investment (ODI) from India reflects the increasing appetite and capacity of Indian investors. While the total Financial Commitments (FC) under ODI for 2015 decreased to $30 billion from $40 billion the preceding year, the outlook and potential for growth in outward FDI from India remain positive. According to the U.S. Bureau of Economic Analysis, Indian direct investment into the U.S. was $11.3 billion in 2015.

2. Bilateral Investment Agreements and Taxation TreatiesShare    

India made public a new model Bilateral Investment Treaty (BIT) in December 2015. This followed a string of rulings against it in international arbitration. The new model BIT requires foreign investors to first exhaust all local judicial and administrative remedies before entering into international arbitration, unless the claim is non judicable in Indian courts. The Indian government also announced its intention to abrogate all BITs negotiated on the earlier 1993 BIT model. The government has served termination notices to roughly 58 countries, including EU countries and Australia. The Ministry of Finance said the revised model BIT will be used for the renegotiation of existing and any future BITs, and will form the investment chapter in any Comprehensive Economic Cooperation Agreements (CECAs)/Comprehensive Economic Partnership Agreements (CEPAs)/Free Trade Agreements (FTAs). The complete list of agreements can be found at: http://finmin.nic.in/bipa/bipa_index.asp?pageid=1. India signed a BIT agreement with Cambodia in August 2016 with no changes to the new model text, while Brazil has concluded a BIT framework but has not signed a new BIT.

India has a bilateral taxation treaty with the United States, available at: https://www.irs.gov/pub/irs-trty/india.pdf

3. Legal RegimeShare    

Transparency of the Regulatory System

Some government policies are written in a way that can be discriminatory to foreign investors or favor domestic industry; for example, approval for higher FDI in the insurance sector came with a new requirement for “Indian management and control.” On most occasions the rules are promulgated after thorough discussions by the competent government authorities and require the approval of the cabinet and, in some cases, the Parliament as well. Policies pertaining to foreign investments are promulgated by DIPP and the implementation is undertaken by lead federal ministries and sub-national counterparts. The Indian Accounting Standards were issued under the supervision and control of the Accounting Standards Board, a committee under the Institute of Chartered Accountants of India (ICAI), and has government, academic, and professional representatives. The Indian Accounting Standards are named and numbered in the same way as the corresponding International Financial Reporting Standards. The National Advisory Committee on Accounting Standards recommends these standards to the Ministry of Corporate Affairs, which all listed companies must then adopt. These can be accessed at: http://www.mca.gov.in/MinistryV2/Stand.html

International Regulatory Considerations

India is a member of the South Asia Association for Regional Cooperation (SAARC), an eight-member regional block in South Asia. India’s regulatory systems are aligned with SAARC economic agreements, visa regimes, and investment rules. India’s regulatory system traditionally follows the European system; however, since the new government came to power to May 2014 the practice has moved to resolving disputes through tribunals. In the 2017 budget, Jaitley announced the merger of all tribunals. This is expected to fast track dispute resolution. India has been a member of the WTO since 1994, and generally notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade; however, at times there are delays in publishing the notifications. The Governments of India and the United States cooperate in areas such as standards, trade facilitation, competition, and antidumping practices.

Legal System and Judicial Independence

India adopted its legal system from English law and the basic principles of the Common Law as applied in the UK are largely prevalent in India. However, foreign companies need to make adaptations per Indian Law and the Indian business culture when negotiating and drafting contracts in India to ensure adequate protection in case of breach of contract. The Indian Judicial Structure provides for an integrated system of courts to administer both central and state laws. The legal system has a pyramidal structure, with the Supreme Court at the apex, and a High Court in each state or a group of states which covers a hierarchy of subordinate courts. Article 141 of the Constitution of India provides that a decision declared by the Supreme Court shall be binding on all courts within the territory of India. Apart from courts, tribunals are also vested with judicial or quasi-judicial powers by special statutes to decide controversies or disputes relating to specified areas.

Courts have maintained that the independence of the judiciary is a basic feature of the Constitution, which provides the judiciary institutional independence from the executive and legislative branches.

Laws and Regulations on Foreign Direct Investment

The government has a policy framework on FDI, which is updated every year and formally notified as the Consolidated FDI Policy (http://dipp.nic.in/English/Policies/FDI_Circular_2016.pdf). DIPP makes policy pronouncements on FDI through Press Notes/Press Releases, which are notified by the RBI as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (Notification No. FEMA 20/2000-RB dated May 3, 2000). These notifications are effective on the date of the issued press release, unless otherwise specified. The judiciary does not influence FDI policy measures.

The government has introduced a “Make in India” program as well as investment policies designed to promote manufacturing and attract foreign investment. “Digital India” aims to open up new avenues for the growth of the information technology sector. The “Start-up India” program created incentives to enable start-ups to commercialize and grow. The “Smart Cities” project intends to open up new avenues for industrial technological investment opportunities in select urban areas. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses.

Competition and Anti-Trust Laws

The central government has been successful in establishing independent and effective regulators in telecommunications, banking, securities, insurance, and pensions. The Competition Commission of India (CCI), India's antitrust body, is now taking cases against cartelization and abuse of dominance as well as conducting capacity-building programs for bureaucrats and business officials. Currently the Commission’s investigations wing is required to seek the approval of the local chief metropolitan magistrate for any search and seizure operations. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance standards, and is well-regarded by foreign institutional investors. The RBI, which regulates the Indian banking sector, is also held in high regard. Some Indian regulators, including SEBI and the RBI, engage with industry stakeholders through periods of public comment, but the practice is not consistent across the government.

Expropriation and Compensation

In 2010 and 2011, high-profile graft cases in the construction and telecom sectors exacerbated existing private sector concerns about the government’s uneven application of its policies. For example, in 2014, the Supreme Court cancelled 214 out of the 218 coal blocks that had been allocated since 1993. Apart from the cancellations, the Supreme Court ordered that operational mines pay a penalty of INR 295 ($5) for every ton of coal previously extracted.

The government has taken steps to provide greater clarity in regulation. In 2016 the government successfully carried out the largest spectrum auction in the country’s history, and has also stated its intent to eliminate retroactive taxation proposals. India also has transfer pricing rules that apply to related party transactions. The government passed a constitutional amendment in August 2016 to establish a comprehensive Goods and Services Tax (GST), which could reduce the complexity of tax codes and eliminate multiple taxation policies. Parliament approved the enabling GST bills in March 2017, and the Finance Minister has said that the government is targeting a July 1, 2017 date to begin implementation.

Land acquisition continues to be a complicated process due to the lack of an effective legal framework, but is governed by the Land Acquisition Act (2013), which entered into force in 2014. In 2015, an amendment was introduced in Parliament which proposed that five land categories (national security and defense production, rural infrastructure, affordable housing, industrial corridors, and PPP projects on government-vested land) should receive various exemptions, including consent for acquisition; the bill has since been withdrawn.

Land sales require adequate compensation, resettlement of displaced citizens, and 70% approval from landowners. The displacement of poorer citizens is politically challenging for local governments.

Dispute Settlement

According to the World Bank's Ease of Doing Business Report, it takes on average nearly four years to resolve a commercial dispute in India, the third longest rate in the world. Indian courts are understaffed and lack the technology necessary to resolve an enormous backlog of pending cases—estimated by the UN at 30-40 million cases nationwide (http://www.refworld.org/docid/51ab45674.html).

India enacted the Arbitration and Conciliation Act in 1996, based on the United Nations Commission on International Trade Law model, as an attempt to align its adjudication of commercial contract dispute resolution mechanisms with most of the world. Judgments of foreign courts are enforceable under multilateral conventions, including the Geneva Convention. The 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 has also funded ICADR to conduct training for mediators in commercial dispute settlement.

India is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention). It is not unusual for Indian firms to file lawsuits in domestic courts in order to delay paying any arbitral award. Seven cases are currently pending, the oldest of which dates to 1983. India is not a member state to the International Centre for the Settlement of Investment Disputes (ICSID).

The Permanent Court of Arbitration (PCA) at The Hague and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi, although no progress has been made in establishing the office. The office would provide an arbitration forum to match the facilities offered at The Hague but at a lower cost.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels across the country to settle the transfer-pricing tax disputes of domestic and foreign companies. In 2016 the government also presented amendments to the Commercial Courts, Commercial Division and Commercial Appellate Division of High Courts Act to establish specialized commercial divisions within domestic courts to settle long-pending commercial disputes.

Investor-State Dispute Settlement

According to the United Nations Conference on Trade and Development, India has been a respondent state for 21 investment dispute settlement cases, of which 11 remain pending (http://investmentpolicyhub.unctad.org/ISDS/CountryCases/96?partyRole=2).

Though India is not a signatory to the ICSID Convention, current claims by foreign investors against India can be pursued through the ICSID Additional Facility Rules, the UN Commission on International Trade Law (UNCITRAL Model Law) rules, or through the use of ad hoc proceedings.

International Commercial Arbitration and Foreign Courts

Alternate Dispute Resolution (ADR)

Since formal dispute resolution is expensive and time consuming, many businesses choose methods, including ADR, for resolving disputes. The most commonly used ADRs are arbitration and mediation. India has enacted the Arbitration and Conciliation Act based on the UNCITRAL Model Laws of Arbitration. Experts agree that the ADR techniques are extra-judicial in character and emphasize that ADR cannot displace litigation. In cases that involve constitutional or criminal law, traditional litigation remains necessary.

Dispute Resolutions Pending

An increasing backlog of cases at all levels reflects the need for reform of the dispute resolution system, whose infrastructure is characterized by an inadequate number of courts, benches and judges, inordinate delays in filling judicial vacancies, and only 14 judges per one million people. Almost 25% of judicial vacancies can be attributed to procedural delays.

Bankruptcy Regulations

According to the World Bank, it takes an average of 4.3 years to recover funds from an insolvent company in India, compared to 2.7 years in Pakistan, 1.8 years in China and 1.7 years in OECD countries. Recognizing that reforms in the bankruptcy and insolvency regime are critical for improving the business environment and alleviating distressed credit markets, the government introduced the Insolvency and Bankruptcy Code (IBC) Bill in November 2015, drafted by a specially-constituted Bankruptcy Law Reforms Committee under the Ministry of Finance. The IBC passed Parliament on May 11, 2016 and came into effect after receiving Presidential assent on May 28, 2016. It overhauled the previous framework on insolvency of corporations, individuals, partnerships and other entities, and paved the way for much-needed reforms. It also focused on creditor-driven insolvency resolution. The IBC offers a uniform, comprehensive insolvency legislation encompassing all companies, partnerships and individuals (other than financial firms). The government is proposing a separate framework for bankruptcy resolution in failing banks and financial sector entities. Supplementary legislation would create a new institutional framework, consisting of a regulator, insolvency professionals, information utilities and adjudicatory mechanisms that would facilitate formal and time-bound insolvency resolution process and liquidation. The new law, however, does not provide for U.S. style Chapter 11 bankruptcy provisions.

In August 2016, the Indian Parliament passed amendments to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and the Debt Recovery Tribunals Act. These would amend debt recovery laws and make them more time-bound and effective while helping address the problem of rising bad loans for domestic and multilateral banks. It will also help banks and financial institutions recover loans more effectively, encourage the establishment of more asset reconstruction companies (ARCs) and revamp debt recovery tribunals.

4. Industrial PoliciesShare    

Foreign Trade Zones/Free Ports/Trade Facilitation

The government established several foreign trade zone initiatives to encourage export-oriented production. These include Special Economic Zones (SEZs), Export Processing Zones (EPZs), Software Technology Parks (STPs), and Export Oriented Units (EOUs). The newest category is the National Industrial and Manufacturing Zones (NIMZs), of which 14 are being established across India. These initiatives are governed by separate rules and granted different benefits, details of which can be found at: http://www.sezindia.nic.in, https://www.stpi.in/ http://www.eouindia.gov.in/ and http://www.makeinindia.com/policy/national-manufacturing/ .

SEZs are treated as foreign territory; therefore businesses operating within SEZs are not subject to customs regulations, nor FDI equity caps. They also receive exemptions from industrial licensing requirements, and enjoy tax holidays and other tax breaks. EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. EOUs are industrial companies, established anywhere in India, that export their entire production and are granted the following: duty-free import of intermediate goods; income tax holidays; exemption from excise tax on capital goods, components, and raw materials; and a waiver on sales taxes.

The current government established NIMZs as new integrated industrial townships with a minimum area of 5,000 hectares, to be managed by a special purpose vehicle and headed by a government official. Publicly available information suggests that foreign and domestic companies will be able to seek all state and central government authorizations for operating with NIMZs via single window. The government has planned the establishment of eight NIMZs on the Delhi-Mumbai Industrial Corridor (DMIC) route and six NIMZs outside the DMIC.

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India, as Public Sector Companies and the government accord a 20% price preference to vendors utilizing more than 50% local content. However, PMA for government procurement limits access to the most cost effective and advanced ICT products available. In December 2014, PMA guidelines were revised and reflect the following updates:

  1. Current guidelines emphasize that the promotion of domestic manufacturing is the objective of PMA, while the original premise focused on the linkages between equipment procurement and national security.
  2. Current guidelines on PMA implementation are limited to hardware procurement only. Former guidelines were applicable to both products and services.
  3. Current guidelines widen the pool of eligible PMA bidders, to include authorized distributors, sole selling agents, authorized dealers or authorized supply houses of the domestic manufacturers of electronic products, in addition to OEMs, provided they comply with the following terms:
    1. The bidder shall furnish the authorization certificate by the domestic manufacturer for selling domestically manufactured electronic products.
    2. The bidder shall furnish the affidavit of self-certification issued by the domestic manufacturer to the procuring agency declaring that the electronic product is domestically manufactured in terms of the domestic value addition prescribed.
    3. It shall be the responsibility of the bidder to furnish other requisite documents required to be issued by the domestic manufacturer to the procuring agency as per the policy.
  4. The current guidelines establish a ceiling on fees linked with the complaint procedure. There would be a complaint fee of INR 200,000 ($3000) or one percent of the value of the Domestically Manufactured Electronic Product being procured, subject to a maximum of INR 500,000 ($7500), whichever is higher.

The Union Cabinet further approved a new procurement policy providing preference to domestically manufactured goods for government procurement in May 2017. The policy mandates that only local suppliers will be eligible for procurement of goods and services above INR 500,000 ($7,500), provided the specific ministry determines there is sufficient local capacity and competition. The order covers government entities, autonomous bodies, government companies, or entities under the government’s control, including the armed and paramilitary forces.

In 2010, India initiated the Jawaharlal Nehru National Solar Mission (JNNSM), which aimed to bring 100,000 megawatts (MW) of solar-based power generation online by 2022, as well as promote solar module manufacturing in India. Under the JNNSM, India imposed certain local content requirements for solar cells and modules. Specifically, under the JNNSM, participating solar power developers must use solar cells and modules made in India in order to enter into long-term power supply contracts and receive other benefits from the Indian government. The United States challenged India’s position at the WTO and, in September 2016, the WTO Appellate Body report sustained that India's local content requirements are inconsistent with WTO non- discrimination obligations.

In January 2017 the Ministry of Electronics & Information Technology (MeitY) issued a draft notification under the PMA policy, stating a preference for domestically manufactured servers in government procurement.

A current list of PMA guidelines, notified products, and tendering templates can be found on MeitY’s website: http://meity.gov.in/esdm/pma

Research and Development

The Government of India allows for 100% FDI in research and development through the automatic route.

Data Storage

The National Telecom Machine-to-Machine (M2M) Roadmap, released on May 25, 2015, states that all M2M gateways and application servers serving customers in India, must be physically located in India. The Roadmap proposes that foreign SIM cards not be permitted in devices used in India. India does not require foreign providers to turn over source code or provide access to encryption. The Telecom Regulatory Authority (TRAI) has issued a consultation paper to examine policy issues concerning cloud computing services and cross-border data flows.

5. Protection of Property RightsShare    

Real Property

Several cities, including the metropolitan cities of Delhi, Kolkata, Mumbai, and Chennai have grown according to a master plan registered with the central government’s Ministry of Urban Development. Property rights are generally well-enforced in such places, and district magistrates—normally senior local government officials—notify land and property registrations. Banks and financial institutions provide mortgages and liens against such registered property.

In other urban areas, and in areas where illegal settlements have been built up, titling often remains unclear. As per the Department of Land Resources, in 2008 the government launched the National Land Records Modernization Program (NLRMP) to clarify land records and provide landholders with legal titles. The program requires the government to survey an area of approximately 2.16 million square miles, including over 430 million rural households, 55 million urban households, and 430 million land records. Initially scheduled for completion in 2016, the program is now scheduled to conclude in 2021. Traditional land use rights, including communal rights to forests, pastures, and agricultural land, are sanctioned according to various laws, depending on the land category and community residing on it. Relevant legislation includes the Scheduled Tribes and Other Traditional Forest Dwellers (Recognition of Forest Rights) Act 2006, the Tribal Rights Act, and the Tribal Land Act.

Foreign and domestic private entities are permitted 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 government does not permit foreign investment in real estate, other than company property used to conduct business and for the development of most types of new commercial and residential properties. Foreign Institutional Investors (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 build facilities on land they own are also required to take the following steps: register the land; seek land use permission if 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 must also obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, 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 Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found at: https://www.rbi.org.in/scripts/Fema.aspx. Foreign investors operating under the automatic route are allowed the same rights as an Indian citizen for the purchase of immovable property in India in connection with an approved business activity. India ranks 138 out of 189 for ease of registering property in the World Bank’s Doing Business Report (http://www.doingbusiness.org/rankings).

In India, a registered sales deed does not confer title ownership and is merely a record of the sales transaction. It only confers presumptive ownership, which can still be disputed. The actual title is established through a chain of historical transfer documents that originate from the land’s original established owner. Accordingly, before purchasing land, buyers should examine all the link documents that establish title from the original owner. Many owners, particularly in urban areas, do not have access to the necessary chain of documents. This increases uncertainty and risks in land transactions.

Intellectual Property Rights

Engagement with India on Intellectual Property Rights (IPR) continues, primarily through the Trade Policy Forum’s High Level Working Group on Intellectual Property. Despite the release of the National IPR Policy and the establishment of India’s first intellectual property (IP) crime unit in Telangana in 2016, India’s IP regime continues to fall short of global best practices and standards. A number of “Notorious Markets” across the country continue to operate, while many smaller stores sell or deal with pirated content across the country.

India made some progress in fulfilling its mandate to build a more market-oriented and competitive India in 2016, but Prime Minister Modi’s courtship of multinationals to invest and “Make in India” has not yet addressed longstanding hesitations over India’s lack of effective IPR enforcement. U.S. government representatives continued to meet the government officials and industry stakeholders on IPR in 2016, including visits to India by officials from the U.S. Trade Representative (USTR), the U.S. Patent and Trademark Office (USPTO), and the Departments of State, Commerce, and Agriculture. The two governments held two IP-related workshops in 2016, one on copyrights and another on trade secrets. India has made efforts to streamline its IP framework through administrative actions and awareness programs, and it is notable that it is the process of reducing its patent and trademark application backlog by adding 458 new examiners.

Parliament passed the Commercial Courts, Commercial Division, and Commercial Appellate Division of High Courts Act in 2016, which enables the creation of Commercial Courts, Commercial Divisions, and Commercial Appellate Divisions within India’s High Courts. These measures are aimed at improving the ease of doing business and facilitating the smooth and prompt resolution of commercial disputes, including IPR. The U.S. government continues to advocate for the passage of anti-camcording legislation, which would have a significant impact on stopping digital piracy in India and subsequent global distribution. This legislation would also improve India’s ease of doing business rankings, and send a signal to investors and entrepreneurs that the government values transparency, predictability, and the rule of law. As of early 2017, the anti-camcording bill remains stalled in parliamentary committees.

India’s copyright laws were amended in 2012, although these amendments have not been fully implemented. Without a copyright board to determine royalty rates for authors, with enforcement being weak, and piracy of copyrighted materials widespread, India requires greater emphasis on enforcement of copyright law. Industry hopes the recent shift of the copyright office from the Ministry of Human Resource Development to DIPP will enable more effective implementation of the law.

In the software field, India in 2016 released new Computer Related Invention patent guidelines, which require computer programs to be claimed in conjunction with novel hardware, rather than acknowledging technical improvements created by the computer program regardless of the associated hardware, as is the international standard. Industry has rallied the government and a final decision is still pending.

The agriculture sector in 2016 saw some troubling IPR related developments. The Ministry of Agriculture and Farmers Welfare (MAFW) filed an application with DIPP to revoke Monsanto’s patents for BT cotton, and sought to force companies to license their technology and impose unprecedented up-front terms and conditions on private party transactions covering a broad range of genetically-modified agricultural products. The government’s refusal to strongly repudiate MAFW’s overly prescriptive GM licensing guidelines has resulted in the withdrawal of next-generation innovative biotechnology from the Indian marketplace and has given pause to many other companies who seek to protect their technology.

Indian law still does not provide any statutory protection for trade secrets. After the workshop conducted in October 2016, India agreed to provide guidance to start-ups on trade secret protection through existing contract laws. The Designs Act allows for the registration of industrial designs, and affords a 15 year term of protection. India’s Semiconductor Integrated Circuits Layout Designs Act is based on standards developed by the World Intellectual Property Organization (WIPO); however, this law remains inactive due to the lack of implementing regulations. To date, only one application has been granted.

In the past few years, with regular training, customs and police enforcement of IPR laws has marginally increased. The new customs recording system allows trademark owners to record their brands and trademarks with the Ministry of Commerce and Industry and seek affirmative action in case of any counterfeit issue at the ports. In 2016, as a result of a state-level initiative taken by Telangana, India established its first IP Crime Unit. The unit’s intent is to focus on IP crimes and in particular on online crimes. In early 2017, Maharashtra state also approved a new IP unit. The U.S. government is encouraged by this, and hopes that other states will follow suit. However, these represent only two state out of 32, and IP remains a low priority. The nine most vulnerable sectors for IP crime include media and entertainment, pharmaceuticals, automotive parts, alcohol, computer hardware, consumer goods, packaged foods, mobile phones, and tobacco products.

India also actively engages at multilateral negotiations, including the WTO TRIPS Council. It has strongly supported, and sometimes led the charge, in calling for open technology transfer, liberal use of compulsory licensing across sectors, and protection of traditional knowledge. These negotiations will have an impact on innovation, trade, and investment in IP-intensive products and services.

6. Financial SectorShare    

Capital Markets and Portfolio Investment

The S&P BSE SENSEX index – India’s benchmark 30-share index – ended 2016 marginally higher by 1.78% at 26,626. The SENSEX began the year with a low of 22,951 on February 11, 2016 largely due to weak quarterly earnings, as banks recognized non-performing assets (NPAs) after pressure from the RBI. The stock markets managed to keep investors on edge with reactions to the Brexit vote results in June, announcement of surgical strikes across the Line of Control in Kashmir in September, the demonetization of high value rupee notes, and the results of the U.S. elections in November. Market capitalization of the BSE stood at USD $1.6 trillion as of December 30, 2016.

The Securities and Exchange Board of India (SEBI) is considered one of the most progressive and well-run of India’s regulatory bodies. It regulates India’s securities markets, including enforcement activities, and is India’s direct counterpart to the U.S. Securities and Exchange Commission (SEC). SEBI oversees three national exchanges: the BSE Ltd. (formerly the Bombay Stock Exchange), the National Stock Exchange, and the Metropolitan Stock Exchange. Since its September 2015 merger with the Forwards Market Commission, the then commodities market regulator, SEBI is tasked to deal with three national commodity exchanges: the Multi Commodity Exchange, the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

Unlike Indian equity markets, local debt and currency markets remain underdeveloped, with limited participation from foreign investors. Indian businesses receive the majority of their financing through the banking system, not capital markets. Although private placements of corporate debt have increased (95% of corporate debt is privately placed), the corporate bond market is around 14% of GDP, compared to bank assets of 89% of GDP and equity markets of 80% of GDP. There were 2,636 corporate bond issuances for $62 billion in 2014-15. The Reserve Bank of India (RBI) announced several measures intended to further market development, enhance participation, facilitate greater market liquidity and improve communication on August 25, 2016: https://www.rbi.org.in/scripts/bs_pressreleasedisplay.aspx?prid=37875.

Foreign investment in India can be made through various routes, including FDI, Foreign Portfolio Investor (FPI), and venture capital investment: https://www.rbi.org.in/SCRIPTS/FAQView.aspx?Id=26. FPIs include investment groups of FIIs, Qualified Foreign Investors (QFIs) and sub-accounts. Non-Resident Indians do not come under FPI. Investment by an FPI cannot exceed 10% of the paid up capital of the Indian company. All FPIs together cannot acquire more than 24% of the paid up capital of any Indian company. As per SEBI regulations, FPIs are not allowed to invest in unlisted shares, and investment in unlisted entities will be treated as FDI.

Foreign investors withdrew $3.47 billion from the Indian capital markets in 2016, the worst year in terms of overseas investment since 2008. Surprisingly, debt instruments took the biggest hit, after remaining a preferred investment avenue for foreign funds in recent years, while equities continued to attract net inflows - but not enough to compensate the huge outflows from the bond market. FPIs purchased $3.09 billion in equities, but sold $6.56 billion of bonds in 2016. FII bank deposits are fully convertible, and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings post tax, may be repatriated without prior approval. Non Resident Indians (NRI) are subject to separate investment limitations. They can repatriate dividends, rents, and interest earned in India, and specially designated NRI bank deposits are fully convertible.

India’s growing importance in the global economy has led to increased interest in the rupee. Yet, the persistence of capital controls in the onshore market has led to the development of an offshore INR market called Non Deliverable Forward (NDF), particularly in Singapore, Dubai, London, and New York. The RBI has taken a number of steps in the recent past to bring these offshore activities onshore, in order to deepen the domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market. In addition, FPIs with access to currency futures or exchange traded currency options market, can hedge onshore currency risks in India and may directly trade in corporate bonds.

BSE, Asia's oldest stock exchange, established the country's first international exchange, called the India International Exchange at International Financial Services Centre (IFSC) GIFT city in Gujarat. SEBI has allowed trading in commodity derivatives at stock exchanges operating in IFSC. Under the IFSC regime, any recognized domestic or foreign stock exchange can set up a subsidiary in the financial services center, provided they hold at least a 51% stake in the venture. These norms aim to ease the establishment of stock exchanges and capital market infrastructure in such centers. SEBI has announced that they would introduce new products and allow more participants to deepen the commodity derivatives market.

Foreign venture capital investors (FVCIs) must register with SEBI to invest in Indian firms. They can also set up domestic asset management companies to manage funds. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations, and the FDI policy. FVCIs can invest in many sectors, including software, information technology, pharmaceuticals and drugs, biotechnology, nanotechnology, biofuels, agriculture, and infrastructure. Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs). SEBI allows FVCIs to register as a foreign portfolio investor if they meet certain guidelines.

Companies planning to issue an IDR are required to maintain pre-issued, paid-up capital, and free reserves of at least $100 million, as well as demonstrate an average turnover of $500 million during the three financial years preceding issuance. The company must be profitable for at least five years preceding the issuance, declaring dividends of no less than 10% each year and maintaining a pre-issue debt-equity ratio of no more than 2:1. Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, remains the only foreign firm to have issued IDRs.

External commercial borrowing (ECB), or direct lending to Indian entities by foreign institutions, is allowed if funds are used for outward FDI, or for domestic investment in industry, infrastructure, hotels, hospitals, software, self-help groups or microfinance activities, or to buy shares in the disinvestment of public sector entities: https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10204. ECBs cannot be used for on-lending, investments in financial assets, acquisition of real estate or a domestic firm, meeting of working capital requirements or repayment of existing INR loans. An infrastructure or manufacturing company can raise a maximum of $750 million in a financial year under ECB. Companies in software development sector can raise ECB up to $200 million. Companies engaged in micro-finance activities and microfinance institutions can raise ECB up to $100 million in a financial year, and must hedge 100% of their currency risk exposure. A Non-banking Finance Company – Infrastructure Finance Company (NBFC-IFC) can raise ECB up to 75% of its owned funds, and must hedge 75% of its currency risk exposure. The all-in cost ceilings for ECBs with an average maturity period of three-to-five years is capped at 300 basis points over the six-month LIBOR, and 450 basis points for loans maturing after five years. Indian companies borrowed close to USD $17.15 billion through ECBs in 2016.

Money and Banking System

The banking sector remained predominantly in the public sector, with public sector banks (PSBs) accounting for 72% of total banking sector assets, notwithstanding a gradual decline in their share in recent years. PSBs are not technically subject to any extra regulations relative to commercial banks, either in terms of lending practice nor deposits. They do, however, have their CEOs, upper management, and a number of their board of directors appointed by the government, meaning that the government can be quite influential in credit decisions.

Public sector banks (PSBs) face two significant hurdles: capital constraints and poor asset quality. Under the Indradhanush roadmap, which Jaitley announced in the 2016 budget to revive Public Sector Banks, the government will infuse $10.52 billion in PSBs over four years, while these banks will have to raise a further $16.53 billion from the markets to meet their capital requirements in line with global capital norms under Basel-III. PSBs are to get $3.76 billion in each fiscal year, 2015-16 and 2016-17, and $1.5 billion each in 2017-18 and 2018-19. In July 2016, the government infused 75% of the earmarked fund for fiscal 2016-17 and said the remaining amount would be linked to the banks’ performance.

The consolidated balance sheets of the banking sector continued to grow at a modest pace during 2015-16 with the ratio of assets to liabilities expanding at 7.7%, compared to 9.7% in 2014-15. Bad loans continue to be a challenge for banks, with the gross NPA for at 8.4% for banks as of March 31, 2016. Improved recognition of NPAs led to a more than 60% drop in net profits for the banking sector as a whole, though it remained in positive. In addition to regulatory provisions, including strategic debt restructuring (SDR) and scheme for sustainable structuring of stressed assets (S4A), banks are selling NPAs to ARCs. Under RBI norms announced on September 1, 2016, if security receipts make more than 50% of the value of the asset under consideration, banks then have to provide for these loans as if the loans continued on the books of the bank. This norm ensures stressed asset sales by banks are classified as “true sales.” Security receipts are issued by ARCs to banks pending recovery from an account.

Under the government’s 2014 Jan Dhan program, to provide universal access to banking facilities, as of March 22, 2017, 280 million accounts had been opened and 219 million RuPay debit cards issued. The program provides no-fee basic banking accounts and RuPay debit cards to all households, conducts financial literacy programs, guarantees credit, and offers micro-insurance and unorganized sector pension schemes. Though the number of accounts opened is immense, some of these still maintain a zero-balance, and six months of “satisfactory transactions” are necessary before the account-holder qualifies for benefits including overdrafts and life insurance.

Takeover regulation in India applies equally to domestic and foreign companies. The regulations do not recognize, however, any distinct category of hostile takeovers. RBI and lead ministry clearances are required to acquire a controlling stake in Indian companies. Takeover regulations require disclosure on acquisition of shares exceeding 5% of total capitalization. As per SEBI's Substantial Acquisition of Shares and Takeovers (Amendment) Regulations, released in 2013, acquisition of 25% or more of the voting rights in a listed company triggers a public offering of an additional 26% stake at least. Under the creeping acquisition limit, an acquirer holding 25% or more voting rights in the target company can acquire additional shares or voting rights up to 5% of the total voting rights in any financial year, up to a maximum permissible non-public shareholding limit of 75% generally. Acquisition of control over the target company, irrespective of shares or voting rights held by the acquirer, will trigger a mandatory open offer.

Foreign Exchange and Remittances

Foreign Exchange

The Indian rupee extended its 2015 losses by falling a further 2.7% against the dollar in 2016. According to market experts, demonetization of INR 500 and INR 1000 notes, as well as U.S. Federal Reserve rate hike worries, dampened sentiment towards the currency.

The RBI, under the Liberalised Remittance Scheme, allows individuals to remit up to $250,000 per fiscal year (April-March) out of the country for permitted current account transactions (private visit, gift/donation, going abroad on employment, emigration, maintenance of close relatives abroad, business trip, medical treatment abroad, studies abroad) and certain capital account transactions (opening of foreign currency account abroad with a bank, purchase of property abroad, making investments abroad, setting up Wholly Owned Subsidiaries and Joint Ventures outside of India, extending loans). The INR is fully convertible only in current account transactions, as regulated under the Foreign Exchange Management Act regulations of 2000 (https://www.rbi.org.in/Scripts/Fema.aspx.

Foreign exchange withdrawal is prohibited for remittance of lottery winnings; income from racing, riding or any other hobby; purchase of lottery tickets, banned or proscribed magazines; football pools and sweepstakes; payment of commission on exports made towards equity investment in Joint Ventures or Wholly Owned Subsidiaries of Indian companies abroad; and remittance of interest income on funds held in a Non-Resident Special Rupee Scheme Account (https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=10193#sdi). Furthermore, the following transactions require the approval of the Central Government: cultural tours; remittance of hiring charges for transponders for television channels under the Ministry of Information and Broadcasting, and Internet Service Providers under the Ministry of Communication and Information Technology; remittance of prize money and sponsorship of sports activity abroad if the amount involved exceeds $100,000; advertisement in foreign print media for purposes other than promotion of tourism, foreign investments and international bidding (over $10,000) by a state government and its public sector undertakings (PSUs); and multi-modal transport operators paying remittances to their agents abroad. RBI approval is required for acquiring foreign currency above certain limits for specific purposes including remittances for: maintenance of close relatives abroad; any consultancy services; funds exceeding 5% of investment brought into India or USD $100,000, whichever is higher, by an entity in India by way of reimbursement of pre-incorporation expenses.

Capital account transactions are open to foreign investors, though subject to various clearances. NRI investment in real estate, remittance of proceeds from the sale of assets, and remittance of proceeds from the sale of shares may be subject to approval by the RBI or the lead ministry.

FIIs may transfer funds from INR to foreign currency accounts and back at market exchange rates. They may also repatriate capital, capital gains, dividends, interest income, and compensation from the sale of rights offerings without RBI approval. The RBI also authorizes automatic approval to Indian industry for payments associated with foreign collaboration agreements, royalties, and lump sum fees for technology transfer, and payments for the use of trademarks and brand names. Royalties and lump sum payments are taxed at 10%.

The RBI has periodically released guidelines to all banks, financial institutions, NBFCs, and payment system providers regarding Know Your Customer (KYC) and reporting requirements under Foreign Account Tax Compliance Act (FATCA)/Common Reporting Standards (CRS). The government’s July 7, 2015 notification

(https://rbidocs.rbi.org.in/rdocs/content/pdfs/CKYCR2611215_AN.pdf) amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005, (Rules), for setting up of the Central KYC Records Registry (CKYCR)—a registry to receive, store, safeguard and retrieve the KYC records in digital form of clients.

Remittance Policies

Remittances are permitted on all investments and profits earned by foreign companies in India once taxes have been paid. Nonetheless, certain sectors are subject to special conditions, including construction, development projects, and defense, wherein the foreign investment is subject to a lock-in period. Profits and dividend remittances as current account transactions are permitted without RBI approval following payment of a dividend distribution tax.

Foreign banks may remit profits and surpluses to their headquarters, subject to compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-INR swaps without limits for the purpose of hedging customers’ foreign currency liabilities. They may also offer forward coverage to non-resident entities on FDI deployed since 1993.

Sovereign Wealth Funds

India does not have a sovereign wealth fund. In 2015 the Government of India created a fund – the National Investment and Infrastructure Fund (NIIF) for enhancing infrastructure financing in India. Finance Ministry officials said that the “NIIF will be a commercially run organization and will operate at arm’s length from the government.” Looking to attract larger inflows from sovereign wealth funds and foreign pension funds, government and financial sector regulators have renewed their efforts to make Indian markets, especially government bonds, much more appealing to such investors. Policymakers view overseas investments by sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks as much more stable in nature, as compared to institutional investors and hedge funds. Finance Minister Arun Jaitley visited Australia last year and pitched for investments from sovereign wealth funds in the NIIF and pension and insurance funds in India. Media reports suggest that the $100 billion Australian Government Future Fund is looking to invest in the Indian infrastructure space, including roads, telecommunications and clean energy through the NIIF. The UAE has committed to invest $75 billion in the NIIF, and in April 2017 the UK agreed to invest $300 million in a fund for green energy under the NIIF.

7. State-Owned EnterprisesShare    

The government owns or controls interests in key sectors with significant economic impact, including infrastructure, oil, gas, mining, and manufacturing. The Department of Public Enterprises (http://dpe.gov.in), controls and formulates all the policies pertaining to SOEs, and is headed by a minister to whom the senior management reports. The Comptroller and Auditor General audits the SOEs. The government has taken a number of steps to improve the performance of SOEs, also called the Central Public Sector Enterprises (CPSEs), including improvements to corporate governance. Reforms carried out in the 1990s focused on liberalization and deregulation of most sectors and disinvestment of government shares. These and other steps to strengthen CPSE boards and enhance transparency evolved into a more comprehensive governance approach, culminating in the Guidelines on Corporate Governance of State-Owned Enterprises issued in 2007 and their mandatory implementation beginning in 2010. Governance reforms gained prominence for several reasons: the important role that CPSEs continue to play in the Indian economy; increased pressure on CPSEs to improve their competitiveness as a result of exposure to competition and hard budget constraints; and new listings of CPSEs on capital markets. According to the government’s most recent published data from March 2015, there were 298 CPSEs, of which 235 were in operation - 63 CPSEs have yet to commence business. 206 of the 298 CPSEs showed a profit during 2014-15 and did not require government support. The loss-making entities (e.g. Air India) and the state-run telecom company Bharat Sanchar Nigam Limited continue to be supported by the government through allocations in the general budget. The manufacturing sector constitutes the largest component of investment in CPSEs (45%), followed by services (35%), energy (12%), and mining (8%).

Foreign investments are allowed in the CPSEs in all sectors. The Master List of CPSEs can be accessed at http://www.bsepsu.com/list-cpse.asp. While the CPSEs face the same tax burden as the private sector, on issues like procurement of land, they receive streamlined licensing that private sector enterprises do not.

Privatization Program

Despite the financial upside to disinvestment in loss-making PSUs, the government has not generally privatized its assets as they have led to job losses in the past, and therefore engender political risks. Instead, the government has adopted a gradual disinvestment policy that dilutes government stakes in public enterprises without sacrificing control. Such disinvestment has been undertaken both as fiscal support and as a means of improving PSU efficiency.

In recent years, the government has begun to look to disinvestment proceeds as a major source of revenue to finance its fiscal deficit. The government has budgeted $10.5 billion in disinvestment for the April 2017-March 2018 fiscal year. However, it has missed its disinvestment targets for each of the past four years. FIIs can participate in these disinvestment programs subject to these limits: 24% of the paid up capital of the Indian company and 10% for NRIs/PIOs. The limit is 20% of the paid up capital in the case of public sector banks. There is no bidding process. The shares of the PSUs being disinvested are sold in the open market. Detailed policy procedures relating to disinvestment in India can be accessed at: https://india.gov.in/website-department-disinvestment.

8. Responsible Business ConductShare    

Among the companies there is a general awareness of standards for responsible business conduct. The Companies Act of 2013 established the framework for India’s corporate social responsibility (CSR) laws. The India Responsible Business Index (IRBI) notes, for example, that in 2015 there were only nine firms that had held public hearings regarding project impact with communities, but there were 13 in 2016. Similarly, there were only 27 firms with a provision for conducting impact assessments in 2015; this number increased to 31 in 2016. A CRISIL study reported that only 30% of 5,500 companies listed on the Bombay Stock Exchange met the criteria for mandatory spending and reporting under the CSR.

The Ministry of Corporate Affairs (MCA) administers the Companies Act of 2013, and is responsible for regulating the corporate sector in accordance with the law. MCA is also responsible for protecting the interests of consumers by ensuring competitive markets. While the CSR obligations are mandated by law, non-government organizations (NGOs) in India also track activities under the CSR and in some cases provide recommendations for effective use of CSR funds.

India does not adhere to the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Afflicted and High-Risk Areas. There are provisions to promote responsible business conduct throughout the supply chain.

India is not a member of Extractive Industries Transparency Initiative (EITI) nor is it a member of Voluntary Principles on Security and Human Rights.

9. CorruptionShare    

India is a signatory to the United Nation’s Conventions Against Corruption and is a member of the G20 Working Group against corruption. India ranks 79 out of 176 countries surveyed in Transparency International’s 2016 Corruption Perception Index, and was ranked 76 out of 168 in 2015.

Corruption is addressed by the following laws: the Companies Act, 2013; the Prevention of Money Laundering Act, 2002; the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Indian Contract Act, 1872; and the Indian Penal Code of 1860. Anti-corruption laws amended since 2004 have granted additional powers to vigilance departments in government ministries at the central and state levels. The amendments also elevated the Central Vigilance Commission (CVC) to being a statutory body. In addition, the Comptroller and Auditor General is charged with performing audits on public-private-partnership contracts in the infrastructure sector on the basis of allegations of revenue loss to the exchequer.

In November 2016, the Modi government ordered INR 1000 and 500 notes, comprising approximately 86% of cash in circulation, be demonetized to curb “black money,” corruption, and the financing of terrorism.

The Benami Transactions (Prohibition) Amendment Act of 2016 entered into effect in November 2016, and strengthened the legal and administrative procedures of the Benami Transactions Act 1988, which was ultimately never notified. (Note: A benami property is held by one person, but paid for by another, often with illicit funds.) Analysts expect the government to issue a roadmap in 2017-2018 to begin implementing the Act.

In November 2016 India and Switzerland signed a joint declaration to enter into an Agreement on the Exchange of Information (AEOI) to automatically share financial information on accounts held by Indian residents, beginning in 2018. India also amended its Double Taxation Avoidance Agreement with Singapore, Cyprus, and Mauritius in 2016 to prevent income tax evasion. The move follows the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, which replaced the Income Tax (IT) Act of 1961 regarding the taxation of foreign income. The new Act penalizes the concealment of foreign income, as well as provides criminal liability for foreign income tax evasion.

In February 2014, the government enacted the Whistleblower Act, intended to protect anti-corruption activists, but it has yet to be implemented. Experts believe that the prosecution of corruption has been effective only among the lower levels of the bureaucracy; senior bureaucrats have generally been spared. Businesses consistently cite corruption as a significant obstacle to FDI in India and identify government procurement as a process particularly vulnerable to corruption. To make the Whistle Blowers Protection Act, 2014 more effective, the government proposed an amendment bill in 2015. This bill is still pending with the Upper House of Parliament; however anti-corruption activists have expressed concern that the bill will dilute the Act by creating exemptions for state authorities, allowing them to stay out of reach of whistleblowers.

The Companies Act of 2013 established rules related to corruption in the private sector by mandating mechanisms for the protection of whistle blowers, industry codes of conduct, and the appointment of independent directors to company boards. As yet, the government has established no monitoring mechanism, and it is unclear the extent to which these protections have been instituted. No legislation focuses particularly on the protection of NGOs working on corruption issues, though the Whistleblowers Protection Act, 2011, may afford some protection once it has been fully implemented.

In 2013, Parliament enacted the Lokpal and Lokayuktas Act 2013, which created a national anti-corruption ombudsman and requires states to create state-level ombudsmen within one year of the law’s passage. The government has yet to implement the law, however, and as of yet, no ombudsmen have been appointed.

UN Anticorruption Convention, OECD Convention on Combatting Bribery

India is a signatory to the United Nations Conventions against Corruption and is a member of the G20 Working Group against Corruption.

India is not party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.

Resources to Report Corruption

Christopher Elms
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri, New Delhi
+91 11 2419 8000
ElmsC@state.gov

Ashutosh Kumar Mishra
Executive Director
Transparency International, India
Lajpat Bhawan, Room no.4
Lajpat Nagar, New Delhi - 110024
+91 11 2646 0826
info@transparencyindia.org

10. Political and Security EnvironmentShare    

There have been no significant major incidents involving political violence. However, outbursts of violence between the state and insurgent movements continued in Jammu and Kashmir and some northeastern states. Maoist/Naxalite insurgent groups also remain active in some eastern and central states, including the rural areas of southern Bihar, Jharkhand, Chhattisgarh, and Orissa. The country also continues to experience conflict related to caste, linguistic identity, socio-economic and communal tensions.

Travelers to India are invited to visit the U.S. Department of State travel advisory website at: https://travel.state.gov/content/passports/en/country/india.html for the latest information and travel resources.

11. Labor Policies and PracticesShare    

Although there are more than 20 million unionized workers in India, unions still represent less than 5% of the total work force. Most of these unions are linked to political parties. According to provisional figures from the Ministry of Labor and Employment (MOLE), over 2.9 million workdays were lost to strikes and lockouts in 2015, as opposed to 11 million workdays lost in 2014.

Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. A majority of the labor problems are the result of workplace disagreements over pay, working conditions, and union representation. According to government statistics, in 2015 the state of Kerala had the most strikes, followed by Tamil Nadu and Assam.

India’s labor regulations are very stringent and complex, and over time have limited the growth of the formal manufacturing sector. The rules governing the payment of wages and salaries are set forth in the Payment of Wages Act, 1936, and the Minimum Wages Act, 1948. Minimum industrial wages vary by state, ranging from about $2.80 per day for unskilled laborers to over $7.70 per day for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act of 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people. Foreign banks also require RBI approval to close branches. Permission is generally difficult to obtain, which has resulted in the increasing use of contract workers (i.e. non-permanent employees) to circumvent the law. Private firms successfully downsize through voluntary retirement schemes.

Since the current government assumed office in 2014, much of the movement on labor laws has taken place at the state level, particularly in Rajasthan, where the government has passed major amendments to allow for quicker hiring, firing, laying off, and shutting down of businesses. The Ministry of Labor and Employment launched a web portal in 2014 to assist companies in filing a single online report on compliance with 16 labor-related laws. In 2015, the Ministry also tabled legislation to amend India’s Factories Act that would encourage voluntary compliance of occupational safety and health standards and reduce government inspections. India’s major labor unions have opposed the labor reforms, arguing that they compromise workers’ safety and job security.

On September 2, major trade unions led country-wide protests against the government’s attempt to reform labor laws. The strike evoked mixed response as major cities like Delhi and Mumbai did not see any disruptions and the affect was restricted to states like Kerala, which is ruled by the Left parties and Karnataka, because the Congress party also supported the strike.

In August, the Child Labor Act was amended establishing a minimum age of 14 years for work and 18 years as the minimum age for hazardous work. In December, the government promulgated legislation enabling employers to pay worker salaries through checks or e-payment in addition to the prevailing practice of cash payment.

There are no reliable unemployment statistics for India due to the informal nature of most employment. The government nonetheless acknowledges a shortage of skilled labor in high-growth sectors of the economy, including information technology and manufacturing. The current government has established a Ministry of Skill Development, and has embarked on a national program to increase skilled labor.

12. OPIC and Other Investment Insurance ProgramsShare    

The United States and India signed an Investment Incentive Agreement in 1987. This agreement covers the Overseas Private Investment Corporation (OPIC), which is the development finance institution of the U.S. Government. Since 1974 OPIC has committed more than $3.5 billion in loans, investment funds, and political risk insurance to 162 projects in India. As of December 31, 2016 OPIC’s current portfolio in India comprises more than $1.5 billion outstanding across 32 projects. These are concentrated in the utilities and financial services sectors, including microfinance.

13. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical Source*

USG or International Statistical Source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP)

2015

$2.1 trillion

2015

$2.095 trillion

www.mospi.gov.in
www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical Source*

USG or International Statistical Source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country (stock positions)

2015

$19.280* billion

2015

$28.335 billion

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Host country’s FDI in the United States (stock positions)

2012

$2.052* billion

2014

$9.3 billion

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Total inbound stock of FDI as % host GDP

2014

1.8%

2015

2.1%

http://data.worldbank.org/
indicator/BX.KLT.DINV.WD.GD.ZS

* The Indian government source for FDI statistics is: http://dipp.nic.in/English/Publications/FDI_Statistics/2016/FDI_FactSheet_April_Sep_2016.pdf and the figure is the cumulative FDI for April 2000 to September 2016. Outward FDI data has been sourced from: http://www.careratings.com/upload/NewsFiles/Studies/Outward%20FDI%20Investment%20by%20India.pdf .


Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

312,152

100%

Total Outward

84,826

100%

Mauritius

63,077

20%

Singapore

17,721

21%

United States

50,152

16%

Mauritius

15,322

18%

United Kingdom

45,802

15%

Netherlands

12,259

14%

Germany

33,112

11%

United States

8,889

10%

Singapore

32,909

11%

UAE

4,449

5%

"0" reflects amounts rounded to +/- USD 500,000.

 

Table 4: Sources of Portfolio Investment

Portfolio Investment Assets

Top Five Partners (Millions, US Dollars)

Total

Equity Securities

Total Debt Securities

All Countries

1,650

100%

All Countries

1,640

100%

All Countries

10

100%

United States

496

30%

United States

494

30%

Singapore

6

60%

United Kingdom

292

18%

United Kingdom

290

18%

United States

2

40%

Luxembourg

273

17%

Luxembourg

273

17%

United Kingdom

2

40%

China P.R. Mainland

236

14%

China P.R. Mainland

236

14%

     

Mauritius

77

5%

Mauritius

77

5%

     

 

14. Contact for More InformationShare    

Christopher Elms
Economic Growth Unit Chief
U.S. Embassy New Delhi
Shantipath, Chanakyapuri
New Delhi
+91 11 2419 8000
ElmsC@state.gov