Investment Incentives

To attract foreign investment, different provinces and municipalities offer preferential packages like a temporary reduction in taxes, resources and land use benefits, reduction in import or export duties, special treatment in obtaining basic infrastructure services, streamlined government approvals, research and development subsidies, and funding for initial startups.  Often, these packages stipulate that foreign investors must meet certain benchmarks for exports, local content, technology transfer, and other requirements.  The Chinese government incentivizes foreign investors to participate in initiatives like MIC 2025 that seek to transform China into an innovation-based economy.  Announced in 2015, China’s MIC 2025 roadmap has prioritized the following industries:  new-generation information technology, advanced numerical-control machine tools and robotics, aerospace equipment, maritime engineering equipment and vessels, advanced rail, new-energy vehicles, energy equipment, agricultural equipment, new materials, and biopharmaceuticals and medical equipment.  While mentions of MIC 2025 have all but disappeared from public discourse, a raft of policy announcements at the national and sub-national levels indicate China’s continued commitment to developing these sectors.  Foreign investment plays an important role in helping China move up the manufacturing value chain.  However, foreign investment remains closed off to many economic sectors that China deems sensitive due to broadly defined national or economic security concerns.

Foreign Trade Zones/Free Ports/Trade Facilitation

In 2013, the State Council announced the Shanghai pilot FTZ to provide open and high-standard trade and investment services to foreign companies.  China gradually scaled up its FTZ pilot program to 12 FTZs, launching an additional six FTZs in 2019.  China’s FTZs are in: Tianjin, Guangdong, Fujian, Chongqing, Hainan, Henan, Hubei, Liaoning, Shaanxi, Sichuan, Zhejiang, Jiangsu, Shandong, Hebei, Heilongjiang, Guanxi, and Yunnan provinces.  The goal of all of China’s FTZs is to provide a trial ground for trade and investment liberalization measures and to introduce service sector reforms, especially in financial services, that China expects to eventually introduce in other parts of the domestic economy.  The FTZs promise foreign investors “national treatment” for the market access phase of an investment in industries and sectors not listed on the FTZ negative list, or on the list of industries and economic sectors from which foreign investment is restricted or prohibited.  However, the 2019 FTZ negative list lacked substantive changes, and many foreign firms have reported that in practice, the degree of liberalization in the FTZs is comparable to opportunities in other parts of China.  The stated purpose of FTZs is also to integrate these areas more closely with the OBOR initiative.

Performance and Data Localization Requirements

As part of China’s WTO accession agreement, the PRC government promised to revise its foreign investment laws to eliminate sections that imposed on foreign investors requirements for export performance, local content, balanced foreign exchange through trade, technology transfer, and research and development as a prerequisite to enter China’s market.  In practice, China has not completely lived up to these promises.  Some U.S. businesses report that local officials and regulators sometimes only accept investments with “voluntary” performance requirements or technology transfer that help develop certain domestic industries and support the local job market.  Provincial and municipal governments will sometimes restrict access to local markets, government procurement, and public works projects even for foreign firms that have already invested in the province or municipality.  In addition, Chinese regulators have reportedly pressured foreign firms in some sectors to disclose IP content or provide IP licenses to Chinese firms, often at below market rates.

Furthermore, China’s evolving cybersecurity and personal data protection regime includes onerous restrictions on firms that generate or process data in China, such as requirements for certain firms to store data in China.  Restrictions exist on the transfer of personal information of Chinese citizens outside of China.  These restrictions have prompted many firms to review how their networks manage data.  Foreign firms also fear that PRC laws call for the use of “secure and controllable,” “secure and trustworthy,” etc. technologies will curtail sales opportunities for foreign firms or pressure foreign companies to disclose source code and other proprietary intellectual property.  In October 2019, China adopted a Cryptography Law that includes restrictive requirements for commercial encryption products that “involve national security, the national economy and people’s lives, and public interest.”  This broad definition of commercial encryption products that must undergo a security assessment raises concerns that implementation will lead to unnecessary restrictions on foreign information and communications technology (ICT) products and services.  Further, prescriptive technology adoption requirements, often in the form of domestic standards that diverge from global norms, in effect give preference to domestic firms.  These requirements potentially jeopardize IP protection and overall competitiveness of foreign firms operating in China.

Capital Markets and Portfolio Investment

China’s leadership has stated that it seeks to build a modern, highly-developed, and multi-tiered capital market.  Since their founding over three decades ago, the Shanghai and Shenzhen Exchanges, combined, are ranked the second largest stock market in the world with over USD5 trillion in assets.  China’s bond market has similarly expanded significantly to become the third largest worldwide, totaling approximately USD13 trillion.  Direct investment by private equity and venture capital firms has increased significantly, but has faced setbacks due to China’s capital controls, which complicate the repatriation of returns.  In December 2019, the State Council and China’s banking and securities regulatory authorities issued a set of measures that would remove in 2020 foreign ownership caps in select segments of China’s financial sector.  Specifically, foreign investors can wholly own insurance and futures firms as of January 1, asset management companies as of April 1, and securities firms as of December 1, 2020.

China has been an IMF Article VIII member since 1996 and generally refrains from restrictions on payments and transfers for current international transactions.  However, the government has used administrative and preferential policies to encourage credit allocation towards national priorities, such as infrastructure investments.  As of 2019, over 40 sovereign entities and private sector firms, including Daimler and Standard Chartered HK, have since issued roughly USD48 billion in “Panda Bonds,” Chinese renminbi (RMB)-denominated debt issued by foreign entities in China.  China’s private sector can also access credit via bank loans, bond issuance, and wealth management and trust products.  However, the vast majority of bank credit is disbursed to state-owned firms, largely due to distortions in China’s banking sector that have incentivized lending to state-affiliated entities over their private sector counterparts.

The Monetary and Banking System

China’s monetary policy is run by the People’s Bank of China (PBOC), China’s central bank.  The PBOC has traditionally deployed various policy tools, such as open market operations, reserve requirement ratios, benchmark rates and medium-term lending facilities, to control credit growth.  The PBOC had previously also set quotas on how much banks could lend, but abandoned the practice in 1998.  As part of its efforts to shift towards a more market-based system, the PBOC announced in 2019 that it will reform its one-year loan prime rate (LPR), which will serve as an anchor reference for Chinese lenders.  The LPR is based on the interest rate for one-year loans that 18 banks offer their best customers.  Despite these measures to move towards more market-based lending, China’s financial regulators still influence the volume and destination of Chinese bank loans through “window guidance” – unofficial directives delivered verbally – as well as through mandated lending targets for key economic groups, such as small and medium sized enterprises.

The China Banking and Insurance Regulatory Commission (CBIRC) oversees China’s roughly 4,000 lending institutions.  At the end of the first quarter of 2019, Chinese banks’ total assets reached RMB 276 trillion (USD40 trillion).  China’s “Big Five” – Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank, and Industrial and Commercial Bank of China – dominate the sector and are largely stable, but over the past year, China has experienced regional pockets of banking stress, especially among smaller lenders.  Reflecting the level of weakness among these banks, in November 2019, the PBOC announced that about one in 10 of China’s banks received a “fail” rating following an industry-wide review.  The assessment deemed 420 firms, all rural financial institutions, “extremely risky.”  The official rate of non-performing loans among China’s banks is relatively low: below two percent as of the end of 2019.  However, analysts believe the actual figure may be significantly higher.  Bank loans continue to provide the majority of credit options (reportedly around 66 percent in 2019) for Chinese companies, although other sources of capital, such as corporate bonds, equity financing, and private equity are quickly expanding their scope, reach, and sophistication in China.  In December 2019, the Coronavirus (COVID-19) pandemic emerged in Wuhan, China.  In response, the PBOC established a variety of programs to stimulate the economy, including a re-lending scheme of USD4.28 billion and a special credit line of USD50 billion for policy banks.  In addition, the Ministry of Industry and Information Technologies established a list of companies vital to COVID-19 efforts, which would be eligible to receive additional loans and subsidies from the Ministry of Finance.

As part of a broad campaign to reduce debt and financial risk, Chinese regulators over the last several years have implemented measures to rein in the rapid growth of China’s “shadow banking” sector, which includes wealth management and trust products.  These measures have achieved positive results: the share of trust loans, entrusted loans, and undiscounted bankers’ acceptances dropped a total of seven percent in 2019 as a share of total social financing (TSF) – a broad measure of available credit in China.  TSF’s share of corporate bonds jumped from a negative 2.31 percent in 2017 to 12.7 percent in 2019.  In October 2019, the CBIRC announced that foreign owned banks will be allowed to establish wholly-owned banks and branches in China.  However, analysts noted there are often licenses and other procedures that can drag out the process in this sector, which is already dominated by local players.  Nearly all of China’s major banks have correspondent banking relationships with foreign banks, including the Bank of China, which has correspondent banking relationships with more than 1,600 institutions in 179 countries and regions.  Foreigners are eligible to open a bank account in China, but are required to present a passport and/or Chinese government issued identification.

Foreign Exchange and Remittances

Foreign Exchange

While the central bank’s official position is that companies with proper documentation should be able to freely conduct business, in practice, companies have reported challenges and delays in obtaining approvals for foreign currency transactions by sub-national regulatory branches.  Chinese authorities instituted strict capital control measures in 2016, when China recorded a surge in capital flight that reduced its foreign currency reserves by about USD1 trillion, stabilizing to around USD3 trillion today.  China has since announced that it will gradually reduce those controls, but market analysts expect they would be re-imposed if capital outflows accelerate again.  Chinese foreign exchange rules cap the maximum amount of RMB individuals are allowed to convert into other currencies at approximately USD50,000 each year and restrict them from directly transferring RMB abroad without prior approval from the State Administration of Foreign Exchange (SAFE).  In 2017, authorities further restricted overseas currency withdrawals by banning sales of life insurance products and capping credit card withdrawals at USD5,000 per transaction.  SAFE has not reduced the USD50,000 quota, but during periods of higher than normal capital outflows, banks are reportedly instructed by SAFE to increase scrutiny over individuals’ requests for foreign currency and to require additional paperwork clarifying the intended use of the funds, with the express intent of slowing capital outflows.

China’s exchange rate regime is managed within a band that allows the currency to rise or fall by 2 percent per day from the “reference rate” set each morning.  In August 2019, the U.S. Treasury Department designated China a “currency manipulator,” given China’s large-scale interventions in the foreign exchange market.  Treasury removed this designation in January 2020.

Remittance Policies

According to China’s FIL, as of January 1, 2020, funds associated with any forms of investment, including investment, profits, capital gains, returns from asset disposal, IPR loyalties, compensation, and liquidation proceeds, may be freely converted into any world currency for remittance.  Under Chinese law, FIEs do not need pre-approval to open foreign exchange accounts and are allowed to retain income as foreign exchange or to convert it into RMB without quota requirements.  The remittance of profits and dividends by FIEs is not subject to time limitations, but FIEs need to submit a series of documents to designated banks for review and approval.  The review period is not fixed and is frequently completed within one or two working days of the submission of complete documents.  For remittance of interest and principal on private foreign debt, firms must submit an application form, a foreign debt agreement, and the notice on repayment of the principal and interest.  Banks will then check if the repayment volume is within the repayable principal.  There are no specific rules on the remittance of royalties and management fees.  In August 2018, SAFE raised the reserve requirement for foreign currency transactions from zero to 20 percent, significantly increasing the cost of foreign currency transactions.

Sovereign Wealth Funds

China officially has only one sovereign wealth fund (SWF), the China Investment Corporation (CIC), which was launched to help diversify China’s foreign exchange reserves.  Established in 2007 with USD200 billion in initial registered capital, CIC currently manages over USD940 billion in assets as of the close of 2018 and invests on a 10-year time horizon.  CIC has since evolved into three subsidiaries:

• CIC International was established in September 2011 with a mandate to invest in and manage overseas assets.  It conducts public market equity and bond investments, hedge fund, multi-asset and real estate investments, private equity (including private credit) fund investments, co-investments, and minority investments as a financial investor.
• CIC Capital was incorporated in January 2015 with a mandate to specialize in making direct investments to enhance CIC’s investment in long-term assets.
• Central Huijin makes equity investments in Chinese state-owned financial institutions.

CIC publishes an annual report containing information on its structure, investments, and returns.  CIC invests in diverse sectors, including financial services, consumer products, information technology, high-end manufacturing, healthcare, energy, telecommunications, and utilities.  China also operates other funds that function in part like sovereign wealth funds, including:  China’s National Social Security Fund, with an estimated USD325 billion in assets; the China-Africa Development Fund (solely funded by the China Development Bank), with an estimated USD10 billion in assets; the SAFE Investment Company, with an estimated USD417.8 billion in assets; and China’s state-owned Silk Road Fund, established in December 2014 with USD40 billion in assets to foster investment in OBOR partner countries.  Chinese state-run funds do not report the percentage of their assets that are invested domestically.  However, Chinese state-run funds follow the voluntary code of good practices known as the Santiago Principles and participate in the IMF-hosted International Working Group on SWFs.  The Chinese government does not have any formal policies specifying that CIC invest funds consistent with industrial policies or in government-designated projects, although CIC is expected to pursue government objectives.  CIC generally adopts a “passive” role as a portfolio investor.

The regulatory environment in terms of foreign investment has been eased to make it investor- friendly.  The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy.  The Indian government does issue guarantees to investments but only in case of strategic industries.

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).  In 2018, the Indian government announced guidelines for the establishment of the National Industrial and Manufacturing Zones (NIMZs), envisaged as integrated industrial townships to be managed by a special purpose vehicle and headed by a government official.  So far, three NIMZs have been accorded final approval and 13 have been accorded in-principle approval.  In addition, eight investment regions along the Delhi-Mumbai Industrial Corridor (DIMC) have also been 12 established as NIMZs.  SEZs are treated as foreign territory; businesses operating within SEZs are not subject to customs regulations, nor have 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. 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.fisme.org.in/export_schemes/DOCS/B- 1/EXPORT%20ORIENTED%20UNIT%20SCHEME.pdf and http://www.makeinindia.com/home. 

Performance and Data Localization Requirements

Preferential Market Access (PMA) for government procurement has created substantial challenges for foreign firms operating in India.  State-owned “Public Sector Undertakings” and the government accord a 20 percent price preference to vendors utilizing more than 50 percent 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.

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 percent FDI in research and development through the automatic route.

Data Storage & Localization

In April 2018, the RBI, announced, without prior stakeholder consultation, that all payment system providers must store their Indian transaction data only in India. The RBI mandate went into effect on October 15, 2018, despite repeated requests by industry and the U.S. officials for a delay to allow for more consultations.  In July 2019, the RBI, again without prior stakeholder consultation, retroactively expanded the scope of its 2018 data localization requirement to include banks, creating potential liabilities going back to late 2018.  The RBI policy overwhelmingly and disproportionately affects U.S. banks and investors, who depend on the free flow of data to both achieve economies of scale and to protect customers by providing global real-time monitoring and analysis of fraud trends and cybersecurity.  U.S. payments companies have been able to implement the mandate for the most part, though at great cost and potential damage to the long-term security of their Indian customer base, which will receive fewer services and no longer benefit from global fraud detection and AML/CFT protocols.  Similarly, U.S. banks have been able to comply with RBI’s expanded mandate, though incurring significant compliance costs and increased risk of cybersecurity vulnerabilities.

In addition to the RBI data localization directive for payments companies and banks, the government formally introduced its draft Data Protection Bill in December 2019, which contains restrictions on all cross-border transfers of personal data in India.  The Bill is currently under review by a Joint Parliamentary Committee and stipulates that personal data that is considered “critical” can only be stored in India.  The Bill is based on the conclusions of a ten-person Committee of Experts, established by MeitY in July 2017.

Capital Markets and Portfolio Investment

Total market capitalization of the Indian equity market stood around $2.2 trillion as of December 31, 2019. The benchmark Standard and Poor’s (S&P) BSE (erstwhile Bombay Stock Exchange) Sensex recorded gains of about 14 percent in 2019. Nonetheless, Indian equity markets were tumultuous throughout 2019. The BSE Sensex generally gained from the beginning of the year until July 5, when Finance Minister Nirmala Sitharaman introduced a tax increase on foreign portfolio investment in her post-election Union Budget for the remainder for FY 2020.  The Sensex declined, erasing all previous gains for the year as the new tax led to a rapid exodus of foreign portfolio investors from the market.  The market continued to fluctuate even after the tax increase was repealed on August 23 until September 20, when the Finance Minister made a surprise announcement to slash corporate tax rates.  After that, the Sensex surged and hit a record high of 41,854 on December 20. However, even as the benchmark Sensex hit record highs, the midcap and small cap indices disappointed investors with a year of negative returns.  The Sensex’s advance was driven by a handful of stocks; two in particular Reliance Industries Ltd. and ICICI Bank Ltd. accounted for about half the gain.   Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

Foreign portfolio investors (FPIs), pumped a net of over $14 billion into India’s equity markets in 2019, making it their highest such infusion in six years.  In 2018, FPIs pulled out $ 4.64 billion from the market.  Domestic money also continued to flow into equity markets via systematic investment plans (SIP) of mutual funds.  SIP assets under management hit an all-time high of $43.94 billion in November, according to data from the Association of Mutual Funds of India.

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 (NSE), and the Metropolitan Stock Exchange.  SEBI also regulates the three national commodity exchanges: the Multi Commodity Exchange (MCX), the National Commodity & Derivatives Exchange Limited, and the National Multi-Commodity Exchange.

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 to 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) based on SEBI guidelines.  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.

Companies incorporated outside India can raise capital in India’s capital markets through the issuance of Indian Depository Receipts (IDRs) based on SEBI guidelines.  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 it conforms to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling as prescribed by the RBI, 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_PressReleaseDisplay.aspx?prid=47736.

Total external commercial borrowings through both the approval and automatic route increased 61.45 percent year-on-year to $50.15 billion as of December 2019, according to the Reserve Bank of India’s data.

The RBI has taken a number of steps in the past few years to bring the activities of the offshore Indian rupee market in Non Deliverable Forwards (NDF) onshore, in order to deepen domestic markets, enhance downstream benefits, and generally obviate the need for an NDF market.  FPIs with access to currency futures or the exchange-traded currency options market can hedge onshore currency risks in India and may directly trade in corporate bonds. In October 2019, the RBI allowed banks to freely offer foreign exchange quotes to non-resident Indians at all times and said trading on rupee derivatives would be allowed and settled in foreign currencies in the International Financial Services Centers (IFSCs).  This was based on the recommendations of the task force on offshore rupee markets to examine and recommend appropriate policy measures to ensure the stability of the external value of the Rupee (https://m.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=937).    The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

The International Financial Services Centre at Gujarat International Financial Tec-City (GIFT City) in Gujarat is being developed to compete with global financial hubs.  The BSE was the first to start operations there, in January 2016.  The NSE and domestic banks including Yes Bank, Federal Bank, ICICI Bank, Kotak Mahindra Bank, IDBI Bank, State Bank of India, and IndusInd Bank have started IFSC banking units in GIFT city.  Standard Chartered Bank and Bank of America started operations in GIFT City in 2019.

Money and Banking System

The public sector remains predominant in the banking sector, with public sector banks (PSBs) accounting for about 66 percent of total banking sector assets. Although most large PSBs are listed on exchanges, the government’s stakes in these banks often exceeds the 51 percent legal minimum. Aside from the large number of state-owned banks, directed lending and mandatory holdings of government paper are key facets of the banking sector. The RBI requires commercial banks and foreign banks with more than 20 branches to allocate 40 percent of their loans to priority sectors which include agriculture, small and medium enterprises, export-oriented companies, and social infrastructure. Additionally, all banks are required to invest 18.25 percent of their net demand and time liabilities in government securities. The RBI plans to reduce this by 25 basis points every quarter until the investment requirement reaches 18 percent of their net demand and time liabilities.

PSBs currently face two significant hurdles: capital constraints and poor asset quality. As of September 2019, gross non-performing loans represented 9.3 percent of total loans in the banking system, with the public sector banks having an even larger share at 12.7 percent of their loan portfolio. The PSBs’ asset quality deterioration in recent years is driven by their exposure to a broad range of industrial sectors including infrastructure, metals and mining, textiles, and aviation. With the new bankruptcy law (IBC) in place, banks are making progress in non-performing asset recognition and resolution. As of December 2019, the resolution processes have been approved in 190 cases Lengthy legal challenges have posed the greatest obstacle, as time spent on litigation was not counted against the 270 day deadline.

In July 2019, Parliament amended the IBC to require final resolution within 330 days including litigation time. To address asset quality challenges faced by public sector banks, the government injected $30 billion into public sector banks in recent years. The capitalization largely aimed to address the capital inadequacy of public sector banks and marginally provide for growth capital. Following the recapitalization, public sector banks’ total capital adequacy ratio (CRAR) improved to 13.5 percent in September 2019 from 12.2 in March 2019. In 2019, the Indian authorities also announced a consolidation plan entailing a merger of 10 public sector banks into 4, thereby reducing the total number of public sector banks from 18 to 12.

Women in the Financial Sector

Women in India receive a smaller portion of financial support relative to men, especially in rural and semi-urban areas. In 2015, the Modi government started the Micro Units Development and Refinance Agency Ltd. (MUDRA), which supports the development of micro-enterprises. The initiative encourages women’s participation and offers collateral-free loans of around $15,000. The Acting Finance Minister Piyush Goyal while delivering the 2019 budget speech mentioned that 70 percent of the beneficiaries of MUDRA initiative are women. Under the MUDRA initiative, 155.6 million loans have been disbursed amounting to $103 billion. Following the Global Entrepreneurship Summit (GES) 2017, government agency the National Institute for Transforming India (NITI Aayog), launched a Women’s Entrepreneurship Platform, https://wep.gov.in/, a single window information hub which provides information on a range of issues including access to finance, marketing, existing government programs, incubators, public and private initiatives, and mentoring. About 5,000 members are currently registered and using the services of the portal said a NITI Aayog officer who has an oversight of the project.

Foreign Exchange and Remittances

Foreign Exchange

The RBI, under the Liberalized 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 percent 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 FIPB.

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 percent.

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

The FY 2016 the Indian government established the National Infrastructure Investment Fund (NIIF), touted as India’s first sovereign wealth fund to promote investments in the infrastructure sector. The government agreed to contribute $3 billion to the fund, while an additional $3 billion will be raised from the private sector primarily from sovereign wealth funds, multilateral agencies, endowment funds, pension funds, insurers, and foreign central banks. So far, the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority, Australian Super, Ontario Teachers’ Pension Plan, Temasek, Axis Bank, HDFC Group, ICICI Bank and Kotak Mahindra Life Insurance have committed investments into the NIIF Master Fund, alongside Government of India. NIIF Master Fund now has $2.1 billion in commitments with a focus on core infrastructure sectors including transportation, energy and urban infrastructure.

Investment Incentives

To attract foreign investment, the GOM offers investment incentives to investors on a national treatment basis. These incentives are contained in Decrees 23/98/M and 49/85/M and are provided so long as companies can prove they are doing one of the following: promoting economic diversification, contributing to the promotion of exports to new unrestricted markets, promoting added value within their activity’s value chain, or contributing to technical modernization. There is no requirement that Macau residents own shares. These incentives are categorized as fiscal incentives, financial incentives, and export diversification incentives.

Fiscal incentives include full or partial exemption from profit/corporate tax, industrial tax, property tax, stamp duty for transfer of properties, and consumption tax. The tax incentives are consistent with the WTO Agreement on Subsidies and Countervailing Measures, as they are neither export subsidies nor import substitution subsidies as defined in the WTO Agreement. In 2019, the GOM put forward an enhanced tax deduction for research and development (R&D) expenditure incurred for innovation and technology projects by companies whose registered capital reached USD 125,000, or whose average taxable profits reached USD 62,500 per year in three consecutive years. The tax deduction amounts to 300 percent for the first USD 375,000 of qualifying R&D expenditure and 200 percent for the remaining amount, subject to a limit of USD 1.9 million in total). In addition, income received from Portuguese speaking countries is exempt from the corporate tax, provided such income has been subject to tax in its place of origin.

Two new laws to encourage financial leasing activities in Macau became effective in April 2019. Under the new regime, the minimum capital requirement of a financial leasing company is reduced from USD 3.75 million to USD 1.25 million. In addition, the acquisition by the financial leasing company of a property exclusively for its sole use has an exemption of up to USD 62,500 from a stamp duty.

Financial incentives include government-funded interest subsidies. Export diversification incentives include subsidies given to companies and trade associations attending trade promotion activities organized by IPIM. Only companies registered with Macau Economic Services (MES) may receive subsidies for costs such as space rental or audio-visual material production. Macau also provides other subsidies for the installation of anti-pollution equipment.

Foreign Trade Zones/Free Ports/Trade Facilitation

Macau is a free port; however, there are four types of dutiable commodities: liquors, tobacco, vehicles, and petrol (gasoline). Licenses must be obtained from the MES prior to importation of these commodities.

In order to promote the MICE (meetings, incentives, conventions, and exhibitions) and logistics industries in Macau, the GOM has accepted the ATA Carnet (Admission Temporaire/Temporary Admission), an international customs document providing an efficient method for the temporary import and re-export of goods that eases the way for foreign exhibitions and businesses.

The latest CEPA addition established principles of trade facilitation, including simplifying customs procedures, enhancing transparency, and strengthening cooperation.

Performance and Data Localization Requirements

Macau does not follow a forced localization policy in which foreign investors must use domestic content in goods or technology.

There are no requirements by the GOM for foreign IT providers to turn over source code and/or provide access to surveillance (i.e., backdoors into hardware and software or turning over keys for encryption).

According to the Personal Data Protection Act (Decree 8/2005), if there is transfer of personal data to a destination outside Macau, the opinion of the Office for Personal Data Protection — the regulatory authority responsible for supervising and enforcing the Act — must be sought to confirm if such destination ensures an adequate level of protection.

In December 2019, Macau’s Cybersecurity Law came into force. With this law, public and private network operators in certain industries have to meet obligations, including providing real-time access to select network data to Macau authorities, with the stated aim of protecting the information network and computer systems. For example, network operators must register and verify the identity of users before providing telecommunication services. The new law creates new investment and operational costs for affected businesses, and has raised some privacy and surveillance concerns.

One major U.S. cloud computing company reported that Macau’s Gaming Inspection and Coordination Bureau had refused permission for potential clients in the gaming sector to export personal data-to-data centers located outside of Macau.

Capital Markets and Portfolio Investment

Macau allows free flows of financial resources. Foreign investors can obtain credit in the local financial market. The GOM is stepping up its efforts to develop finance leasing businesses and exploring opportunities to establish a system for trade credit insurance in order to take a greater role in promoting cooperation between companies from Portuguese-speaking countries.

Since 2010, the People’s Bank of China (PBoC) has provided cross-border settlement of funds for Macau residents and institutions involved in transactions for RMB bonds issued in Hong Kong. Macau residents and institutions can purchase or sell, through Macau RMB participating banks, RMB bonds issued in Hong Kong and Macau. The Macau RMB Real Time Gross Settlements (RMB RTGS) System came into operation in March 2016 to provide real-time settlement services for RMB remittances and interbank transfer of RMB funds. The RMB RTGS System is intended to improve risk management and clearing efficiency of RMB funds and foster Macau’s development into an RMB clearing platform for trade settlement between China and Portuguese-speaking countries. In December 2019, the PBoC canceled an existing quota of RMB 20,000 exchanged in Macau for each individual transaction.

Macau has no stock market, but Macau companies can seek a listing in Hong Kong’s stock market. Macau and Hong Kong financial regulatory authorities cooperate on issues of mutual concern. Under the Macau Insurance Ordinance, the MMA authorizes and monitors insurance companies. There are 11 life insurance companies and 13 non-life insurance companies in Macau. Total gross premium income from insurance services amounted to USD 2.7 billion in the third quarter of 2019.

In October 2018, the Legislative Assembly took steps to tackle cross-border tax evasion. Offshore institutions in Macau, including credit institutions, insurers, underwriters, and offshore trust management companies, will be abolished by the end of 2020. Decree 9/2012, in effect since October 2012, stipulates that banks must compensate depositors up to a maximum of MOP 500,000 (USD 62,500) in case of a bank failure. To finance the deposit protection scheme, the GOM has injected MOP 150 million (USD 18.75 million) into the deposit protection fund, with banks paying an annual contribution of 0.05 percent of the amount of protected deposits held.

Money and Banking System

The MMA functions as a de facto central bank. It is responsible for maintaining the stability of Macau’s financial system and for managing its currency reserves and foreign assets. At present, there are thirty-one financial institutions in Macau, including 12 local banks and 19 branches of banks incorporated outside Macau. There is also a finance company with restrictive banking activities, two financial leasing companies and a non-bank credit institution dedicated to the issuance and management of electronic money stored value card services. In addition, there are 11 moneychangers, two cash remittance companies, two financial intermediaries, six exchange counters, and one representative office of a financial institution. The BoC and Industrial and Commercial Bank of China (ICBC) are the two largest banks in Macau, with total assets of USD 79.8 billion and USD 33.9 billion, respectively. Banks with capital originally from mainland China and Portugal had a combined market share of about 86 percent of total deposits in the banking system at the end of 2016. Total deposits amounted to USD 83.8 billion by the end of 2019. In the fourth quarter of 2019, banks in Macau maintained a capital adequacy ratio of 14.2 percent, well above the minimum eight percent recommended by the Bank for International Settlements. Accounting systems in Macau are consistent with international norms.

The MMA prohibits the city’s financial institutions, banks and payment services from providing services to businesses issuing virtual currencies or tokens.

Foreign Exchange and Remittances

Foreign Exchange

Profits and other funds associated with an investment, including investment capital, earnings, loan repayments, lease payments, and capital gains, can be freely converted and remitted. The domestic currency, Macau Official Pataca (MOP), is pegged to the Hong Kong Dollar at 1.03 and indirectly to the U.S. Dollar at an exchange rate of approximately MOP 7.99 = USD 1. The MMA is committed to exchange rate stability through maintenance of the peg to the Hong Kong Dollar.

Although Macau imposes no restrictions on capital flows or foreign exchange operations, exporters are required to convert 40 percent of foreign currency earnings into MOP. This legal requirement does not apply to tourism services.

Remittance Policies

There are no recent changes to or plans to change investment remittance policies. Macau does not restrict the remittance of profits and dividends derived from investment, nor does it require reporting on cross-border remittances. Foreign investors can bring capital into Macau and remit it freely.

A Memorandum of Understanding on AML actions between MMA and PBoC, increased information exchanges between the two parties, as well as cooperation on onsite inspections of casino operations. Furthermore, Macau’s terrorist asset-freezing law, which is based on United Nations (UN) Security Council resolutions, requires travelers entering or leaving with cash or other negotiable monetary instruments valued at MOP 120,000 (USD 15,000) or more to sign a declaration form and submit it to the Macau Customs Service.

In December 2019, the PBoC increased a daily limit set on the amount of RMB-denominated funds sent by Macau residents to personal accounts held in mainland China from RMB 50,000 to RMB 80,000.

Sovereign Wealth Funds

The International Monetary Fund (IMF) suggested in July 2014 that the GOM invest its large fiscal reserves through a fund modeled on sovereign wealth funds to protect the city’s economy from economic downturns. In November 2015, the GOM decided to establish such a fund, called the MSAR Investment and Development Fund (MIDF), through a substantial allocation from the city’s ample fiscal reserves. However, the GOM in 2019 withdrew a draft bill that proposed the use of USD 7.5 billion to seed the MIDF over public concerns about the government’s supervisory capability. The MMA said it will conduct a consultation in mid-2020 to help the public better understand the regulations and operations of the fund.