India A new Business Partner - Blackbitherfurth.t3.blackbit.de/uploads/media/HP_Extra_2008_10_India.pdf · India A new Business Partner Im October 2008 CASTON LAW & BUSINESS INFORMATION

India A new Business Partner

Im October 2008

CASTON LAW & BUSINESS INFORMATION

HERFURTH & PARTNER RECHT INTERNATIONAL

India October 2008 Page 2 of 12

HERFURTH & PARTNER INTERNATIONAL LAW.

Announcement of the Alliuris partnership of the firm Seth Dua, New Delhi in the presence of Niedersachsen State Ministerpresident Christian Wulff, with Atul Dua (right), Ulrich Herfurth and Dr. Jona Aravind Dohrmann (Herfurth Partners) German Embassy in New Delhi , October 2008

Herfurth & partners goes India

Herfurth & Partner accompanies companies in their interests in India with a well-positioned team: Adeline

Maler Berger, Solicitor (Singapore, England and Wales) at our Hanover Office, Dr Jona Aravind Dohrmann

(currently in Nagpur) and Oliver Saha in our Munich office.

Herfurth & Partners works together with Seth Dua, New Delhi, one of the leading medium sized law firms

in India for several years already. Seth Dua has become a member of our Alliuris Group in October 2008.

The firm is specialised in business law and has significant experience in infrastructure projects in India.

Seth Dua was ranked as one of the leading Indian firms in the telecom and media sector (Legal 500).



India as a business Partner

India has become one of the top foreign investments destinations in the world today. amounting to some

5,135 Billion USD in 2005-2006. This represents an increase of 60% over the corresponding figure last

year. Keeping track of past trends, a further increase of 50% is expected. Economic Reforms initiated in

1991 have brought dramatic changes in international investment in India.

Since then, the US Department of Commerce has identified India as one of the world’s top the “big emerg-

ing markets”. India has a vibrant capital market and a highly developed stock market with more than 9000

listed companies. The developed Indian banking system allows for market-determined interest rates and is

able to price credit. India also has an active domestic credit market with lively corporate and government

bond markets and interest rate & credit derivative markets.

The drivers of economic activity in India are private enterprises and not the state. While no company of any

size aspiring to be a global player can for long ignore this country, which is expected to become one of the

top three emerging economies, success in India will depend on the correct estimation of the country’s

potential. An underestimation of its complexity or and overestimation of its possibilities can lead to failure.

Entering India’s marketplace requires a well-designed plan back up by serious thought and careful re-

search. Difficulties in understanding the Indian culture, its administration system and its constantly chang-

ing legal rules are not uncommon. Nevertheless, those who take the time and look into India as an oppor-

tunity for long-term growth and not short term profit are likely to find the trip well worth the effort.

International Business Convention of the State of Niedersachsen at the Hannover Industrial Fair Aussenwirtschaftstag Niedersachsen, Hanover, April 2008



Herfurth & Partner India Conference with Ms. Neeta Bhushan, Economy & Commerce Counsel; Indian Embassy in Germany Herfurth & Partners, Hanover, June 2008

The new Alliuris Partner firm Seth Dua, New Delhi, Atul Dua (mid) with Ulrich Herfurth and Dr. Jona Aravind Dohrmann (Herfurth & Partners), Offices of Seth Dua, October 2008 Chamber of Industry & Commerce India Workshop with Herfurth & Partner, Hanover, September 2008

Hannover Trade Fair Hanover welcomes India Hannoverimpuls, investment promotion organisation of the Hannover Region Hannover Industrial Fair, April 2007



Dr. Jona Aravind Dohrmann Rechtsanwalt / Attorney (D) Herfurth & Partners Hanover (Nagpur)

Maler Berger, Advocate (SG) and Solicitor (UK) Herfurth & Partners, Hanover

Oliver Saha Rechtsanwalt / Attorney (D) Herfurth & Partners, Munich

Herfurth & Partner’s background

Ulrich Herfurth founded the law firm in 1990 in Hanover. Today, the firm has 20 lawyers in Hanover and 4

Lawyers in Munich and has a leading position in the state Niedersachsen. Mr Herfurth also heads the

board of the ASU Association for Self-employed Entrepreneurs in Lower Saxony. Consequently, Herfurth &

Partner has aligned itself in the direction of an international practice. The practice has inter alia 16 lawyers

with foreign backgrounds and the lawyers speak a total of 11 different languages. The firm is a founding

member and Mr. Herfurth is the president of the ALLIURIS GROUP Alliance of International Business

Lawyers with 20 offices and 200 lawyers in Europe. The firm maintains good relations with Indian clients

and supports German clients with interest in India for many years.

The India Team

Dr. Jona Aravind Dohrmann is a German attorney (Rechtsanwalt) and of half Indian origin; he works as off-

shore counsel and is currently based in Nagpur. Mr Dohrmann is our link into India and provides us with

quick and easy access to practical legal questions relating to India.

Adeline-Maler Berger is an advocate and solicitor called to the bar in Singapore, England and Wales. Ms

Berger has 5 years of working experience in Singapore and has advised in various international invest-

ment projects involving India. In light of the fact that Indian laws are based on English laws and the com-

mon law legal system, Ms Berger is fully equipped to deal with Indian laws and to interpret the same. Ms

Berger is a native English speaker and is fluent in Tamil. Based at our Hannover office, she advises our

German clients on their Indian-related legal interests.

Oliver Saha is a German attorney (Rechtsanwalt) and specialises in corporate structuring in the areas of

commercial law and tax law. The tax lawyer has gathered experience from working at an international

auditing company, a large law firm as well as a law firm specialising in company law. Saha, whose family

roots are Indian, is our newest addition to our Indian team.

Atul Dua, Advocate and Accountant, Partner Seth Dua,New Delhi

Investment Regulations I. Foreign Direct Investment

The Indian Foreign Direct Investment (“FDI”) policy has become more and more in-

vestment-friendly in the past years. The Department of Industrial Policy and Promotion

published the current foreign direct investment policy in April 2006. This policy is sup-

plemented by means of press notes, which are issued on a regular basis. 3 Press Notes

were published in 2007 while 6 Press Notes have already been published in 2008.

The approach taken by the FDI policy is that FDI would be permitted up to 100% on the

automatic route, unless specific rules are expressly provided for. In general, invest-

ments in India can be separated into the following groups:

� Investments which are prohibited for FDI;

� Sectors requiring prior governmental approval for FDI;

� Sectors in which FDI is allowed with limitations

� Sectors in which FDI is allowed up to 100% on the automatic route.

1. Investments Prohibited for FDI

At the moment, there are four sectors prohibited for FDI, namely

� Retail Trading (except Single Brand Product retailing)

� Atomic Energy

� Lottery business

� Gambling and Betting

The retail trade of “Single Brand Products” is permitted pursuant to Press Note No. 3

(2006 Series). FDI in such retail trade is allowed up to 51% with prior Governmental ap-

proval. Retail trade is deemed to be retail of “Single Brand Products” inter alia when the

relevant products are soled under the same brand internationally and when the product

is branded during manufacture. The Indian government has clarified that such trade has

been allowed for the purposes of attracting investments in production and marketing,

improving the availability of such goods for the Indian consumer, encouraging increased

sourcing of goods in India and enhancing the competitiveness of Indian enterprises

through access to global designs, technologies and management practices.

2. Sectors requiring prior governmental approval for FDI

There are two main sectors, in which prior governmental approval is required. These

are :

� Cases, where the foreign investor has an existing joint venture or



technology transfer/trademark agreement in the same or allied field in India. It is

to be noted that Press Note 1 (2005 Series), which governs this regulation, pro-

vides for certain exceptions for the need to require prior approval in such cases.

� Cases, in which more than 24% foreign equity is proposed to be inducted

for the manufacture of items reserved for the Small Scale sector.

Applications for FDI proposals are to be sent to the Department of Economic Affairs in

New Dehli and must be made in the prescribed proforma FC-IL form or on plain paper

with a standard checklist furnished by the Department of Industrial Policy and Promo-

tion.

3. Sectors in which FDI is allowed with limitations

Automatic investment is only allowed in certain sectors subject specific limitations. Limi-

tations can relate to the maximum percentage of FDI allowed, whether prior governmen-

tal approval is allowed and/or other guidelines set out by specific governmental depart-

ments. These limitations are contained both in the FDI Policy as well as its correspond-

ing Press Notes. Some examples of the types of limitations are contained hereinbelow :

� In most broadcasting sectors, foreign investment is only allowed

up to 49%. Investment is also subject to prior governmental approval and to ap-

plicable guidelines issued by the Ministry of Information and Broadcasting.

� Investment in certain telecommunication branches is only allowed

up to 74%. Investment can be made via the automatic route up to 49%. Any in-

vestment exceeding 49% requires prior governmental approval. Many sectors

are made subject to other limitations, such as licensing and security require-

ments notified by the Department of Telecommunications.

4. Sectors in which FDI is allowed up to 100% on the automatic route

FDI under the automatic route does not require any form of prior approval. Investors are

only required to

� Notify the regional office of the Reserve Bank of India within 30 days

of receipt of inward remittances; and

� File documentation with regional Office of Reserve Bank of India

within 30 days of issue of shares to foreign investor.

II. Portfolio Investment



Indian stocks are in great demand by overseas investors. Between March 2001 and

March 2007, the market value of shares owned by Foreign Institutional Investors went

up from $9.7 billion to $124 billion. The investment by foreigners in India’s primary and

secondary capital market is governed by the Portfolio Investment Scheme and is moni-

tored by the Reserve Bank of India.

Foreign investment in Indian securities, such as shares, debentures, warrants, units of

mutual funds and derivative instruments, can usually only be made through Foreign In-

stitutional Investors (FIIs). A FII is defined as an institution established or incorporated

outside India for making investment in Indian securities and also includes a sub-account

of an FII. The Securities and Exchange Board of India (SEBI) has established various

re-requisites, which a foreigner has to fulfil before registration as an FII.

Investment by FIIs is regulated by the SEBI (FII) Regulations 1995 and Regulation 5(2)

of the Foreign Exchange Management Act Notification No. 2 dated 3 May 2000. Pursu-

ant to these rules, FIIs are entitled to buy and sell securities on stock exchanges. In-

vestment in listed and unlisted securities outside the stock exchange can be made

when the Reserve Bank of India approves of the relevant price. No individual FII or sub-

account is allowed to acquire more than 10% of the paid up capital of an Indian com-

pany. All FIIs and sub-accounts taken together are only allowed to invest up to 24% of

the capital of an Indian company and up to 20% of the paid up capital of public sector

banks.



Corporate Forms for Foreign Investors

I. Introduction

There are several entry options for a foreign investor. In general, there are two main

means of entry into the Indian market:

� Entry as an incorporated entity

� Entry as a foreign company

All companies incorporated in India are deemed to be Indian Companies and therefore

subject to all Indian laws, such are the Indian Companies act as well as Income Tax

Act. The Indian Companies Act 1956 is the key legislation governing companies in India

and is largely similar to its counterpart in the United Kingdom. The Companies Act in In-

dia provides for three types of companies, which are based on the liability of its mem-

bers. These three forms are :

� A company limited by shares

� A company limited by guarantee

� A company with unlimited liability.

The choice as to whether to enter into a joint venture with a Indian partner or to incorpo-

rate a wholly owned subsidiary is a choice, which each foreign investor has to make on

its own. While there are several benefits in entering into a joint venture (such as the in-

jection of market know-how and established contacts in India), a wholly owned subsidi-

ary guarantees a foreign investor full control over his investment.

Upon receiving approval from the reserve bank of India, foreign companies can set up

the following offices:

� A branch office

� A liaison office

� A project office.

These offices would be deemed to be “resident in India”, as per the Foreign Exchange

Management Act 1999. The registration of such offices requires the foreign parent com-

pany to submit various documents to the registrar of companies including a certified

copy of its memorandum or articles of association as well as a list and details of the di-

rectors and secretary of the foreign company. A foreign company would be obliged to

submit an annual balance sheet and profit and accounts for the place of business in In-

dia in the same manner as if the foreign company were a company incorporated in In-

dia. The Indian office would also be obliged to maintain books of accounts with respect

to monies received, sales made and liabilities arising in the course of business in India.

All income made by the foreign companies would be taxed at the rates applicable to

foreign companies.

II. Company Limited by Shares : Private Company



A company limited by shares is a company in which the liability of a shareholder is lim-

ited to any amount outstanding on the nominal value of his shares. A shareholder is not

obliged to pay any balance due on his shares upon winding up. A company limited by

shares can be either a private or a public company.

The most significant benefit available to a private company is the ability to restrict the

transfer of shares. The private limited company is the most popular corporate form for

foreign investors. The key characteristics of a private limited company are as follows :

� Minimum Paid up capital of Rs 0,1 Million. For companies having the

word “India” in their company names, the minimum authorised

capital is Rs 0,5 million;

� Restricted transfer of shares;

� Minimum of 2 directors and 2 shareholders;

� Limits members to 50, not including persons in employment in

company or persons who, during their employment with the

company became members of the company;

� Prohibits public invitations to subscribe in shares.

The incorporation of a private limited company is a three-step process, namely

� Verification and confirmation of the company name

� Execution and stamping of the memorandum and articles of association

� Registration of the company.

The application for name approval is required to be made in Form 1A setting out six

names in order of preference. In the event that it is intended that the company to be in-

corporated holds the same trade name as the foreign parent, the foreign parent would

inter alia have to execute a resolution issuing its no objection to the usage of the

brand/trade name. Copies of the trademark or brand would also have to be submitted.

The Registry of Companies would issue the approval of the company name approxi-

mately 3-4 days from the date of the filing of the application.

The memorandum of association sets out the powers of the company to execute speci-

fied acts for specified purposes. The memorandum of association must inter alia set out

the name of the company, the registered office, the objects or purposes of the company,

the liability of the shareholders and the authorised share capital. The articles of associa-

tion sets out inter alia the voting rights of shareholders, directors, meetings, powers of

management and quorum requirements. The memorandum and articles of association

must be stamped pursuant to the 1899 India Stamps Act. Such stamping will be

charged at the applicable rates.

For the registration of the company, all relevant documentation and applicable forms

must be filed at the register of companies within 6 months of the confirmation of the

availability of the company name. The registration fees payable is variable and depends



on the nominal share capital of the company and is charged at the minimum amount of

Rs 4.000,00.

III. Company Limited by Shares : Public Company

The features of a public company are as follows:

� The company name must have the suffix “limited”

� Minimum paid up capital of Rs 500.000,00

� Must have at least 7 shareholders.

� Must have at least 3 directors.

� Must hold statutory meetings and obtain governmental

approval for the appointment of management.

The procedure for the incorporation of a public company is similar to that of a private

company, except that either a prospectus or a statement in lieu of prospectus must be

filed before commencing business. Directors are obliged to execute an undertaking con-

firming that the application and allotment of monies have been paid or will be paid. A

certificate of commencement of business must also be obtained from the register of

companies.

III. Company Limited by Guarantee

A guarantee company is essentially a private company, in which the liability of its mem-

bers to pay in their contributions can be enforced during the lifetime of the company,

while outstanding contributions may be recovered in the event of a winding-up. A guar-

antee company does not have a share capital and obtains funds inter alia through dona-

tions. This is a suitable vehicle for educational, research and scientific development in-

stitutions.

IV. Company with unlimited liability

A company with unlimited liability resembles a partnership, where the liability of the

members extends to the entire amount of the company’s debts and liabilities. The

shareholders could be called upon to discharge debts and liabilities of the company

upon winding up. An unlimited company is also not required to have a share capital and

is entitled to increase and reduce its capital without restrictions. This kind of company is

rarely incorporated in India.

V. Foreign Company : Liaison/Representative Office

A Representative Office is only entitled to collect information about possible market op-

portunities and provide information about the company to prospective Indian customers.



It cannot undertake any commercial activity in India and therefore cannot earn any in-

come in India. A liaison office is also not entitled to acquire or own any real estate in In-

dia.

VI. Foreign Company : Project Office

A Project Office and is only allowed to carry out activities incidental to a particular pro-

ject. The Project Office is to be utilised to represent the parent company’s interests in

the relevant project, provided that the project is inter alia funded directly by inward re-

mittance from abroad, cleared by an appropriate authority, funded by a bilateral or multi-

lateral international financing agency or the entity in India that awarded the contract has

been grated term loans by a public financial institution or bank in India for the particular

project.

VII. Foreign Company : Branch Office

A Branch Office is entitled to perform limited tasks such as export and import of goods,

rendering consultancy services, provision of technical support for products supplied by

the parent company and acting as a buying or selling agent for the parent company. A

Branch is not entitled to carry out manufacturing and processing activities, whether di-

rectly or indirectly. A branch office is entitled to remit profits made upon the payment of

taxes and the submission of various documentation. The branch office is entitled to ac-

quire real estate in India upon the fulfilment of various pre-requisites and when the ac-

quisition of real estate is necessary or incidental to the activities conduced in India.

Documents

India A new Business Partner - Blackbitherfurth.t3.blackbit.de/uploads/media/HP_Extra_2008_10_India.pdf · India A new Business Partner Im October 2008 CASTON LAW & BUSINESS INFORMATION