Law Environment of India and Investment Practice
1. Overview of India
India is one of the four ancient civilizations and the largest country in the South Asian subcontinent, with a land area of 2.98 million square kilometers (excluding the India-occupied area of the Sino-Indian border and the actual control area of India in Kashmir), ranking seventh in the world. India borders China, Nepal, and Bhutan to the northeast, Myanmar to the east, Sri Lanka across the sea to the southeast, and Pakistan to the northwest.
India implements a federal system and claims to have 29 states and 7 centrally administered territories (including the Indian-occupied areas on the border between China and India-the so-called “Arunachal Pradesh” and Kashmir). The responsibilities of the Indian President are mostly ceremonial.
The Council of Ministers (Cabinet) headed by the Prime Minister is the highest administrative organ. The main parties in India are the Indian National Congress Party (“National Congress”), the Bharatiya Janata Party and the Communist Party of India. In May 2014, the opposition People’s Party won the general election by a landslide.
The party’s prime minister candidate Narendra Modi has been in office since then.
2. The bilateral trade agreement signed between India and China
In 1994, China and India signed the “Double Taxation Avoidance Agreement and the Memorandum of Understanding on Cooperation between Banks of the Two Countries”;
In 2006, China and India signed the “Bilateral Investment Protection Agreement”;
In 2014, China and India signed the Five-Year Development Plan for Economic Cooperation.
3. The status quo and trend of cooperation with Chinese enterprises under the “Belt and Road Initiative”
Both India and China are in a period of rapid economic development. In recent years, many Chinese companies have invested in India.
In 2015, notable deals included Alibaba’s investment in e-commerce companies Snapdeal and Paytm, and Didi Chuxing’s investment in taxi service provider Ola.
In 2016, the momentum of Chinese investment in India was even stronger. According to public reports, Chinese companies invested US$2.3 billion in Indian companies in 2016. This is significantly higher than China’s total investment in India over the past 15 years.
Notable deals include Shanghai Fosun Pharmaceutical (Group) Co., Ltd.’s acquisition of Indian injection pharmaceutical company Gland Pharma, and Beijing Meiteno Communication Technology Co., Ltd.’s investment in India’s automatic advertising company Media.net.
India’s legal and economic system reforms have been fruitful, its geographical location is close to China, and its labor costs are low. These factors have made economic exchanges between China and India more frequent.
At the same time, China and India are stepping up the formulation of bilateral agreements in various fields, which will further strengthen the investment relationship between the two countries, especially in the fields of infrastructure construction, communications and manufacturing.
Therefore, the cooperation between the two countries will continue to deepen, providing inexhaustible impetus for China’s investment in the Indian market.
4. Which is the Investment authority in India?
The following three institutions are the competent authorities for investment in India:
(1) Reserve Bank of India
The Reserve Bank of India is the central bank of India, responsible for overseeing all transactions involving foreign exchange, including foreign investment. The Reserve Bank of India often formulates regulations on foreign exchange transactions and is responsible for the supervision of foreign investment and India’s overseas investment.
Foreign exchange transactions are broadly divided into automatically approved transactions and transactions subject to approval.
Depending on the nature of the transaction, transactions that require approval generally must be approved by the Reserve Bank of India or the Foreign Investment Promotion Agency. In addition, certain types of foreign direct investment need to be approved by other government agencies (such as the Ministry of National Defense, the Ministry of Foreign Affairs, and the Information Technology and Broadcasting Bureau).
(2) Foreign Investment Promotion Bureau
The Foreign Investment Promotion Agency is an inter-ministerial agency that handles foreign direct investment and is responsible for reviewing foreign investment related matters. The Foreign Investment Promotion Bureau provides approval channels for foreign direct investment subject to approval. The Foreign Investment Promotion Agency has played a key role in all transactions subject to approval under the foreign exchange law.
(3) The Securities and Exchange Commission of India
The Securities and Exchange Commission of India is the regulator of the Indian securities market (similar to the US Securities and Exchange Commission), which regulates all transactions involving listed (company) securities, fund-raising instruments, etc.
The main responsibility of the Securities and Exchange Commission of India is to protect the rights of investors and maintain the healthy development of the Indian securities market.
5. Investment industry regulations
The following are some of the key laws governing and regulating investment in India:
(1) Foreign exchange law
The Foreign Exchange Control Law (1999) and related regulations promulgated by the Reserve Bank of India, and the Foreign Direct Investment Policy (collectively referred to as the “Foreign Exchange Law”) promulgated by the Ministry of Industry and Commerce of India (collectively referred to as the “Foreign Exchange Law”) to deal with foreign investment in India Regulations.
The promulgation of the Foreign Exchange Control Law (1999) resulted in the abolition of the Foreign Exchange Control Law (1973).
The primary objective of the “Foreign Exchange Control Law” (1999) is to integrate and amend the laws governing foreign investment in India, while facilitating foreign trade and payment, and improving the development of the Indian foreign exchange market.
Foreign exchange law largely regulates foreign exchange management, exports of goods and services, foreign exchange sales and repatriation, permits and exemptions for investment methods, upper limits for foreign direct investment, permitted and prohibited investment industries, foreign direct investment declaration procedures, and penalties for illegal acts.
In particular, the “Foreign Direct Investment Policy” issued by the ministerial level stipulates the time limit for the foreign investment promotion bureau to approve foreign direct investment applications. This point will be elaborated in the “Foreign Exchange Management” section of the book.
(2) Securities Law
The promulgation of the Securities and Exchange Commission of India Act (1992) gave the Securities and Exchange Commission the following statutory powers:
i. Protect the interests of securities investors
ii. Promote the development of the securities market
iii. Regulate the securities market. In accordance with the powers conferred by the law, the Securities and Exchange Commission of India has issued various regulations and guidelines (the “Securities Law”) to regulate securities investment in India.
The securities law is complicated in content, covering investment methods, acquisition of listed securities, supervision of insider trading, the code of conduct of intermediaries, the registration obligations of certain fund managers, and the protection of investors.
The above content will be elaborated in the “Securities” part of the book.
(3) Tax law
India’s Income Tax Law (1961) is the core law in India’s tax law system. As the core law, the Income Tax Law provides a taxation framework for all income earned in India.
At the same time, the “Income Tax Law” determines the subject of taxation, the types of tax deductions, the amount of deductions for available allowances, and the legal liability for violations of the law.
The levying conditions and preferential policies of personal income tax play a key role in the structure of investment and acquisition. Some key tax points related to investment in India will be elaborated in the section “(8) Taxation” below.
(4) Company law
The “Company Law” (2013) provides comprehensive regulations on company behavior, such as company establishment, governance, and dissolution.
The law only came into effect recently and has caused significant changes to the legal system applicable to Indian companies.
Previously, Indian companies applied the “Company Law” (1956). But at present, certain provisions in the new law have yet to be announced. In this case, the relevant provisions in the old law continue to apply.
It should be noted that the previous foreign exchange law allowed (automatically) foreign direct investment to be invested only in the form of companies, and not in other forms (such as limited liability partnerships).
At the same time, considering the flexibility and operability of investment, especially the limited liability and separable independent legal entities, most Indian companies that receive investment are also in the form of companies rather than other forms.
Nowadays, limited liability partnerships can be used as an organizational form that is automatically permitted to receive foreign direct investment without approval.
Therefore, the Limited Liability Partnership Law (2008) has also become an important law regulating foreign investment in Indian companies. .
6. Investment method
1. Establishment of Indian company
According to Indian law, foreign investors can establish a private limited company in India as a sole proprietorship or joint venture. Such a company is deemed to be a local company in India.
It should be noted that the establishment of a company in India should meet the requirements of the number of shareholders, directors and qualifications stipulated in the company law, and apply for registration with the local company registration authority within 30 days after completing the approval.
2. Foreign mergers and acquisitions
Investment can be realized through foreign mergers and acquisitions of local Indian companies. Local companies must meet the requirements for foreign shareholding ratios in their industries and obtain approval from the Reserve Bank of India.
3. Acquisition of listed companies
On the premise of meeting relevant regulatory requirements, foreign companies can acquire local listed companies through the Indian securities market.
4. PPP/BOT model
The Indian government encourages foreign investment to carry out infrastructure construction through the PPP/BOT model to solve investment shortages, reduce project risks, and overcome obstacles such as corruption and land acquisition difficulties.
7. Market access conditions and review
The Indian market is full of unlimited business opportunities. In the past ten years, India has been implementing extensive market liberalization and economic system reforms.
These measures have enabled India to open its doors to foreign investment and create development opportunities for itself. India’s tax system is still a continuing concern for foreign investors.
India’s tax system, preferential policies, and reductions and exemptions lack clear regulations, and legal liabilities are retrospective. Therefore, foreign investors have been criticized.
Although the final content of the terms is still unclear, the government plans to implement the General Anti-Avoidance Rules on April 1, 2017.
The government is implementing various measures to solve these bottlenecks and has announced various tax liberalization proposals. The relevant content will be elaborated in the “taxation” part of the book.
Although the commercial form of investment in India has been described in detail in the “Investment Methods” above, foreign companies can still conduct business in India through non-investment entities.
Companies not registered in India, including companies or other individual alliances, can set up branches, liaison offices or project companies in India based on the specific conditions of their business before establishing an independent entity enterprise.
In the following cases, a natural person (legal person) who is not resident (registered) in India needs to go through the pre-approval of the Reserve Bank of India when applying to establish a branch, liaison office or project company in India:
- The applicant is a resident of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, China, or a legal person registered in or established in the aforementioned countries or regions, applying for establishment in Jammu and Kashmir, the Northeast Region or the Andaman-Nicobar Islands Branch office, liaison office or project company.
- The applicant’s main business is national defense, communications, private security, information and broadcasting. If the contract is awarded by the Ministry of National Defense, the service (team) headquarters, or the National Defense Public Service Department, or the aforementioned departments are the counterparties of the contract, there is no need to obtain separate government approval when opening a project company in the defense field. Similarly, the above investment behavior does not require separate approval from the Reserve Bank of India.
- The applicant is a non-governmental organization or a non-profit organization, institution, or department of a foreign government.
Under the above-mentioned circumstances, applications for the establishment of branches, liaison offices or project companies will be approved by the Reserve Bank of India after consultation with the government.
When establishing and operating branches, liaison offices or project companies, foreign entities must abide by the foreign exchange laws and other relevant regulations formulated by the Reserve Bank of India.
8. Investment incentives and protection
1. Preferential policy framework
In order to further attract foreign investment, the Indian government has announced many promotion measures and preferential policies for specific industries. These measures are outlined as follows:
· Simplify the registration and approval conditions for conducting business;
· Relax industry restrictions and attract foreign investment;
· Provide preferential policies for tax reduction or exemption or issue tax exemption declarations to the department at least for a certain period of time.
Other preferential tax policies will be further elaborated below.
2. Support for specific industries and regions
The government has implemented the following support measures for specific industries:
(1) “Made in India” investment policy in the manufacturing sector
Foreign direct investment in the Indian manufacturing industry can be licensed without approval. In addition, according to foreign exchange laws and foreign direct investment rules, manufacturers can sell products produced in India either wholesale or retail, including through e-commerce (e-commerce does not require government approval).
This also coincides with the “Made in India” investment policy formulated by the Indian government to promote the country’s economic development.
(2) Indian Entrepreneurship Policy
Driven by the “Indian Entrepreneurship” policy, the Indian government plans to relax various compliance standards. Start-ups can issue 50% of the paid-in capital within 5 years from the date of their incorporation.
Non-listed start-ups can hold more than 10% of the company’s issued shares from the company’s core employees (which must be the company’s promoters or one of the company’s promoters), directly or indirectly (through their relatives or any other corporate entity) of directors implement an equity incentive policy.
In addition, the Reserve Bank of India allows start-ups that have established subsidiaries overseas to open foreign exchange accounts with foreign banks, and start-ups and their overseas subsidiaries can obtain foreign exchange loans through import and export proceeds and accounts receivable.
The balance obtained from exports from India under the foreign exchange account shall be remitted back to India within the prescribed time limit. In addition, the Indian government also provides the following preferential tax policies for start-ups:
i. The capital gains obtained from investing in government-approved funds to provide capital to start-ups are exempted from income tax.
ii. Within 3 years of its initial establishment, the Dividend start-ups are exempted from income tax.
iii. The start-ups are exempted from tax on investments above their fair value.
(3) Air transportation service industry
India automatically permits foreign countries to directly invest in 49% ownership of scheduled air transportation services or domestic scheduled passenger air service industry, and invest in 100% ownership of air transportation services in regional routes.
100% of the investment targets under the automatic licensing path can only be non-scheduled air transport services and helicopter services. However, a few projects should be approved by the Civil Aviation Commission in advance, such as seaplane services.
(4) Construction and development-towns, housing, combined infrastructure
the Indian government automatically permits foreign countries to make 100% investment in the following construction and development projects, including urban construction, residential or Commercial residential construction, roads or bridges, hotels, resorts, hospitals, educational institutions, entertainment facilities, urban or regional infrastructure.
(5) E-commerce
The Indian government automatically allows foreign countries to make 100% investment in B2B e-commerce companies.
(6) Railway infrastructure
Foreign investment can participate in the construction of Indian suburban corridor projects, such as high-speed rail projects, freight dedicated lines, etc., in a PPP (Public Private Partnership) model.
However, these investors must comply with the industry guidelines set by the Ministry of Railways and other conditions stipulated in the Foreign Exchange Law.
(7) National defense
India has expanded its opening up and actively introduced foreign direct investment in the defense sector. As we all know, the Indian government allows 100% direct foreign investment in the defense sector.
Before June 2016, foreign investment in defense companies under the automatic licensing path could only be limited to 49%.
In addition, more than 49% of foreign direct investment requires permission from the Security Council of the Cabinet of Ministers of India, which is limited to the introduction of modern and latest technology and is subject to case-by-case review.
Now if the investment can expose India to modern technology, the Indian government allows more than 49% of foreign investment to be implemented after government approval.
The Indian government also relaxed foreign investment restrictions on the small arms and ammunition manufacturing industry stipulated in the Armed Law (1959).
At the same time, in order to straighten out the current taxation and management system and relax financing restrictions, many related policies are being drafted and will be announced in the near future.
9. Special economic zone
In India, special economic zones are governed by the Special Economic Zone Act (2005). Special economic zones in India can be established individually or jointly by the central government, the federal government or any individual for the purpose of producing goods, providing services, engaging in free trade or duty-free storage.
According to the “Income Tax Law”, developers of special economic zones can obtain many fiscal and regulatory incentives. The following are some of the tax incentives:
(1) Tax exemption for products imported for the development, operation and maintenance of special economic zones and products purchased from China.
(2) Exemption of tariffs, consumption tax, central business tax and service tax on products purchased across states.
(3) In accordance with Section 10AA of the Income Tax Law, the special economic zone units engaged in the manufacture, production or provision of services after April 1, 2006 and before April 1, 2021 will be exempted from income tax.
(4) Tax reduction and exemption for profits and gains obtained by units in the special economic zone that started operations from after 2005 to April 1, 2017.
(5) There are no established restrictions on special economic zones that can borrow up to US$500 million in overseas commercial loans through certified banking channels within one year.
(6) Exempt from alternative minimum tax and dividend distribution tax.
(7) Exemption from local business tax and other types of local taxes.
In the 2016 Budget, the Minister of Finance proposed a final plan to gradually abolish the tax reduction and exemption policy for special economic zones. Therefore, special economic zone units that started operations before April 1, 2021 can only enjoy the tax reduction policies on profits and income under Section 10-AA of the Income Tax Law.
Secondly, the developers of the special economic zone can only enjoy the “tax reduction on profits” under Section 80-IAB of the Income Tax Law only if they start development and construction before April 1, 2017.
The aforementioned amendments to Section 10AA and Section 80-IAB of the Act will be implemented on April 1, 2017. The “Financial Law” (2016) was announced on May 14, 2016, and the relevant proposals have been passed and the law has been implemented.
The gradual abolition of preferential tax policies for special economic zones heralds the end of the preferential income tax for special economic zones.
Conclusion
It can be seen that the government is trying to forcibly ban the accumulation of land in the name of establishing a special economic zone, and is trying to prevent the practice of not carrying out actual business in the special economic zone and enjoying tax relief under the Income Tax Law.
Author’s Bio
Name: Ajay Rastogi
Educational Qualification: LLB
Profession: Advocate / Lawyer
Work Experience: 20 Years of Legal Practice
Profile Link: https://lawjc.com/members/advajayrastogi/
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