Investment in India Overview

MADHURENDRA NATH JHA

Destination India

Amongst Fastest growing market Economies in the World, @ over 7% p.a. last 4 years

Liberal FDI Policy Framework FDI up to 100% allowed in most sectors

Rationalization of Tax Structure to promote Investment High Foreign Exchange ReservesLiberal outbound investment Currency appreciation

Entry Routes for Investment in India Approval Automatic

Foreign Investment in IndiaThe Driving Force

Well diversified Industrial Base

A large & sophisticated financial Architecture

A healthy GDP composition

An acknowledged strength in knowledge driven Industry

FDI and Portfolio Flows to India

Source: RBI, 2007

Investor Confidence

India Ranked 2nd by AT Kearney's Foreign Direct Investment Confidence Index 2007

Has progressively moved ahead in the rankings; was ranked 15th in 2003

Attractive location across all broad sectors especially Manufacturing and high value-added services industries like financial services and information technology.

Investor Attractiveness Source: 2007 A T KEARNEY

0

10

20

30

40

50

60

70

80

90

Manuf. Service Telecom& Utility

retail

India

US

UK

Poland

Germany

Sectors Attracting Highest FDI Equity

Flows

0

500

1000

1500

2000

2500

3000

2004-05 2005-06 2006-07 2007-08

Computer Software &Hardware

Construction Activities

Automobile Industry

Housing & Real Estate

Power

Drugs and Pharmaceuticals

Mettalurgic Industries

All Figures in US $(Million)

Advantage IndiaOne of the Largest Free Market Democracies in the world

Unparalleled resource of educated, hard-working, skilled and ambitious workforce

Youngest workforce in the world

- Working age population estimated to rise 70% of the total population by 2030

- 70 million new entrants to its work force every 5 years

Advantage India

English the language of business in India- one of the largest Pools of English Speaking Manpower

after the US

Manpower- Over 3 million scientific and technical manpower- Over 2.5 million graduates added to the workforce

every years- 3rd largest pool of educated personnel

A large and Growing Middle class with per capita income of more than 1000 US $ p.a.

Advantage India

Amongst the largest and ever growing domestic market

Abundant Resources

Sound economic Fundamentals; Stable Economic reform regime

Vibrant Financial Sector

M&A Band WagonFrenzied Activity in the field of M&A in recent years

In 2007 out of Total 348 Cross Border Deals:Outbound: 240 ($32.37 billion) Inbound: 108 ($15.61 billion)

In First Quarter of 2007 while Inbound FDI flows were at an all time high they still exceeded by outbound investment

Increase in M& A

0

100

200

300

400

500

600

700

2006 2007

No. of DealsAmount (USD million)

India Inc. Goes Global

Tata Motors acquired Jaguar & Land Rover for 23 billion

Tata Steel acquired UK based Corus for $ 8 billion.

Suzlon Energy Ltd acquired German firm Repower Systems AG for $ 1.7 billion.

United Spirits bought Scotch whisky distiller Whyte & Mackay for US$ 1.11 billion

Hindalco acquired Novelis for $ 6 billion

Inbound Transactions Sistema, Russian Joint Stock

Company’s acquisition of 74% stake in Shyam Telelink – Telecommunications

French banking major BNP Paribas’s acquisition of 45% stake in financial services firm Sundaram Home Finance for $45.81 million

Standard Chartered Bank bought 49% stake for $34.19 million in UTI Securities and Interpublic Group hiked its stake in Lintas India to 100% for $100 million

Fursa Mauritius’s acquisition of 42.63% equity in Gayatri Starchkem

UBS Global Management’s Acquisition of Standard Chartered Asset Management Company for $ 117.78 Million

EMC Corporations Acquisition of Valyd Software Pvt. Ltd.

Orkla’s Acquisition of MTR foods for $ 100 Million

Indian Overseas Investment

Favourable Policy framework- Overseas Investment Limit – 400% of Net

Worth for Companies Incorporated in India including Subsidiaries of Foreign Co.

- Overseas portfolio investment - 50 per cent of Net Worth

- RBI approval on case by case basis if in

excess of the above specified limit

FundingPermissible Funding: Drawal of foreign exchange from an AD; Capitalization of exports; Swap of shares Utilization of proceeds of External Commercial

Borrowings (ECBs) / Foreign Currency Convertible Bonds (FCCBs);

in exchange of ADRs/GDRs Balances held in EEFC account of the Indian

party; Utilization of proceeds of foreign currency funds

raised through ADR / GDR issues.

India’s Direct Investment Abroad

Source: RBI 2007

Entry Routes Investing In India

Automatic Route Approval Route

General PermissionNo Prior Permission RequiredRBI to be informed within 30 days of inflow/issue of shares

DiscretionGovt. Approval requiredDecision generally within 4-6 weeks

Entry Strategies for Foreign Investors

Incorporation of a company (governed by companies Act)

As a Foreign Company through: Liaison office/Representative office Project Office Branch Office foreign company

As an Indian company through: a Joint Venture Wholly Owned Subsidiary

Joint Ventures As An Entry Strategy

JV’S regulated by Policies and Laws governing FDITwo Tier Approval Mechanism for JV’S:

- Automatic Approval Route

- FIPB Approval RouteIf the Foreign Partner has entered into JV in the same field before then NOC of the previous JV partner and approval of the Government also required

Joint Ventures …… Cont’d‘Same Field’ may be defined as the 4 digit National Industrial Classification (NIC) Code

Illustration: If the foreign investor has collaboration

for the manufacture of tarpaulin Code 268.3, he can invest in the manufacture of rubberized cloth Code 268.2 as there is no restriction to enter into JV’s in allied fields. The restriction shall apply to any item whose code NIC code is 268.2.

Joint Ventures …… Cont’d

A ‘Conflict of Interest’ clause advisable in the JV/Collaboration agreement in case one of the Partners to the JV wants to set up another JV or wholly owned subsidiary in the same field

Joint Ventures …… Cont’d

The Following are exempted from the restriction of entering into JV in the same field:

1) Information Technology sector2) Investments made by

multinational financial institutions3) mining sector for the same

area/mineral

Joint Ventures …… Cont’d

Prior government approval not required in certain cases:

- Investment to be made by venture capital funds is registered with SEBI

- Existing JV investment is less than 3%

- Existing venture is defunct or sick

Remittances

Determination of sale Price of Shares- Listed Company- Unlisted Company/Shares Thinly Traded

on the Stock ExchangeRemittance of Sale Proceeds:

i. NOC from Income Tax Authority requiredii. If the security has not been sold on a

recognized stock exchange then prior approval of the RBI in form TS 1 has been obtained

Regulatory Framework

Some applicable Indian Laws- Companies Act - Competition Act- SEZ Act- Income Tax Act- Indian Stamp Act- SEBI Takeover

Code- FEMA- FDI Policy

Competition Law, 2002

Salient Features: Anti-competitive agreements; Prohibition of abuse of dominant

position Regulation of Combinations

including mergers Unfair Trade Practices

India : Merger Law

Monopolies and Restrictive Trade Practices Act, 1969 Inadequate Obsolete

Still Prevailing

New Merger Law

Competition Act, 2002Combination The Indian law uses the word combinations to cover acquisition of control, shares, voting rights and assets, and mergers and amalgamations

Relevant Sections: 5-6 & 29-32

Areas of Concern

Applicable threshold Limits Based on: Value of Assets Turnover

Notice Requirement Mandatory Within 30 days of

Approval of proposal by BOD Execution of agreement/ document

Competition proposals

Mandatory waiting Period for Approval 210 Days

Extra Territorial Jurisdiction of CCI CCI has power to inquire about

combinations taking place outside India

Intent of National Security Legislations

Right to Intervene in case of perceived threat to National Security

Discretionary powers to prevent certain foreign companies from doing business in the country

Foreign Investments & National Security Legislations

United States- Foreign Investment & National Security Act, 2007 (Exon-Florio Provision)

China- Anti Monopoly Law

European Union- Members are free to regulate International Mergers (Articles 81-85 EC Treaty regulates Competition)

National Security … Cont’d.

United Kingdom- Enterprises Act 2002

India- National Security Exception Bill yet to be passed by the Parliament

FDI PolicySno. Sector Sectoral Cap

1. Manufacturing (Exceptions- Defense products, Products reserved for Small Scale Sector

100%

2. Coal Mining 100%

3. Electricity (Generation, Transmission, Distribution and Power Trading)

100%

4. Roads & Highways 100%

5. Airport Projects (Greenfield) 100%

6. Telecom-Basic & Cellular, Unified Access ServicesISP without Gateway Infrastructure Provider providing Dark fibre, right of way, duct space, tower etc.

74%

100%

FDI Policy

7. Hotels & Tourism 100%

8. Shipping & Ports 100%

9. Industrial Parks 100%

10. Hospitals 100%

11. SEZ’S 100%

FDI Policy – Prohibited Sectors

Atomic Energy

Lottery Business

Betting & Gambling

Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and Cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea plantations)

Special Economic Zones “Fuelling India’s Economic Growth”

FDI- 100% permitted under automatic route

Regulated by the SEZ Act 2005

Objectives

Investment Promotion

Engine for economic growth

Development of infrastructure

SEZ (Objectives)… Cont’d.

Promotion of Export of Goods & Services

Generation of Employment oppurtunities

minimum possible regulations. attractive fiscal package

both at the Centre and the State

SEZ ProceduresEstablishment

- By Central/State or any other entity

Requirements- Minimum Area Requirements for different class of

SEZ’s- SEZ divided into Processing area (for units) and

Non Processing Area (for supporting infrastructure)

Single Window Clearance available

SEZ – Current Statistics

496 SEZ’s Approved after SEZ Act 2005

- 282 EH/IT/ITES SEZ’s- 9 Multi Product SEZ’s- 13 Pharmaceuticals and chemical SEZ’s- 4 Bio Tech SEZ’s- 8 Textile/Apparel/Wool SEZ’s

136 In principle approvals

207 SEZ’s have been notified

Incentives: SEZ Developers

Customs/Excise exemptions

Income Tax exemption - On export Income for 10 years out of 15

Exemption from Dividend Distribution Tax

Exemption from Sales Tax/Service Tax

Incentives: SEZ Units

Duty free import/domestic procurement of goods

Income Tax exemption

Exemption from minimum alternate tax

External commercial borrowing by SEZ units up to US $ 500 million in a year without any maturity restriction through recognized banking channels.

Exemption from Central Sales Tax/VAT/State Acts & Service Tax

Single window clearance.

Real Estate“Developing India’s Tomorrow”

Overview

- Amongst the largest employers only after agriculture

- US $12 Billion Industry- 30% growth rate- Housing Sector contributes 5% of

GDP

Real Estate- Growth Potential

Requirements of housing, commercial and industrial infrastructure bound to rise367 Million Sq. Ft. of additional office space needed by 2012-13 ( Estimated by Ernst & young)Indian Ministry of Tourism forecasted requirements of 2.9 and 6.6 Million hotel rooms to meet the tourism and business by 2010 and 2020.Fast growing Medical tourism will become US$2 billion industry by 2012 Asian Development Bank estimates requirements of 10 million units by 2030 and will require huge investment in Health Services sector

Real Estate- FDI Policy

FDI not permitted in Business of buying & selling property

FDI up to 100% under the automatic route in townships, housing, built-up infrastructure and construction-development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure) subject to:

- Minimum Area requirements

- Minimum Capitalization requirement - Divestment clause i.e. No repatriation before 3 years

Real Estate Developers- Incentives

Tax exemptions up to 100% on profits derived by an undertaking

- Developing/operating/maintaining Industrial Parks

- Developing & Building Housing Projects- Developing/operating/maintaining

SEZ’s- Constructing Hotels & Hospitals in Tier

2 cities

Real Estate- Foreign Players in India

Investor Country

Emmar Group U.A.E

Kontur Bintang/ Westport

Malaysia

Singapore Housing Board

Singapore

Keppel Land Singapore

Salim Group Indonesia

Lee Kim Tah Holdings

Singapore

Retail Sector

Overview- Amongst the largest employers in

the country at par with Real Estate- Amongst the highest outlet density

in the world with around 12 mn Outlets

- Largely unorganized; Large no. of local players;

- Scope of Market consolidation

FDI in Retail

FDI not allowed in Multi-Brand Retail

100% permitted through the Automatic route in Wholesale Cash & Carry operations

51% in Single Brand Retailing- Requires FIPB Approval- Product to be single brand only- Should be sold under same Brand Internationally- Covers only Products Branded during Manufacturing

Retail Sector -Foreign Players

Player Retail Activity

Wal Mart Whole Sale Cash & Carry Operations

Marks & Spencer Single Brand Retail

Nike Single Brand Retail

Christian Dior Single Brand Retail

Jimmy Choo Single Brand Retail

French Connection Single Brand Retail

Lee Cooper Single Brand Retail

Areas of Concern

Transfer Pricing Issues- Method of escaping Tax Liability- Tax Avoidance hence Illegal

RBI approval required- Source of Funds

National Security issues

Judicial System

Robust, well-developed legal and administrative system

Derived from the Common Law System

Commercial Disputes:- Arbitration Preferred mode of settlement - International Commercial Arbitration Possible

Strong Intellectual Property laws

Investing in India

It is advisable to have a thorough Due Diligence done before investing

Non-Compete clause- It is advisable to have a clearly worded non-

compete clause if entering into a JV

Dispute Resolution clause- Must be clearly worded in terms of Governing

Law, Jurisdiction, Mode of Dispute Resolution

Investing in India…cont’d.

Intellectual Property Clause- To protect IP rights from

Infringement

THANK YOUShould you have any questions on issues reported here or on other areas of law, you may contact Paras Kuhad and Associates at the following co-ordinates:

Madhurendra Nath JhaParas Kuhad and Associates, AdvocatesTel: +91 (0) 11 46562525, 46562727 Fax: +91 (0) 11 46562000Mob: +91(0)-9811319922Email : mnjha@paraskuhad.com, mnjha@hotmail.com

Delhi Mumbai Kolkata Chennai Jaipur Pune Jodhpur

Disclaimer

The contents of this document are intended for informational purposes only and are not in the nature of a legal opinion or advice. They may not encompass all possible regulations and circumstances applicable to the subject matter and readers are encouraged to seek

legal counsel prior to acting upon any of the information provided herein.

This Note is the exclusive copyright of Paras Kuhad and Associates, Advocates and may not be circulated,

reproduced or otherwise used by the intended recipient without the prior permission of its originator.© Paras Kuhad and Associates, Advocates

2008