MGI International Tax and Business Guide India · MGI International Tax and Business Guide India ... A. Accounting profession B. Auditing requirements ... Nepal and Bhutan, in the

MGI India Business Guide 2008

Complied by S.R. Dinodia & Co.

MGI International Tax and Business Guide India

I. INTRODUCTION

A Geography B Climate C Population D Language E Transportation F Communications G Political set-up H Judiciary I Currency and banking J Travel regulations for foreign personnel K Quality of life

II.BUSINESS AND INVESTMENT CLIMATE

A Economic factors B India - an attractive investment location C Special investment programmes D Foreign direct investment E Foreign institutional agreements F Venture capital investments G Joint ventures and subsidiaries outside India H Exchange control I Business forms J Monopolies and restrictive trade practices K Intellectual property rights L Finance M Securities and Exchange Board of India (SEBI) N Labour relations

III. TAXATION A Income tax B Administrative systems C Assessments D Advance ruling E Residence F Scope of total income G Taxable income H Taxable expenses under Fringe Benefit Tax I Agricultural income J Tax concessions K Special provisions for computation of taxable income of non-residents engaged in specified business L Taxation of Non-resident Indians M Taxation of offshore funds/foreign institutional investors N Commodities Transaction Act O Business loss P Capital gains Q Tax rates and advance tax for individual and non-corporate assesses R Corporate tax rates and advance tax



S Withholding taxes T Business connection U Double taxation relief V Transfer pricing W Wealth-tax X Indirect taxes

IV. ACCOUNTING AND AUDITING

A. Accounting profession B. Auditing requirements C. Accounting standards and principles

V APPENDICES

Appendix I List of industries reserved for the public sector

Appendix II List of industries for which industrial licensing is compulsory

Appendix III List of cities with population of 1 million and above according to the provisional results of 2001 census.

Appendix IV Sectoral cap on investments by person resident outside India.

Appendix V Upper limits of withholding taxes in India's agreements for avoidance of double taxation.

Appendix VI Transfer of Shares/Convertible Debentures, from a Person Resident in India to a Person Resident outside India and from a Person Resident outside India to a Person Resident in India

Abbreviations



SECTION 1: INTRODUCTION

A. GEOGRAPHY

In area, India is the largest country in South Asia and the seventh largest in the world. India stands apart from the rest of Asia, marked off as it is by mountains and the sea, which give the country a distinct geographical entity. India is to the North of the equator between 8° 4' to 37° 6' North latitude and 68° 7' to 97° 25' east longitude with an area of 3.28 million sq. km (i.e. 2.4% of the total world area) and is 3,214 km. from North to South and 2,933 km. from East to West. The neighbouring countries in the North are China, Nepal and Bhutan, in the East, Bangladesh and Burma, and in the West, Pakistan and Afghanistan. In the South the country tapers off into the Indian Ocean. The Palk Strait separates the island country of Sri Lanka, which is situated to the Southeast of India.

India is a natural sub-continent flanked by the Himalayas in the North, the Arabian Sea in the West, the Bay of Bengal in the East and the Indian Ocean in the South. It has a land frontier of 15,200 km. A coastline of the mainland, Lakshadweep Islands and Andaman & Nicobar Islands is 7,516.6 km. The Andaman and Nicobar Islands in the Bay of Bengal and Lakshadweep Islands in the Arabian Sea are parts of the territory of India.

B. CLIMATE

The Indian climate can be described as the tropical monsoon type. Due to the vastness of the country and differences of altitude there are various climatic zones in the country. The great Himalayan mountain barrier stops the Northern winter from blanketing India and thus keeps it pleasant in winter except for Kashmir and the hill stations in the Himalayas, where the temperature in winter touches - 15° C.

Rainfall in India is not evenly distributed. Areas like the West coast, Bengal and Assam in the East get the heaviest rainfall with more than 200 cm. each year. Rajasthan and the high Ladakh plateau of Kashmir receive only 10 cm. each year. At the other extreme Cherrapunji in Meghalaya in the Northeast gets as much as 1,270 cm. of rainfall, the highest in the world.

Seasons recognized by the Indian Meteorological Department are (1) Cold weather season (December to March); (2) Hot weather season (April to May); (3) Rainy season (June to September); and (4) Season of retreating south-west monsoons (October and November).

C. POPULATION

India's population of approximately 1.13 billion people (estimate for March 10, 2008) comprises approximately one-sixth of the world's population.India occupies 2.4% of the world's land area and supports over 17.5% of the world's population. As per the 2001 census, 72.22% of the people live in more than 550,000 villages, and the remainder in 5161 towns and cities.

The literacy rate is 79.9% with a great degree of regional variation. As per the 2001 census the country has more than twenty cities with population more than one million. The details are given below:

(This space has been intentionally left blank)



Name of the city Population (in millions)

Mumbai 14.5

Kolkata 12.0

Delhi 10.1

Madras 5.7

Hyderabad 4.7

Bangalore 4.5

Ahmedabad 3.6

Pune 2.7

Kanpur 2.3

Lucknow, Nagpur 1.8

Jaipur 1.6

Surat 1.2

Bhopal, Coimbatore, Indore, Madurai, Patna, Vadodara, Varanasi, Ludhiana, Vishakhapatnam

1.1

D. LANGUAGE

Hindi is the official language of the republic. English is the associate official language is widely used for business and is understood almost everywhere in India.

E. TRANSPORTATION

The present transport system of the country comprises several modes of transport including rail, road, coastal shipping, air transport etc.

India has an extensive network of roads. The Indian railway system is the largest in Asia and the fourth largest in the world, with a network of about 62,725-km comprising Broad Gauge, Meter Gauge and Narrow Gauge. The railways play a crucial role in India's development.

Among eleven major ports, Mumbai is the biggest port in India handling a major amount of the total trade through Indian ports.

India is well served by air transport. The world's major airlines fly to and through India. Indian Airlines, Jet Airways and other private airlines also provide extensive inbound and outbound air services.

F. COMMUNICATIONS

India has a well-developed modern system of communication.There are various modes of Communication in India, which makes it very easy to communicate with people in India and outside India also. The various modes of communication are: -

• Public Phone Booths - This is one of the main modes of communication. These public phone booths are also commonly knows as PCO's. These public booths provide all types of call facilities. They provide the facility or making local, STD as well as ISD calls. One of the major features of this mode of communication is that it is available in every nook and corner.

• Mobile Phones - Nowadays this has become the most favourite mode of communication. The major feature of this mode of communication in India is that it gives all types of facility in your hand and also it is mobile. You won't have to confine yourself. Wherever you go you are connected. Mobile service in India is full fledged.



• Cyber Cafes - Another major mode of communication in India are these cyber cafes. These cafes provide Internet facility through which you would be able to access anything anywhere in this world.

• Postal Service - The oldest and the most reliable of all the services is the postal service. The postal service of India is very good. It provides various services like registered post, speed post, parcels etc.

The improved systems of Communication in India have changed many lives and have made life very simple.

G. POLITICAL SET-UP

India, a union of states is a sovereign socialist secular democratic republic with a parliamentary system of government with two legislative houses. The executive authority is responsible to the elected representatives of the people in the Parliament for all its decisions and actions.

The country is a Union of states and Union Territories. The Central Government has exclusive jurisdiction over all matters of national interest such as defense, communication, banking and currency, international trade and foreign affairs. The State Governments have primary responsibility for matters like law and order, education, health and agriculture. The Central Government comprises a council of ministers headed by a Prime Minister. The Prime Minister is usually the head of the party, which has the support of a majority in the Parliament. Parliamentary elections are generally held once in five years.

The Constitution distributes legislative power between Parliament and state legislatures and provide for vesting of residual powers in Parliament.

H. JUDICIARY

India has a well-established and independent judicial system. The judiciary is independent of the executive. It is the guardian and interpreter of the Constitution. The Supreme Court is the highest judicial tribunal, positioned at the apex of a single unified system for the whole country. Each State has its own High Court. A uniform code of civil and criminal laws applies to the whole country.

I. CURRENCY AND BANKING

The Indian rupee is the country's currency.

The country's banking system is controlled and monitored by the Reserve Bank of India (Reserve bank). The functions of the Reserve Bank are divided into two distinct areas:

• Issue department which looks after issue of currency. • Banking department, which regulates and supervises Indian banking

The commercial banking system in India is fully developed and the large Indian commercial banks

are state owned. Industry estimates indicate that out of 274 commercial banks operating in India,

223 banks are in the public sector and 51 are in the private sector.

In the public sector banking system, there are 196 regional rural banks specially set up to increase

the flow of credit to small borrowers in the rural areas. These banks have specified areas of

operations usually limited to two to three districts and have limited exposure to commercial banking

business. The remaining 27 banks in the public sector are regular commercial banks and transact all

types of commercial banking business. The private sector bank grid also includes 24 foreign banks

that have started their operations here.



J. TRAVEL REGULATIONS FOR FOREIGN PERSONNEL

Foreigners desirous of visiting India can do so after obtaining a visa from the Indian Mission in the country of their residence. The visas can be of different categories; the major ones being the tourist visa, business visa, student visa, and transit visa, visa for missionaries, journalist visa, conference visa and employment visa. Employment visas are also granted if backed by employment contracts. All visa applicants must posses a valid passport of their country of citizenship.

Indian Embassies and Consulates abroad issue visas for up to 5 years with multiple entry option to foreign nationals for business purposes and for studies in India. For employment purpose visas are issued for 1 year, which can be extended for further stay. A foreign national staying in India for more than 180 days, must obtain a Registration Certificate / Residential Permit from the Foreigners Registration offices of the state where he would be stationed.

K. QUALITY OF LIFE

India has an ancient culture with a rich tradition and history dating back several thousand years. India has a secular society where all the religions of the world are practiced.

The educational system maintains fairly high standards and consists of public and private schools, universities and institutions of higher learning. These impart academic and vocational training besides encouraging participation in sports and extra-curricular activities. Most large Indian cities have internationally recognized schools and colleges and world-class health care facilities.

A host of tourist attractions abound in India from historical monuments like the world famous Taj Mahal to the beach resorts in the south. The Himalayas offer a unique experience of scenic beauty and for sports. There are excellent facilities for accommodation and transport available at tourist centres.




SECTION II - BUSINESS AND INVESTMENT CLIMATE

A. ECONOMIC FACTORS

A foreign investor who wishes to undertake business in India will find tremendous opportunities. The industrial policy offers a great deal of freedom to business houses and entrepreneurs to make their own investment decisions.

India has gone through more than a decade of economic reforms. Continuity in the economic liberalization process and the political consensus that “economic change is imperative” could place India on an industrial growth path that few countries in the world enjoy. A review of the key economic indicators for 2007-08 is given below.

• The rate of growth in GDP is expected to be 8.7 % during 2007-08 compared to 9.6 % during 2006-07.

• During 2007-08 (April-February) the index of industrial production (IIP) rose by 8.7 % as compared with an increase of 11.2 %during 2006-07 (April-February). The manufacturing sector recorded a growth of 9.1 % during 2007-08 (April-February) as compared to 12.2 % during April-February 2006-07.

• On the Foreign trade front, Imports during the period 2006-07 have shown a growth of 27.27% as compared to previous year growth of 31.80%.

• In 2007-08 the gross fiscal deficit was brought down to 3.17% (Rs. 1, 43,653 crore) of the Gross Domestic Product in 2007-08 from 3.8% in 2006-07 and revenue deficit is reduced by 0.5% of Gross Domestic Product over 2006-07.

• The total food grains production is estimated to reach an all-time high of 227.3 million tonnes, recording an increase of 4.6 per cent over the previous year (217.3 million tonnes).

• In the beginning of 2007-08 inflation based on the wholesale price index (WPI) was 6.4 % which was reduced to a low of 3.1% on October 13, 2007 before increasing again to 7.4% by March 29, 2008, mainly reflecting the hardening of prices of primary

articles, fuel group and some manufactured products items.

The Finance Minister's Budget speech for 2008-09 has spelt the following broad strategy:

• Focus on achievement of self-sufficiency in food grain • Focus next year to be management of supply side of food, market, capital inflows • Keeping inflation under check to be the focus • Education at the centre of the social sector reforms • Women entitled to equal share and equal say • Manufacturing rate of growth planned to be doubled • Banks would be bucked up to embrace total financial inclusion




B. INDIA - AN ATTRACTIVE INVESTMENT LOCATION:

There are several good reasons for investing in India.

• Stable democratic environment, over 60 years of independence; • India is the fourth largest economy, in terms of purchasing power parity. Tenth most

industrialized economy • Strong macro-economic performance • Political stability and broad consensus on reforms. Liberal and transparent foreign

investment regime • Well developed banking system. Vibrant capital market. National Stock Exchange

third largest, Bombay Stock Exchange fifth largest in terms of number of trades • Strong and independent judicial system • Strong pool of scientific and technical manpower. Prowess of IITs, IIMs well known • Abundant, high-quality, cost-effective, competitive manpower. Over 100,000 IT

professionals added each year. • India amongst the leading entrepreneurial hotbeds globally • Per-capita income in India has risen steadily over the past five years, from $285 to

around $550 today. • Corporate earnings in India are growing at an astounding annual rate of 35%. • Large market size with middle class population of 330 million with increasing

purchasing power reflected by remarkable increase in purchase of consumer durables in recent years

C.SPECIAL INVESTMENT PROGRAMMES

(Electronic Hardware and Software Technology Parks / Export Oriented Units and Export Processing Zones / Special Economic Zones)

1. Electronic Hardware and Software Technology parks

Salient features of investment in Electronic Hardware and Software Technology parks

• For building up strong electronics industry and with a view to enhancing export, two schemes viz. Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) are in operation. Under EHTP/STP scheme, the inputs are allowed to be procured free of duties and the requisite infrastructural equipment with no export obligation.

• STP/EHTP Units may be set up anywhere in India. • The units are allowed to render consultancy services for development of software “on

site” abroad and consultancy fees received by such units in convertible foreign currencies are deemed to be exports for the purposes of fulfillment of export obligation under the Scheme

• STP units are allowed to import telematic infrastructure equipments for creating a central facility for export of software without payment of duty. The central facility so developed by STP units for transmission of data / software for export are allowed to be utilized by other STP units and units in DTA for export of software

• 100% foreign equity is permissible • The units are exempted from payment of Income Tax for a block of ten years of its

operation. • Export income is exempt from income tax for all exporters. • The STP/EHTP are designed to provide an internationally competitive duty-free

environment at low cost for export production • These provide basic infrastructure and facilities like developed land, standard design

factory buildings, roads, power, water supply and drainage and customs clearance facilities.



2. Export oriented units and Export processing zones

The Indian Government has established the following eight Export Processing Zones (EPZs) to promote exports.

Salient features of investment in EOUs/EPZs

• 100 per cent Export Oriented Units (EOUs) and units in the Export Processing Zones (EPZs), enjoy a package of incentives and facilities, which include duty free imports of all types of capital goods, raw material, and consumables.

• These are eligible for tax holiday against export. • EOU/EPZ units may procure goods required by it for manufacture, services, trading

or in connection therewith, without payment of duty, from bonded warehouses in the DTA set up under the Policy.

• Transfer of manufactured goods from one EOU/EPZ unit to another EOU/EPZ unit will be allowed.

• Goods imported/procured by an EOU/EPZ unit may be transferred or given on loan to another EOU/EPZ unit which shall be duly accounted for, but not counted towards discharge of export performance.

3. Special Economic Zones

The Government of India introduced the concept of Special Economic Zones in 2001-02.

Export oriented units may be set up anywhere in India:

• Quark City SEZ in Chandigarh • Flextronics SEZ in Tamil Nadu • Mahindra World City in Tamil Nadu • Motorola ,DELL and Foxconn • Divvy’s Laboratories, Andhra Pradesh • Rajiv Gandhi Technology Park, Chandigarh • ETL Infrastructure IT SEZ , Chennai • Apache SEZ in Andhra Pradesh • Nokia SEZ in Tamil Nadu • Hyderabad Gems Limited ,Hyderabad

Some of the salient features of investment in special economic zones are as follows:

• Developers of Special Economic Zones are allowed duty free import/ procurement from Domestic Tariff Area for development of Special Economic Zones to give boost to development of integrated infrastructure for exports.

• For setting up of factory in the zone it is permitted to procure/import goods from Domestic Tariff Area without payment of duty.

• Units in Special Economic Zones are allowed to produce items without any license which are reserved for Small Scale Industries

• Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency account.

• Facility in respect of units in Special economic Zones to realise and repatriate export proceeds within twelve months

• Write-off of unrealised export bills up to 5% • Permitted to sell goods in the Domestic Tariff Area in accordance with the import

policy in force • Subcontracting of part of production abroad permitted. • Duty free goods to be utilised in five years.



• The developer of the Special Economic Zone is given infrastructure status under the Income tax Act and is entitled to tax benefit.

• Units established in Special Economic Zone which manufacture or produce articles or things or computer software are also entitled to the benefit of tax holiday under the Income tax Act.




D. FOREIGN DIRECT INVESTMENT

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999.

1. Entry routes for investment in India

Foreign investment is freely permitted in almost all sectors. Under Foreign direct Investment (FDI) Scheme, investments can be made by non-residents in the shares /convertible debentures of an Indian Company, under the two following routes;

1) Automatic route

Under this route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the Investment. Following are list of activities for which Automatic Route of RBI for investment from person resident outside India is not available: 1. Petroleum Refining (except for Private sector oil refining), Natural Gas / LNG

Pipelines 2. Investing companies in Infrastructure & Services Sector 3. Defence and Strategic Industries 4. Atomic Minerals 5. Print Media 6. Broadcasting 7. Postal services 8. Courier Services 9. Establishment and Operation of satellite 10. Development of Integrated Township 11. Tea Sector 12. Asset Reconstruction Companies

2) Government Route

Under this route, prior approval of the Government of India, Ministry of Finance, and Foreign Investment Promotion Board (FIPB) is required.

2. Prohibition of Investment in India

(a) Foreign investment in any form is prohibited in any entity, whether incorporated or not (such as Trusts), which is engaged or proposes to be engaged in the following activities:

(i) Business of chit fund, or (ii) Nidhi Company, or (iii) Agricultural or plantation activities, or

(iv) Real estate business, or construction of farm houses, but will not include development of townships, construction of residential/commercial premises, roads or bridges.

(v) Trading in Transferable Development Rights (TDRs).

Entry Routes for

Investment

Government Route

Automatic Route



Note: -

It is further clarified that partnership firms/ proprietorship concerns having investments, as per FEMA Regulations, are not allowed to engage in Print Media sector.

(b) In addition to the above, investment in the form of FDI is also prohibited in certain

sectors 1. Retail Trading

2. Atomic Energy 3. Lottery Business 4. Gambling and Betting 5. Housing and Real Estate business.

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

3. Eligibility for Investing in India

(i) A person resident outside India (other than a citizen of Pakistan) or an entity incorporated outside India, (other than an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with prior approval of FIPB (Foreign Investment Promotion Board).

(ii) Overseas Corporate Bodies (OCBs) are entities established outside India and predominantly owned by NRIs (at least 60% of the paid up capital). Erstwhile OCBs, which are incorporated outside India and are not under adverse notice of Reserve Bank can make fresh investments under the FDI as incorporated non-resident entities, with the prior approval of Government if the investment is through Government Route and with the prior approval of Reserve Bank if the investment is through Automatic Route.

4. Types of Instruments

(i) Indian companies can issue equity shares / convertible debentures and preference shares subject to pricing guidelines /valuation norms prescribed under FEMA Regulations.

(ii) Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible have to be in accordance with the guidelines applicable for External Commercial Borrowing (ECB). Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of LIBOR (London Inter bank rate) plus the spread permissible for ECBs of corresponding maturity.

(iii) As far as debentures are concerned, only those which are fully and mandatorily

convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.




5. Investments in Small Scale Industrial Units

(i) A foreign investor can invest in an Indian company which is a small-scale industrial unit provided it is not engaged in any activity, which is prohibited under the FDI policy. Such investments are subject to a limit of 24 per cent of paid-up capital of the Indian company/SSI Unit. An SSI Unit can issue equity shares / fully convertible preference shares / fully convertible debentures more than 24 per cent of its paid-up capital if: a) It has given up its small-scale unit status, b) It is not engaged or does not propose to engage in manufacture of items

reserved for small-scale sector, c) It complies with the sectoral caps specified in Appendix IV.

(ii) The company/SSI Unit would be reckoned as having given up its SSI status, if the

investment in plant and machinery exceeds the limits prescribed under the Micro, Small and Medium Enterprises Development Act, 2006 (in case of enterprise engaged in the manufacture or production of goods, the SSI has to invest more than 5 crores in plant and machinery while for the enterprises engaged in the rendering of services, the SSI has to invest more than 2 crores in plant and machinery, to give up its SSI status.)

(iii) An SSI Unit, which is an Export Oriented Unit or a unit in Free Trade Zone or in

Export Processing Zone or in a Software Technology Park or in an Electronic Hardware Technology Park, can issue shares / convertible debentures / preference shares exceeding 24 per cent of the paid-up capital up to the sectoral caps specified in Appendix IV.

6. Investment in Asset Reconstruction Companies (ARCs)

(i) Non-resident [other than Foreign Institutional Investors (FIIs)] can invest in the equity capital of Asset Reconstruction Companies (ARCs), registered with Reserve Bank under the Government Route, only upto 49 per cent of the paid up capital of the ARCs. Automatic Route is not available for such investments.

Foreign

Investor can

invest in

Government Route permissible and investment

upto 49%

Small Scale Industrial

Unit

Asset Reconstruction

Company

Infrastructure

Company

Overall limit of 49% with FII

requirement of 24%

FDI upto 26% and FII cap

upto 23%

Commodities

Exchange

Public Sector

Banks

Overall limit of 20%

FDI upto 26% and FII cap

upto 23%

Invest upto 24% of the paid

up capital

Credit Information

Companies



(ii) FIIs registered with SEBI can invest in the Security Receipts (SRs) issued by ARCs registered with Reserve Bank. FIIs can invest up to 49 per cent of each section of scheme of SRs, subject to the condition that investment by a single FII in each section of SRs shall not exceed 10 per cent of the issue.

7. Investment in infrastructure companies in securities market

Foreign investment is permitted in Infrastructure Companies in Securities Markets, namely stock exchanges, depositories and clearing corporations, in compliance with SEBI Regulations and subject to the following conditions: Foreign investment up to 49 per cent of the paid up capital, is allowed in these companies with a separate FDI cap of 26 per cent and FII cap of 23 per cent;

i) FDI will be allowed with specific prior approval of FIPB; and

ii) FII can invest only through purchases in the secondary market.

8. Investment in Credit Information Companies

Foreign investment in Credit Information Companies is permitted in compliance with the Credit Information Companies (Regulations) Act, 2005 and subject to the following:

i) The aggregate Foreign Investment in Credit Information Companies is permitted only

up to 49 per cent of the paid up capital only with the prior approval of FIPB and regulatory clearance from RBI.

ii) There is a composite ceiling of 49 per cent for Foreign Investment with SEBI

registered FIIs limit of 24 per cent

iii) Investment by SEBI registered FIIs is permitted only through purchases in secondary markets only.

iv) No FII can individually hold directly or indirectly more than 10 percent of the equity.

9. Investment in Commodity Exchanges

Foreign investment in Commodity Exchanges is permitted, subject to compliance with the regulations issued in this regard by the Forward Market Commission, along with the following conditions:

i) There is a composite ceiling of 49 per cent for Foreign Investment, with a FDI limit of

26 per cent and an FII limit of 23 per cent.

ii) FDI is allowed with specific approval of the Government.

iii) The SEBI registered FIIs purchases in equity of Commodity Exchanges are restricted to the secondary markets only.

10. Investment in Public Sector Banks

FDI and Portfolio Investment in nationalized banks are subject to overall statutory limits of 20 per cent as provided under Section 3(2D) of the Banking Companies Act. The same ceiling would also apply in respect of such investments in State Bank of India and its associate banks.



11. Investment from Nepal & Bhutan

NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through

normal banking channels.

12. Issue of Rights/Bonus shares to erstwhile OCBs

FEMA provisions allow Indian companies to freely issue Rights /Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, if any. However, such issue of bonus/rights shares have to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies), etc.

13. Right issue to erstwhile OCBs

The price of shares offered on rights basis by the Indian company to non-resident shareholders shall not be lower than the price at which such shares are offered to resident shareholders.

OCBs have been de-recognized as a class of investors with effect from September 16, 2003. Therefore, companies desiring to issue rights shares to such erstwhile OCBs will have to take specific prior permission from the Reserve Bank. As such, entitlement of rights shares is not automatically available to OCBs. However, bonus shares can be issued to erstwhile OCBs without RBI approval.

14. Additional Allocation of right shares by residents to non-residents

Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights share entitlements. The investee company can allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to non residents in the total paid-up capital of the company does not exceed the sectoral cap.

15. Acquisition of shares under Scheme of Amalgamation/ merger

The issuance of shares by the transferee company (the new company) to the shareholders of the transfer or company resident outside India are subject to:

(i) The percentage of shareholding of person’s resident outside India in the transferee or new company does not exceed the sectoral cap.

(ii) The transferor company or the transferee or the new company is not engaged in activities which are prohibited in terms of FDI policy.

16. Issue of shares under Employees Stock Option Scheme (ESOPs)

Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad that are resident outside India, other than to the citizens of Pakistan.

Citizens of Bangladesh can invest with the prior approval of FIPB. Shares under ESOPs can

be issued directly or through a Trust subject to the condition that:

(a) The scheme has been drawn in terms of relevant regulations issued by the Securities and Exchange Board of India; and



(b) The face value of the shares to be allotted under the scheme to the non-resident

employees does not exceed 5 per cent of the paid-up capital of the issuing company. Unlisted companies for issuing shares, under Employees Stock Option Plan (ESOP), have to follow the provisions of the Companies Act, 1956. The Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior FIPB approval. The issuing company is required to report the details of such issues to the concerned Regional Office of the Reserve Bank, within 30 days from the date of issue of shares.

17. Reporting of FDI

(i) Reporting of Inflow

(a) An Indian company receiving investment from outside India for issuing shares/convertible debentures/preference shares under the FDI scheme, should report the details of the amount of consideration to the Reserve Bank within 30 days from the date of receipt in the Advance Reporting form.

(b) Indian companies are required to report the details of the receipt of the amount of consideration for issue of shares / convertible debentures, through an Authorised Dealer (AD) Category - I bank, together with a copies of the FIRC/s evidencing the receipt of the remittance along with the Know Your Customer (KYC) report on the non-resident investor from the overseas bank remitting the amount. The report would be acknowledged by the Regional Office concerned, which would allot a Unique Identification Number (UIN) for the amount reported.

(ii) Time frame within which shares have to be issued

The equity instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor, or else, the amount of consideration so received should be refunded immediately to the non-resident investor by outward remittance through normal banking channels or by credit to the NRE/FCNR (B) account, as the case may be. Non-compliance with the above provision would be reckoned as a contravention under FEMA and could attract penal provisions. In exceptional cases, refund of the amount of consideration outstanding beyond a period of 180 days from the date of receipt may be considered by the Reserve Bank on the merits of the case.

(iii) Reporting of issue of shares

(a) After issue of shares/convertible debentures/preference shares, the Indian

company has to file Form FC-GPR, not later than 30 days from the date of issue.

(b) Part A of Form FC-GPR has to be duly filled up and signed by Managing

Director/Director/Secretary of the Company and submitted to the Authorized Dealer of the company, who will forward it to the Reserve Bank. The following documents have to be submitted along with Part A:

A certificate from the Company Secretary of the company Certifying that:

(i) all the requirements of the Companies Act, 1956 have been complied with;

(ii) terms and conditions of the Government’s approval, if any, have been complied with;



(iii) the company is eligible to issue shares under these Regulations; and

(iv) the company has all original certificates issued by authorized dealers in India

evidencing receipt of amount of consideration.

(2) A certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India.

(c) The report of receipt of consideration as well as FC-GPR have to be submitted, to the

concerned Regional Office of the Reserve Bank, under whose jurisdiction the registered office of the company is situated.

(d) Part-B of FC-GPR should be filed on an annual basis, directly with the Reserve

Bank, by the Indian company. This is an annual return to be submitted by 31st of July every year, pertaining to all investments by way of direct/portfolio investments/re-invested earnings/others in the Indian company made during the previous years (i.e. the information in Part B submitted by 31st July 2008 will pertain to all the investments made in the previous years up to March 31, 2008). The details of the investments to be reported would include all foreign investments made into the company, which is outstanding as on the balance sheet date. The details of overseas investments in the company both under Direct / portfolio investment may be separately indicated.

(e) Issue of bonus/rights shares or stock options to person resident outside India directly

or on amalgamation / merger with an existing Indian company, as well as issue of shares on conversion of ECB/royalty/ lump sum technical know-how fee /import of capital goods by SEZs has to be reported in Form FC-GPR.

Reporting requirement can be summarized in the following manner: 18. Issue Price

In case of listed companies, price of shares issued to persons resident outside India under the FDI Scheme, shall be on the basis of SEBI guidelines. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues.

19. Foreign Currency account

Indian companies, eligible to issue shares to persons resident outside India under the FDI Scheme, will be allowed to retain the share subscription amount in a foreign currency account, with the prior approval of RBI.

Part – B of FC-GPR is to

be filed on annual basis

with the RBI.

Equity instruments

should be issued within

180 days of the receipt.

Report the consideration

to RBI within 30 days of

the receipt.

Reporting of issue of

shares to be done within

30 days of the issue.



20. Transfer of Shares and convertible debentures

(i) Foreign investors can also invest in Indian companies by purchasing / acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents / NRIs for acquisition of shares by way of transfer subject to the following:-

(a) A person resident outside India (Other than NRI and OCB) may transfer by way of

sale or gift the shares or convertible debentures to any person resident outside India (including NRIs).

(b) NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or

convertible debentures held by them to another NRI.

(c) A person resident outside India can transfer any security to a person resident in India

by way of gift.

(d) A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.

(e) A person resident in India can transfer by way of sale, shares / convertible

debentures (including transfer of subscriber's shares), of an Indian company in sectors other than financial service sector (i.e. Banks, NBFC, Insurance, ARCs and infrastructure companies in the securities market viz. Stock Exchanges, Clearing Corporations and Depositories) under private arrangement to a person resident outside India, subject to the guidelines given in Appendix VI.

(f) General permission is also available for transfer of shares /convertible debentures, by

way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the guidelines given in Appendix VI.

(g) The above General Permission also covers transfer by a resident to a non-resident of

shares / convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route of RBI, as well as transfer of shares by a non-resident to an Indian company under buy-back and / or capital reduction scheme of the company. However, this General Permission is not available for transfer of shares /debentures of an entity engaged in any activity in the financial service sector (i.e. Banks, NBFCs, ARCs, Insurance and infrastructure providers in the securities market such as Stock Exchanges, Clearing Corporations, etc.),

(ii) Reporting of transfer of shares between residents and nonresidents and vice versa is

to be done in Form FC-TRS. This Form needs to be submitted to the AD Category – I bank, which will forward the same to its link office. The link office will consolidate the Forms and submit a report to the Reserve Bank.

(iii) AD Category – I banks have been given general permission to open Escrow account

and Special account by non-resident corporate for open offers/ exit offers and delisting of shares. The relevant SEBI (SAST) Regulations or any other applicable SEBI Regulations / provisions of the Companies Act, 1956 will be applicable.




21. Prior permission of RBI in certain cases for transfer of shares /convertible debentures

(i) A person resident in India, who intends to transfer any security, by way of gift to a person resident outside India, has to obtain prior approval from Reserve Bank. Reserve Bank

considers the following factors while processing such applications:

a. The transferee is eligible to hold such security under Schedules 1, 4 and 5 of Notification No. FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.

b. The gift does not exceed 5 per cent of the paid-up capital of the Indian

company / each series of debentures/each mutual fund scheme.

c. The applicable sectoral cap limit in the Indian company is not breached.

d. The transferor and the transferee are close relatives as defined in Section 6 of the Companies Act, 1956, as amended from time to time.

e. The value of security to be transferred together with any security already

transferred by the transferor, as gift, to any person residing outside India does not exceed the rupee equivalent of USD 25,000 during a calendar year.

f. Such other conditions as stipulated by Reserve Bank in public interest from

time to time. (ii) The following instances of transfer of shares from residents to non-residents by way of

sale require RBI approval:

a. Transfer of shares or convertible debentures of an Indian company engaged in financial sector (i.e. Banks, NBFCs, Asset Reconstruction Companies, Insurance and Infrastructure providers in the securities market such as Stock Exchanges, Clearing Corporations, etc.),

b. Transactions, which attract the provisions of SEBI (Substantial Acquisition of

Shares and Takeovers) Regulations, 1997.

(iii) The following instances of transfer of shares from residents to non-residents by way of sale or

otherwise requires Government approval followed by permission from RBI:

a. Transfer of shares of companies engaged in sectors falling under the Government Approval route.

b. Transfer of shares resulting in foreign investments in the Indian company, breaching the sectoral cap applicable.

22. Conversion of ECB / Lump sum Fee / Royalty/Import of Capital goods by SEZs into Equity

(i) Indian companies have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/preference shares, subject to the following conditions and reporting requirements.

a. The activity of the company is covered under the Automatic Route for FDI or the

company has obtained Government approval for foreign equity in the company, b. The foreign equity after conversion of ECB into equity is within the sectoral cap, if

any,



c. Pricing of shares is as per SEBI regulations or erstwhile CCI guidelines in the case of listed or unlisted companies respectively.

d. Compliance with the requirements prescribed under any other statute and regulation in force is been met.

(ii) This conversion would also be applicable to ECBs, due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators.

(iii) General permission is also available for issue of shares/preference shares against lump-sum technical know-how fee, royalty, under automatic route or SIA / FIPB route, subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.

(iv) Units in Special Economic Zones (SEZs) are permitted to issue equity shares to non-residents against import of capital goods subject to the valuation done by a Committee consisting of Development Commissioner and the appropriate Customs officials.

(v) Reporting

Details of issue of shares against conversion of ECB have to be reported to the concerned Regional Office of the Reserve Bank, as indicated below:

a. In case of full conversion of ECB into equity, the company shall report the conversion

in form FC-GPR to the concerned Regional Office of the Reserve Bank as well as in form ECB- 2 to the Department of Statistics and Information Management (DSIM), Reserve Bank of India, Mumbai, within seven working days from the close of month to which it relates. Once reported, filing of form ECB-2 in the subsequent months is not necessary.

b. In case of partial conversion of ECB, the company shall report the converted portion

in form FC-GPR to the concerned Regional Office as well as in form ECB-2 clearly differentiating the converted portion from the non-converted portion. The words "ECB partially converted to equity" shall be indicated on top of the ECB-2 form. In the subsequent months, the outstanding balance of ECB shall be reported in ECB-2 form to DSIM.

c. The SEZ unit issuing equity should report the particulars of the shares issued in the

form FC-GPR. 23. Remittance of sale proceeds

AD Category – I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

24. Remittance on winding up/ liquidation of Companies

AD Category – I banks have been allowed to remit winding up proceeds of companies in India, which are under liquidation, subject to payment of applicable taxes. Liquidation may be subject to any order issued by the court, winding up the company or the official liquidator in case of voluntary winding up; under the provisions of the Companies Act, 1956. AD Category – I banks shall allow the remittance provided the applicant submits:

i. No objection or Tax clearance certificate from Income Tax Department for the

remittance.

ii. Auditor's certificate confirming that all liabilities in India have been either fully paid or adequately provided for.



iii. Auditor's certificate to the effect that the winding up is in accordance with the provisions of the Companies Act, 1956.

iv. In case of winding up otherwise than by a court, an auditor's certificate to the effect that there is no legal proceedings pending in any court in India, against the applicant, or the company under liquidation and there is no legal impediment in permitting the remittance.

25. Issue of shares by Indian companies under ADR /GDR

(i) Indian Companies can raise foreign companies in accordance with the scheme for issue of Foreign Currency Convertible Bonds and ordinary shares (Through Depository Receipt Mechanism) Scheme, 1993, under the FDI scheme, through the following:

a) American Depository Receipt: Depository receipt listed and traded in the US markets.

b) Global Depository Receipt: Depository Receipts are those listed and traded elsewhere.

Depositary Receipts (DRs) are negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India.

(ii) An Indian listed company, which is not eligible to raise funds from the Indian Capital Market including a company, which has been restrained from accessing the securities market by the Securities and Exchange Board of India (SEBI), will not be eligible to issue ADRs/GDRs.

(iii) Listing in Domestic Market

Unlisted companies, which have not yet accessed the ADR/GDR route for raising capital in the international market, would require prior or simultaneous listing in the domestic market, while seeking to issue such instruments. Unlisted companies, which have already issued ADRs/GDRs in the international market, have to list in the domestic market on making profit or within three years of such issue of ADRs/GDRs, whichever is earlier.

(iv) Investment of Funds

ADRs/ GDRs are issued on the basis of the ratio worked out by the Indian company in consultation with the Lead Manager to the issue. The proceeds so raised have to be kept abroad till actually required in India. Pending repatriation or utilization of the proceeds, the Indian company can invest the funds in –

a. Deposits with or Certificate of Deposit or other instruments offered by banks

who have been rated by Standard and Poor, Fitch, IBCA or Moody's, etc. and such rating not being less than the rating stipulated by Reserve Bank from time to time for the purpose.

b. Deposits with branches of Indian Authorized Dealers outside India; and c. Treasury bills and other monetary instruments with a maturity or unexpired

maturity of one year or less.

(v) There are no end-use restrictions except for a ban on use / investment of such funds in Real Estate or the Stock Market. There is no monetary limit up to which an Indian company can raise ADRs / GDRs

(vi) The ADR / GDR proceeds can be utilized for first stage acquisition of shares in the disinvestment process of Public Sector Undertakings / Enterprises and also in the mandatory second stage offer to the public in view of their strategic importance.



(vii) Voting Rights

Voting rights on shares issued under the Scheme shall be as per the provisions of Companies Act, 1956 and in a manner in which restrictions on voting rights imposed on ADR/GDR issues shall be consistent with the Company Law provisions while voting rights in the case of banking companies will be as per the provisions of the Banking Regulation Act, 1949 as applicable to all shareholders exercising voting rights.

(viii) Restriction to Investment in ADR/ GDR

Erstwhile OCBs who are not eligible to invest in India and entities prohibited to buy, sell or deal in securities by SEBI will not be eligible to subscribe to ADRs / GDRs issued by Indian companies.

(ix) Pricing of ADR/ GDR

The pricing of ADR / GDR issues should be made at a price not less than the higher of the following two averages:

a. The average of the weekly high and low of the closing prices of the related

shares quoted on the stock exchange during the six months preceding the relevant date;

b. The average of the weekly high and low of the closing prices of the related shares quoted on a stock exchange during the two weeks preceding the relevant date.

26. Two-way Fungibility Scheme

Under this Scheme, a stockbroker in India, registered with SEBI, can purchase shares of an Indian company from the market for conversion into ADRs/GDRs based on instructions received from overseas investors. Reissuance of ADRs / GDRs would be permitted to the extent of ADRs/GDRs which have been redeemed into underlying shares and sold in the Indian market.

27. Sponsored ADR/GDR issue

An Indian company can also sponsor an issue of ADR / GDR. Under this, the company offers its resident shareholders a choice to submit their shares back to the company so that on the basis of such shares, ADRs / GDRs can be issued abroad. The proceeds of the ADR / GDR issue is remitted back to India and distributed among the resident investors who had offered their rupee denominated shares for conversion. These proceeds can be kept in Resident Foreign Currency (Domestic) accounts in India by the resident shareholders who have tendered such shares for conversion into ADR / GDR.

28. Reporting of ADR/GDR Issues

Following are the reporting requirements for the Indian Company issuing ADR/ GDR’s:

(a) Furnish to the Reserve Bank, full details of such issue in the prescribed form, within 30 days from the date of closing of the issue.

(b) Furnish a quarterly return, to the Reserve Bank within 15 days of the close of the calendar quarter. The quarterly return has to be submitted till the entire amount raised through ADR/GDR mechanism is either repatriated to India or utilized abroad as per Reserve Bank guidelines.



29. Portfolio Investment Scheme (PIS) Under the Portfolio Investment Scheme (PIS), NRI’s are permitted to acquire shares/debentures of Indian companies or units of domestic Mutual Funds through the stock exchange(s) in India. (i) Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians

(NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS).

(ii) The FIIs who have been granted registration by SEBI should approach their

designated Custodian bank, for opening a foreign currency account and/or a Non Resident Special Rupee Account.

(iii) NRIs can approach the designated branch of any AD Category - I bank authorized by

the Reserve Bank to administer the Portfolio Investment Scheme for permission to open a NRE/NRO account under the Scheme for routing investments.

30. Investment by FIIs under Portfolio Investment Scheme (PIS)

Reserve Bank has given general permission to SEBI registered FIIs/sub-accounts to invest under the PIS.

(i) Shareholding

(a) Limit for Individual Shareholding Total shareholding of each FII/sub-account under this Scheme shall not exceed 10 per cent of the total paid up capital or 10 per cent of the paid up value of each series of convertible debentures issued by the Indian company.

(b) Limit for Overall holding

Total holdings of all FIIs/sub-accounts put together shall not exceed 24 per cent of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24 per cent can be increased to the sectoral cap / statutory limit, as applicable to the Indian company concerned, by passing a resolution of its Board of Directors, followed by a special resolution to that effect, by its General Body.

(c) A domestic asset management company or portfolio manager, who is

registered with SEBI as an FII for managing the fund of a sub-account can make investments under the Scheme on behalf of:

i. A person resident outside India who is a citizen of a foreign state, or

ii. A body corporate registered outside India;

Provided such investment is made out of funds raised or collected or brought from outside through normal banking channel. Investments by such entities shall not exceed 5 per cent of the total paid-up equity capital or 5 per cent of the paid-up value of each series of convertible debentures issued by an Indian company, and shall also not exceed the overall ceiling specified for FIIs.




(ii) Prohibition on investments FIIs are not permitted to invest in equity shares issued by an Asset Reconstruction Company. They are also not allowed to invest in any company, which is engaged or proposes to engage in the following activities:

i) Business of chit fund, or ii) Nidhi Company, or iii) Agricultural or plantation activities or iv) Real estate business, or construction of farm houses

v) Trading in Transferable Development Rights (TDRs) and vi) Asset Reconstruction Company

31. Short selling by FIIs

Foreign Institutional Investors (FIIs) registered with SEBI and subaccounts of FIIs are permitted to short sell, lend and borrow equity shares of Indian companies, subject to such conditions as may be prescribed in that behalf, by the Reserve Bank and the SEBI / other regulatory agencies from time to time. The above permission is subject to the following conditions:

(a) The FII participation in short selling as well as borrowing /lending of equity shares will be subject to the current FDI policy and short selling of equity shares by FIIs shall not be permitted for equity shares which are in the ban list and / or caution list of Reserve Bank.

(b) Borrowing of equity shares by FIIs shall only be for the purpose of delivery into short

sales.

(c) The margin / collateral shall be maintained by FIIs only in the form of cash. No interest shall be paid to the FII on such margin/collateral.

32. Exchange Traded Derivatives Contracts

(i) SEBI registered FIIs are allowed to trade in all exchange traded derivative contracts

on recognised Stock Exchanges in India, subject to the position limits as prescribed by SEBI from time to time. The SEBI registered FII/sub-account may open a separate account under their Special Non-Resident Rupee Account through which all receipts and payments pertaining to trading/investment in exchange traded derivative contracts will be made. Further, transfer of funds, between the Special Non-Resident Rupee Account and the separate account maintained for the purpose of trading in exchange traded derivative contracts can be freely made. However, repatriation of the rupee amount will be made only through their Special Non-Resident Rupee Account subject to payment of relevant taxes. The AD Category – I banks have to keep proper records of the above mentioned separate account and submit them to Reserve Bank as and when required.

(ii) FIIs are allowed to offer foreign sovereign securities with AAA rating as security to the recognized Stock Exchanges in India for their transactions in derivatives segment. SEBI approved clearing corporations of stock exchanges and their clearing members are allowed to undertake the following transactions subject to the guidelines issued from time to time by SEBI in this regard:

a. to open and maintain demat accounts with foreign depositories and to

acquire, hold, pledge and transfer the foreign sovereign securities, offered as collateral by FIIs;

b. to remit the proceeds arising from corporate action, If any, on such foreign

sovereign securities; and



c. to liquidate such foreign sovereign securities if the need arises.

(iii) Clearing Corporations have to report, on a monthly basis, the balances of foreign

sovereign securities, held by them as non-cash collaterals of their clearing members to the Reserve Bank. The report should be submitted by the 10th of the following month to which it relates.

33. Forward cover & cancellation and rebooking

(i) Designated branches of AD Category – I banks maintaining accounts of FIIs can provide forward cover with rupee as one of the currencies to such customers subject to the following conditions:

a. FIIs are allowed to hedge the market value of their entire investment in equity

and/or debt in India as on a particular date. If a hedge becomes naked in part or full owing to shrinking of the value of the portfolio, for reasons other than sale of securities, the hedge may be allowed to continue to the original maturity, if so desired;

b. Rebooking

FIIs may be allowed to cancel and rebook forward contracts up to a limit of 2 per cent of the market value of their entire investment in equity and / or debt in India. The limit for calculating the eligibility for rebooking shall be based upon market value of the portfolio as at the beginning of the financial year (April – March). The outstanding contracts must be duly supported by underlying exposure at all times. These contracts may be rolled over on or before maturity. The monitoring of forward cover must be done on a fortnightly basis by the AD banks, and reported to the Reserve Bank on a monthly basis, as per the format prescribed.

c. the cost of the forward cover is met out of repatriable funds and /or inward remittance through normal banking channel;

d. all outward remittances incidental to the hedge are net of applicable taxes.

(ii) The eligibility for cover may be determined on the basis of the declaration of the FII. A review may be undertaken on the basis of market price movements, fresh inflows, amounts repatriated and other relevant parameters to ensure that the forward cover outstanding is supported by an underlying exposure. The AD Category – I bank has to ensure that

(a) Total forward contracts outstanding should not exceed the market value of the portfolio, and

(b) Forward contracts permitted to be rebooked should not exceed 2 percent of

the market value as determined at the beginning of the financial year.

34. Margin Requirements

SEBI registered FIIs / sub- accounts are allowed to keep with the Trading Member / Clearing Member amount sufficient to cover the margins prescribed by the Exchange / Clearing House and such amounts as may be considered necessary to meet the immediate needs.



35. Accounts with AD Category I Bank

(i) FIIs/sub-accounts can open a Foreign Currency denominated Account and / or a Special Non-Resident Rupee Account with an AD Category – I bank, for the purpose of investment.

(ii) The sums may be transferred from foreign currency account to rupee account for

making genuine investments in securities in terms of the SEBI (FII) Regulations, 1995 at the prevailing market rate and the AD Category – I bank may transfer repatriable proceeds (after payment of tax) from the rupee account to the foreign currency account.

(iii) The Special Non-Resident Rupee Account may be credited with the proceeds of sale

of shares / debentures, dated Government securities, Treasury Bills etc. Such credits are allowed, subject to the condition that the AD Category - I bank should obtain confirmation from the investee company / FII concerned that tax at source, wherever necessary, has been deducted from the gross amount of dividend / interest payable / approved income to the share / debenture / Government securities holder at the applicable rate, in accordance with the Income Tax Act.

(iv) The Special Non-Resident Rupee Account may be debited for purchase of shares /

debentures, dated Government securities, Treasury Bills etc., and for payment of fees to applicant FIIs’ local Chartered Accountant / Tax Consultant where such fees constitute an integral part of their investment process.

36. Private placement with FIIs

SEBI registered FIIs have been permitted to purchase shares / convertible debentures of an Indian company through offer/private placement, subject to the ceilings prescribed, i.e. individual FII/sub account -10 per cent and all FIIs/sub-accounts put together -24 per cent of the paid-up capital of the Indian company and to the sectoral limits, as applicable. Indian company is permitted to issue such shares provided that:

i. In the case of public offer, the price of shares to be issued is not less than the price at

which shares are issued to residents; and

ii. In the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable. Purchases can also be made of PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual Fund Schemes.

37. Allocation of funds

The SEBI registered FII shall restrict allocation of its total investment between equities and debt in the Indian capital market in the ratio of 70:30. The FII may form a 100% debt fund and get such fund registered with SEBI. Investment in debt securities by FIIs are subject to limits,

if any, stipulated by SEBI in this regard.




38. Reporting of FII investments

(i) An FII may invest in a particular share issue of an Indian company either under the FDI Scheme or the Portfolio Investment Scheme. The AD Category – I banks have to ensure that the FIIs who are purchasing the shares by debit to the special rupee accounts report these details separately in the LEC (FII) returns.

(ii) The Indian company which has issued shares to FIIs under the FDI Scheme (for

which the payment has been received directly into company’s account) and the Portfolio Investment Scheme (for which the payment has been received from FIIs' account maintained with an AD Category – I bank in India) should report these figures separately so that the details could be suitably reconciled for statistical / monitoring purposes.

(iii) A daily statement in respect of all transactions (except derivative trade) have to be

submitted by the custodian bank in floppy / soft copy in the prescribed format directly to Reserve Bank to monitor the overall ceiling / sectoral cap / statutory ceiling.

39. Investments by Non - Resident Indians (NRIs)

(i) NRIs are allowed to invest in shares of listed Indian companies in recognized Stock Exchanges under the PIS. NRIs can invest through designated ADs, on repatriation and non-repatriation basis under PIS route up to 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. The aggregate paid-up value of shares / convertible debentures purchased by all NRIs cannot exceed 10 per cent of the paid-up capital of the company / paid-up value of each series of debentures of the company. The aggregate ceiling of 10 per cent can be raised to 24 per cent, if the General Body of the Indian company passes a special resolution to that effect.

(ii) The NRI investor has to take delivery of the shares purchased and give delivery of

shares sold. Short Selling is not permitted.

(iii) Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India. If the shares are purchased on non-repatriation basis, the NRIs can also utilize their funds in NRO account in addition to the above.

(iv) The link office of the designated branch of an AD Category - I bank shall furnish to

the Reserve Bank, a report on a daily basis on PIS transactions undertaken by it, such report can be furnished on-line or on a floppy to RBI.

(v) Shares purchased by NRIs on the stock exchange under PIS cannot be transferred

by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI.

(vi) NRIs are allowed to invest in Exchange Traded Derivative Contracts approved by

SEBI from time to time out of Rupee funds held in India on non-repatriation basis subject to the limits prescribed by SEBI.

40. Monitoring of investment position by RBI

Reserve Bank monitors the investment position of FIIs/NRIs in listed Indian companies, reported by Custodian banks on a daily basis of the data furnished in Forms LEC (FII) and LEC(NRI).



41. Caution List

When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2 per cent below the applicable limit (for companies with paid-up capital of Rs. 1000 crores and above, the trigger limit is 0.5 per cent below the applicable limit), Reserve Bank will issue a notice to all designated branches of AD Category - I banks cautioning that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. Reserve Bank gives case-by-case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on a first-come-first-served basis.

42. Ban List

Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme.

43. Investments by Overseas Corporate Bodies (OCBs)

With effect from November 29, 2001, OCBs are not permitted to invest under the PIS in India. Further, the OCBs which have already made investments under the Portfolio Investment Scheme are allowed to continue holding such shares / convertible debentures till such time these are sold on the stock exchange. OCBs have been de-recognized as a class of investors in India with effect from September 16, 2003.

44. Foreign Venture Capital Investments

Investments by Venture Capital Funds

(i) A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from

RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI.

(ii) FVCIs can purchase equity / equity linked instruments / debt / debt instruments,

debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, RBI permits the FVCI to open a foreign currency account or rupee account with a designated branch of an AD Category – I bank.

(iii) The purchase / sale of shares, debentures and units can be at a price that is mutually

acceptable to the buyer and the seller.

(iv) AD Category – I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered.

45. Other Foreign Investments

Purchase of other securities by NRIs

(i) On non-repatriation basis

(a) NRIs can purchase shares / convertible debentures issued by an Indian company on non-repatriation basis without any limit. Amount of consideration for such purchase shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR / NRO account maintained with the AD Category - I bank.



(b) NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. Government of India has notified that NRIs are not permitted to make Investments in Small Savings Schemes including PPF. In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon will not be allowed to be repatriated abroad.

(ii) On repatriation basis

An NRI can purchase on repatriation basis, without limit, Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds; bonds issued by a public sector undertaking (PSU) in India and shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.

46. Purchase of Other securities by FIIs Foreign Institutional Investors (FIIs) can buy dated Government securities / treasury bills, listed non-convertible debentures / bonds issued by Indian companies and units of domestic mutual fund either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India. Purchase of debt instruments by FIIs are subject to limits notified by SEBI.

47. Investment by Multilateral Development Banks (MDBs)

A Multilateral Development Bank (MDB), which is specifically permitted by Government of India to float rupee bonds in India, can purchase Government dated securities.

48. Foreign Investment in Tier I and Tier II instruments issued by banks in India

(i) FIIs registered with SEBI and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India and denominated in Indian Rupees, subject to the following conditions.

a. Investment by all FIIs in Rupee denominated Perpetual Debt instruments

(Tier I) should not exceed an aggregate ceiling of 49 per cent of each issue, and investment by individual FII should not exceed the limit of 10 per cent of each issue.

b. Investments by all NRIs in Rupee denominated Perpetual Debt instruments

(Tier I) should not exceed an aggregate ceiling of 24 per cent of each issue and investments by a single NRI should not exceed 5 percent of the issue.

c. Investment by FIIs in Rupee denominated Debt capital instruments (Tier II)

shall be outside the limits stipulated by SEBI for FII investment in corporate debt instruments.

d. Investment by NRIs in Rupee denominated Debt Capital instruments (Tier II)

shall be in accordance with the extant policy for investment by NRIs in other debt instruments.

(ii) The issuing banks are required to ensure compliance with the conditions stipulated

above at the time of issue. They are also required to comply with the guidelines notified by the Department of Banking Operations and Development (DBOD), Reserve Bank of India, from time to time.

(iii) The issue-wise details of amount raised as Perpetual Debt Instruments qualifying for

Tier I capital by the bank from FIIs / NRIs are required to be reported in the prescribed format within 30 days of the issue to the Reserve Bank.



(iv) Investment by FIIs in Rupee denominated Upper Tier II Instruments raised in Indian Rupees will be outside the limit prescribed by SEBI for investment in corporate debt instruments. However, investment by FIIs in these instruments will be subject to a separate ceiling of USD 500 million.

(v) The details of the secondary market sales / purchases by FIIs and the NRIs in these

instruments on the floor of the stock exchange are to be reported by the custodians and designated banks respectively, to the Reserve Bank of India through the soft copy of the LEC Returns.

49. INVESTMENT IN PARTNERSHIP FIRM /PROPRIETARY CONCERN

a. Investment in Partnership Firm / Proprietary Concern

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided:

i. Amount is invested by inward remittance or out of NRE / FCNR / NRO

account maintained with Authorized Dealers / Authorized banks.

ii. The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income there from) or print media sector.

iii. Amount invested shall not be eligible for repatriation outside India.

b. Investments With repatriation benefits

NRIs / PIO may seek prior permission of Reserve Bank for investment in sole proprietorship concerns / partnership firms with repatriation benefits. The application will be decided in consultation with the Government of India.

NRI

N R

On Repatriation Basis

On Non - Repatriation Basis

Approval needed from Reserve Bank

along with GOI consultation.



c. Investment by non residents other than NRIs / PIO

A person resident outside India other than NRIs / PIO may make an application and seek prior approval of Reserve Bank (addressed to the Chief General Manager-in-Charge, Reserve Bank of India, Foreign Exchange Department, Foreign Investment Division, Central Office, Mumbai), for making investment by way of contribution to the capital of a firm or a proprietorship concern or any association of persons in India. The application will be decided in consultation with the Government of India.

d. Restrictions

An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business i.e. dealing in land and immovable property with a view to earning profit or earning income there from or engaged in Print Media.




E. FOREIGN INSTITUTIONAL INVESTMENTS

Registered Foreign Institutional Investors such as:

• Pension Funds; • Investment Trusts • Nominee companies; • Asset Management Companies.

who have obtained registration from SEBI, are permitted to invest on full repatriation basis under the portfolio investment scheme in the Indian Primary and Secondary Stock Markets (including OTCEI) as well as in unlisted, dated Government Securities, Treasury Bills and Units of Domestic Mutual Funds without any lock-in period.

FIIs are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs can acquire shares/debentures of Indian companies through the stock exchanges in India.

The ceiling for overall investment for FIIs is 24 per cent of the paid-up capital of the Indian company, and limit is 20 per cent of the paid-up capital in the case of public sector banks. The ceiling of 24 per cent for FII investment can be raised up to sectoral cap/statutory ceiling, subject to the approval of the board and the general body of the company passing a special resolution to that effect.

To further increase FII participation in the Indian market, the government and SEBI have taken several measures:

• Allowed foreign individuals, corporate and other investors such as hedge funds to register directly as foreign institutional investors.

• SEBI has FII investment limit in government securities being increased to US$ 5 billion from US$ 3.2 billion.

• Institutional investors--including FIIs and their sub-accounts--have been allowed to undertake short-selling, lending and borrowing of Indian securities from February 1, 2008.

• SEBI has simplified the registration norms for FIIs and sub-accounts. • Significantly, it has allowed investment managers, advisors or institutional portfolio

managers in the NRI category to be registered as FIIs.

F. VENTURE CAPITAL INVESTMENT

1. Foreign Venture Capital Investor (FVCI)

The requirements for the Foreign Venture Capital Investor to operate in India are as follows:

• A registered Foreign Venture Capital Investor (FVCI) may, through the Securities and Exchange Board of India, apply to the Reserve Bank for permission to invest in Indian Venture Capital Undertaking (IVCU) or in a VCF or in a scheme floated by such VCFs. Permission may be granted by Reserve Bank subject to such terms and conditions as may be considered necessary

• The registered FVCI permitted by Reserve Bank under sub-paragraph (1), may purchase equity / equity linked instruments/ debt / debt instruments, debentures of a IVCU or of a VCF through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF.

• The amount of consideration for investment in VCFs/IVCUs shall be paid out of inward remittance from abroad through normal banking channels or out of funds held in an account maintained with the designated branch of an authorized dealer in India in accordance with Para 2.



2. Venture Capital Fund (VCF) and Venture Capital Company (VCC)

An offshore venture capital company may contribute upto 100% of the capital of a domestic venture capital fund and may also set up a domestic asset management company to manage the fund. VCFs and VCCs are permitted upto 40% of the paid up corpus of the domestic unlisted companies. This ceiling would be subject to relevant equity investment limit in force in relation to areas reserved for SSI. Investment in a single company by a VCF/VCC shall not exceed 5% of the paid-up corpus of a domestic VCF/VCC.

The automatic route is not available.

G. JOINT VENTURES AND SUBSIDIARIES OUTSIDE INDIA

Reserve Bank has given general permission to Indian companies to invest abroad in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) subject to compliance of the following conditions.

CATEGORY OF INVESMENT

AMONT OF INVESTMENT

NOT TO EXCEED

CRITERIA FOR PERMISSION

MODE OF INVESTMENT

HOW TO APPLY

Investment in J/V or WOS outside India except Nepal & Bhutan

US $ 50 million or its equivalent in a block of three financial years

The direct investment is made in a foreign entity engaged in the same core activity carried on by the Indian party;

The Indian Party has earned net profit during the preceding three accounting years;

.

Investment can be made by way of equity or loan or by way of giving guarantee.

Investment can be made out of EEFC account funds or by drawing Foreign Exchange from the Authorised Dealer.

Investment by way of capitalization of exports of goods and services towards equity contribution and any other dues can be also be made as prescribed under the regulations.

To submit form ODA, duly completed, to the designated branch of an authorised dealer (Bank) for onward transmission to Reserve Bank.

Investment in J/V or WOS in Nepal & Bhutan

Rs. 120 crores in a block of three financial years

Same as above Same as above Same as above

Investment out of ADR/GDR issues

50% of amount raised by ADR / GDR issue

The ADR/GDR issue has been made in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipt Mechanism) Scheme 1993 and the guidelines issued there under

Same as above To file with Reserve Bank, in form ODA full details of the investment made, within 30 days of such investment.




AMONT OF INVESTMENT

NOT TO EXCEED


MODE OF INVESTMENT

HOW TO APPLY

Investment in Financial Service Sector

US $ 50 million or its equivalent in a block of three financial years

Only an Indian party engaged in financial service activities can make investment in entity engaged in financial services activities – If

Investor company has earned net profit in 3 preceding financial years and has minimum net worth of Rs. 15 Cr. as on last audited Balance Sheet

Same as above To submit form ODA, duly completed, to the designated branch of an authorised dealer (Bank) for onward transmission to Reserve Bank.

Investment in foreign security by way of Swap or exchange of shares.

US$ 100 million or 10 times of export earning of Indian party in preceding financial year including all investment in same financial year

Only those Indian party engaged in, Information Technology and entertainment Software, Pharmaceutical sector, biotech [Specified activity] may acquire shares of foreign company in exchange of ADR / GDR

ADR / GDR issue of Indian party is listed outside India

80% of average turnover of Indian party in 3 previous financial year - is from activity included in schedule or Indian party has annual average export earning of at least Rs. 100 Cr. in previous 3 financial year from its activities.

ADR / GDR issue is backed by fresh equity shares by Indian party.

To submit a report in form ODG to the Reserve Bank

Acquisition of a foreign Company through bidding or tender

Same as first category

Same as first category Acquisition of the foreign company

To fill form ODA and ODI as prescribed to Reserve Bank

Investment proposal, not falling under General Permission Category

As per the permission of Reserve Bank

1 . Prima facie viability of J/V or WOS

2. Contribution to external trade by proposed investment

Direct investment

File form ODI




AMONT OF INVESTMENT

NOT TO EXCEED


MODE OF INVESTMENT

HOW TO APPLY

3 . Financial position & business track record of Indian party & foreign entity.

4. Experience & expertise of Indian party in related line of activity

Exchange of shares File form ODB

Investment by partnership firm

Outbound investment is permitted by partnership firms, registered under Indian Partnership Act, 1932 and providing the following professional services:

• Chartered Accountancy • Legal practice and related services • Information technology and entertainment software related services • Medical and health care services.

No permission is necessary for such investment subject to complying with prescribed conditions, failing which specific permission from the Reserve Bank is required.

H. EXCHANGE CONTROL

The Foreign Exchange Management Act, 1999 (FEMA) has been enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market.

It extends to the whole of India. It also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person resident in India to whom this act applies.

The following authorities govern FEMA:

• Central Government has been empowered to prescribe rules; • Reserve Bank has been empowered to prescribe regulations and to issue directions to

authorized persons.

Important features of FEMA are:

• Primarily there are no restrictions on current account transactions related to foreign exchange and a person may sell or draw foreign exchange freely for his current account transactions, subject to certain exceptions, conditions and monetary ceiling

• Capital account transactions, though freed to some extent, continue to be regulated by Reserve Bank.



I. BUSINESS FORMS

A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through

• Joint Ventures; or • Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.

Joint Venture with an Indian Partner

Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners.

Joint Venture may entail the following advantages for a foreign investor:

• Established distribution/ marketing set up of the Indian partner • Available financial resource of the Indian partners • Established contacts of the Indian partners which help smoothen the process of setting

up of operations.

Wholly Owned Subsidiary Company

Foreign companies can also to set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.

Foreign Companies can set up their operations in India through

• Liaison Office/Representative Office • Project Office • Branch Office

Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.

Liaison Office/Representative Office

Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and can not, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to

prospective Indian customers Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI).

Project Office

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.



Branch Office

Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:

• Export/Import of goods. • Rendering professional or consultancy services. • Carrying out research work, in which the parent company is engaged. • Promoting technical or financial collaborations between Indian companies and parent or

overseas group company. • Representing the parent company in India and acting as buying/selling agents in India. • Rendering services in Information Technology and development of software in India. • Rendering technical support to the products supplied by the parent/ group companies. • Foreign airline/shipping company

Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).

Branch Office on “Stand Alone Basis”

Such Branch Offices would be isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India. No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.

Company-Appropriate Entity

The most appropriate form of business enterprise for foreign investor is a limited liability company.

Sole proprietary and partnership are the other business forms prevalent in India but due to unlimited liability they are not normally found suitable by overseas investors.

Under the present policy of the Government, all companies have to be incorporated in India under the Companies Act to carry on in India any business/service activities.

Indian companies are classified into two categories - 'Public' and 'Private' companies

A Private Limited Company is a Company limited by shares in which there can be a maximum 50 shareholders, no invitation can be made to the public for subscription of shares or debentures, cannot make or accept deposits from Public and there are restriction on the transfer of shares. The liability of each shareholder is limited to the extent of the unpaid amount of the shares face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a company can at times be unlimited. The minimum number of shareholders is 2.

A Public Limited Company is a Company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. The liability of each shareholder is limited to the extent of the unpaid amount of the share’s face value and the premium thereon in respect of the shares held by him. However, the liability of a Director / Manager of such a Company can at times be unlimited. The minimum number of shareholders is 7.

The Companies Act has wider regulations for public companies in respect of management, borrowings and dealing with members and creditors due to greater public participation.



Company Formation

Following are the steps by which a company can be formed:

• The proposed company name should be approved by the registrar of companies. • Secondly, the memorandum and articles of association of articles should be

prepared. • Suitable persons should be appointed for the subscription of memorandum of

association. • Registration fees should be deposited to registrar of companies and receipt of

certificate of incorporation should be collected. • Business commencement certificate should be collected from the registrar of

company. • The company then emerges as a legal entity with limited liability.

Memorandum and Articles of Association

The Memorandum of Association of a company defines the objects for which the company is in existence. The company cannot operate beyond the scope of business activities in the Memorandum. The Memorandum of Association of a public company is signed by a minimum of seven promoters and by a minimum of two in the case of private company.

This document should contain

• The company name. • The address where the registered office of the company is located. • The objects of the company. • The name and addresses of the directors of the company

Depending on the type of the company other clauses can be included in the memorandum.

The Articles of Association are the internal regulations for the conduct of the affairs of the company. The Articles of Association cannot go beyond the scope of the Memorandum of Association.The subscribers sign the company's articles in front of the witness which are ultimately delivering to the registrar. These witnesses also attest the signatures.

Issue of Shares

Issue of shares requires compliance of various provisions of the Companies Act. A prospectus is a document, which offers to the public the shares of a company, requires detailed disclosure with regard to the company, its directors, its past working and future projections, contracts which it has entered into, and other details. A company can issue shares to the public only after a copy of the prospectus has been filed with the Registrar. At least 90% subscription of the public issue must be collected prior to allotment.

An Indian company may issue "sweat equity shares" i.e. shares issued by a company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, if approved by its shareholders, subject to certain conditions.

An Indian company may buy-back its own shares if authorised by its Articles of Association and approved by its shareholders, subject to certain conditions.



Directors and Management

Companies Act, which governs the functioning of the company, requires to have at least two directors in the case of private companies and three directors in the case of public company.

Non-resident directors, other than a non-resident Managing Director, can serve on the Board of an Indian company. Under the Companies Act, one-third of the directors need not retire by rotation and, therefore, it is not unusual for the foreign investor to have the right to nominate directors who need not retire by rotation.

Provisions also exist in the Companies Act for the appointment of alternate directors to act in place of the original director. It is common practice for the foreign investor to have Indian legal and accounting professionals to act as alternate directors as their nominees to protect the foreign investor's interest in Indian companies.

J. MONOPOLIES AND RESTRICTIVE TRADE PRACTICES

The Monopolies and Restrictive Trade Practices Act, 1969, aims to prevent concentration of economic power to the common detriment, provide for control of monopolies and probation of monopolistic, restrictive and unfair trade practice, and protect consumer interest.

Monopolistic trade practice: Monopolistic trade practice is that which represents abuse of market power in the production and marketing of goods and services by eliminating potential competitors from market and taking advantage of the control over the market by charging unreasonably high prices, preventing or reducing competition, limiting technical development, deteriorating product quality or by adopting unfair or deceptive trade practices. Unfair Trade Practice:

• Misleading advertisement and False Representation • Falsely representing that goods and services are of a particular standard, quality, grade,

composition or style. • Falsely representing any second hand renovated or old goods as new. • Making a representation of goods or services, seller or supplier have a sponsorship, approval

or affiliation which they do not have. • Making a false or misleading representation concerning need for, or usefulness of goods or

services. • Giving to public any warranty, guarantee of performance that is not based on an adequate

test or making to public a representation which purports to be such a guarantee or warranty. • False and misleading claims with respect to the price of goods or services. • Giving false or misleading facts disparaging the goods, services or trade of another person or

concern.

Restrictive Trade Practice: To maximize profits and market power, traders often attempt to indulge in certain trade practices which tend to obstruct the flow of capital into the stream of production. It may also bring manipulation of prices or conditions of delivery or affect the flow of supplies in the market so as to impose unjustified costs.



K. INTELLECTUAL PROPERTY RIGHTS

Intellectual property rights are a bundle of exclusive rights over creations of the mind, both artistic and

commercial. Intellectual property rights give creators exclusive rights to their creations, thereby

providing an incentive for the author or inventor to develop and share the information rather than keep

it secret. The legal protections granted by Intellectual Property laws are credited with significant

contributions toward economic growth.

Intellectual Property Rights can broadly be categorized into five major sub-heads namely,

(A) Trademark

(B) Patents

(C) Copyright

(D) Industrial Designs

(E) Geographical Indications

Each of the afore-mentioned intellectual property rights have been briefly encapsulated in the

following write-up: -

(A) TRADEMARKS

� Trademarks were one of the foremost forms of intellectual property protection witnessed by

the world and are commonly referred to as ‘identifying marks’ or ‘distinctive marks’. The

common law of trademark arose originally to prevent manufacturers from trying to pass off

their goods as someone else's. Since these humble origins, trademark law has taken giant

strides and now provides protection not only to words and phrases but also three-dimensional

objects and musical notes.

� The trade mark can be combination of words, letters, numbers, drawings, images, symbols,

and even sounds. The trade marks not only protect the owner rights but also required for

consumer to have confidence in the product purchase by him. Trademarks essentially a

product of competitive economy where competition is involved between the manufacturers of

similar products.

� In India, the Trademarks are regulated vide the Trade marks Act, 1999 which provides for the

registration and protection of trademarks and prevents the use of fraudulent trademarks. As

per the Trade Marks Act, all marks are not registrable as ‘trademarks’ under the Act. For a

mark to be registrable, it must conform to certain statutory prescriptions, which can briefly be

summarized as follows:-

i. The selected mark should be capable of being represented graphically (that is in the paper

form);

ii. It should be capable of distinguishing the goods or services of one undertaking from those of

others i.e. it should be distinctive;



iii. It should be used or proposed to be used in relation to goods or services for the purpose of

indicating or so as to indicate a connection in the course of trade between the goods or

services.

� The registration of a trademark shall be for a period of ten years, but it may be renewed from

time to time.

� Infringement of a trademark occurs if a person other than the registered proprietor in the

course of trade, in relation to the same goods or services for which the mark is registered,

uses the same mark or deceptively similar mark. The proprietor of a trademark has a right to

file a suit for infringement of his right and obtain an injunction or damages or accounts of

profits due to unauthorized use of the trademark. However, the legal remedies are available

to the owner of a trademark only if the concerned trademark has been registered by him.

(B) PATENTS

� A patent is not a right to practice or use the invention. Rather, a patent provides the right to

exclude others from making, using, selling, offering for sale, or importing the patented

invention for the term of the patent. A patent is, in effect, a limited property right that the

government offers to inventors in exchange for their agreement to share the details of their

inventions with the public. Like any other property right, it may be sold, licensed, mortgaged,

assigned or transferred, given away, or simply abandoned

� A patent may be defined as a set of exclusive rights granted by a state to an inventor or his

assignee for a fixed period of time in exchange for a disclosure of an invention.

� The patents in India are regulated by the Patents Act, 1970 as amended from time to time,

the latest being the Patents (Amendment) Act, 2005 along with the Patents (Amendment)

Rules, 2006. A Patent is granted for a period of 20 years from the date of filing the application

of patent. After this period the invention is available to all for commercial exploitation and it

becomes a public property.

� An invention must satisfy three conditions i.e. Novelty, Usefulness and Non-Obviousness

(Inventiveness) in order to be patentable. However, the act provides that the following cannot

be patented:

• an invention which is frivolous or which claims anything obviously contrary to well

established natural laws;

• an invention the primary or intended use or commercial exploitation of which could be

contrary to public order or morality or which causes serious prejudice to human ,

animal or plant life or health or to the environment;

• the mere discovery of scientific principle or the formulation of an abstract theory or

discovery of any living thing or non-living substance occurring in nature;

• the mere discovery of any new property or new use for a known substance or of the

mere use of a known process, machine or apparatus unless such known process

results in a new product or employs at least one new reactant;

• a substance obtained by mere admixture resulting only in the aggregation of the

properties of the components thereof or a process for producing such substance;

• the mere arrangement or re-arrangement or duplication of known devices each

functioning independently of one another in a known way;

• a method of agriculture or horticulture;



• any process for medicinal, surgical, curative, prophylactic, diagnostic, therapeutic or

other treatment of human beings or any process for a similar treatment of animals to

render them free of disease or to increase their economic value or that of their

products;

• plants and animals in whole or any part thereof other than microorganisms but

including seeds, varieties and species and essentially biological processes for

production or propagation of plants and animals;

• mathematical or business method or a computer program per se algorithms

• a literary, dramatic, musical or artistic work or any other aesthetic creation whatsoever

including cinematographic works and television productions;

• a mere scheme or rule or method of performing mental act or method of playing game;

• a presentation of information

• topography of integrated circuits

• an invention which, in effect, is traditional knowledge or which is an aggregation or

duplication of known properties of traditionally known component or components

• inventions relating to atomic energy

(C) COPYRIGHT

� Copyright is a legal concept, enacted by governments, giving the creator of an original work of

authorship exclusive rights to control its distribution for a certain time period, after which the

work enters the public domain. The Copyrights are provided for items like literary, musical,

artistic works like songs, musical scores, poetry, paintings, sculpture, films, architecture,

maps, technical drawings; computer programs, data base etc are provided to the creators.

Copyrights provide exclusive right to the creator to use or authorized other to use their

workers.

� The system of Copyrights in India is governed by the Copyright Act, 1957 which has been

amended five times since then, the latest being the amendment in 1999. India is a member of

the Berne Convention of 1886 (as modified at Paris in 1971), the Universal Copyright

Convention of 1951 and the Agreement on Trade Related Aspects of Intellectual Property

Rights (TRIPS) Agreement of 1995.

� Copyright can be obtained in respect of the following items: -

(i) Literary, dramatic and musical work. Computer programs/software are covered within

the definition of literary work.

(ii) Artistic Work

(iii) Cinematographic films which include sound track and video films

(iv) Record-any disc, tape, perforated roll or other device.

� The term of a Copyright is dependent upon the nature of item for which, copyright is sought to

be obtained. The term of a Copyright, as provided under the Copyright Act has been listed

below: -

a. If published within the life time of the author of a literary work the term is for the life

time of the author plus 60 years.

b. For cinematography films, records, photographs, posthumous publications,

anonymous' publication, works of government and international agencies the term is

60 years from the beginning of the calendar year following the year in which the work

was published.

c. For broadcasting the term is 25 years from the beginning of the calendar year

following the year, in which the broadcast was made



(D) INDUSTRIAL DESIGN

� Industrial designs refer to creative activity which result in the ornamental or formal

appearance of a product and design right refers to a novel or original design that is accorded

to the proprietor of a validly registered design. Industrial designs are an element of

intellectual property. The essential purpose of design law it to promote and protect the

design element of industrial production. It is also intended to promote innovative activity in

the field of industries.

� The Designs Act, 2000 enlists the statutory provisions in respect of the Designs and defines

the ‘Design’ as “only the features of shape, configuration, pattern or ornament or composition

of lines or color or combination thereof applied to any article whether two dimensional or

three dimensional or in both forms, by any industrial process or means, whether manual,

mechanical or chemical, separate or combined, which in the finished article appeal to and

are judged solely by the eye, but does not include any mode or principle or construction or

anything which is in substance a mere mechanical device, and does not include any trade

mark, as define in clause (v) of sub-section of Section 2 of the Trade and Merchandise

Marks Act, 1958, property mark or artistic works as defined under Section 2(c) of the

Copyright Act, 1957.”

� The essential requirements for the registration of Design are : -

� The novelty may reside in the application of a known shape or pattern to new

subject matter

� The design should relate to features of shape, configuration, pattern or

ornamentation applied or applicable to an article.

� The design should be applied or applicable to any article by any industrial

process.

� The features of the design in the finished article should appeal to and are judged

solely by the eye. This implies that the design must appear and should be visible

on the finished article, for which it is meant.

� Any mode or principle of construction or operation or anything which is in

substance a mere mechanical device, would not be registrable design

� The design should not include any Trade Mark or property mark or artistic works

as define under the Copyright Act, 1957.

� The duration of the registration of a design is initially ten years from the date of registration,

but in cases where claim to priority has been allowed the duration is ten years from the

priority date. This initial period of registration may be extended by further period of 5 years on

an application made to the concerned authority before the expiry of the said initial period of

Copyright.

(E) GEOGRAPHICAL INDICATIONS

� Geographical Indications of Goods are defined as that aspect of industrial property which

refer to the geographical indication referring to a country or to a place situated therein as

being the country or place of origin of that product. Typically, such a name conveys an

assurance of quality and distinctiveness which is essentially attributable to the fact of its origin

in that defined geographical locality, region or country.



� The salient features of Geographical Indications are: -

• It is an indication

• It originates from a definite geographical territory.

• It is used to identify agricultural, natural or manufactured goods

• The manufactured goods should be produced or processed or prepared in that

territory.

• It should have a special quality or reputation or other characteristics

� The registration of a geographical indication is valid for a period of 10 years. It can be

renewed from time to time for further period of 10 years each. The benefits arising from the

registration of Geographical Indications are as under: -

� It confers legal protection to Geographical Indications in India

� Prevents unauthorized use of a Registered Geographical Indication by others

� It provides legal protection to Indian Geographical Indications which in turn boost

exports.

� It promotes economic prosperity of producers of goods produced in a geographical

territory.

L. FINANCE

Industrial units are financed primarily through two main sources:

• internal sources • external sources

INTERNAL SOURCES OF FINANCE

These are sources of finance that come from the business' assets or activities.

Retained Profits

If the business had a successful trading year and made a profit after paying all its costs, it could use some of that profit to finance future activities .This can be a very useful source of long term finance, provided the business is generating profit.

Sale of assets

The business can finance new activities or pay-off debts by selling its assets such as property, fixtures & fittings, machinery, vehicles etc.

It is often used as a short term source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term finance if the assets being sold are very valuable (e.g. land or buildings)

If a business wants to use its assets, it may consider sale and lease-back where it may sell its assets and then rent or hire it from the business that now owns the assets. It may mean paying more money in the long run but it can provide cash in the short term to avoid a crisis.

.



EXTERNAL SOURCES OF FINANCE

Capital issue

Capital issues by companies are supervised by the Securities and Exchange Board of India which is empowered to regulate the financial structure of joint stock companies and may be a safeguard for the investing public. Minimum limits for promoter's contribution are laid down for all issues of capital to the public. A share issue involves a business selling new shares that entitle the shareholders to share in the control of the business. Each share gives the shareholder a vote on the direction of the company. This usually means that the shareholder can elect the board of directors of the company each year.

Stock Exchange

Indian Stock Exchanges are a structured marketplace for the proper conduct of trading in company stocks and other securities. There are 23 recognized stock exchanges in India, including the Over the Counter Exchange of India for providing trading access to small and new companies. The main services of the Indian Stock Exchanges all over the country are to provide nation-wide services to investors and to facilitate the issue and redemption of securities and other financial instruments.

Currently, in all the Indian Stock Exchanges the trading system is computerized for more efficient and transparent trading. There has been a significant boom in the degree of development and volume of trading in the stock exchanges.

The two most important exchange houses of the Indian stock market are the Bombay Stock Exchange and the National Stock Exchange. Many of the regional stock exchanges have obtained the membership of these two stock exchanges in India. The index of the Bombay Stock Exchange, BSE Sensex is a value-weighted index composed of 30 companies.

Term Borrowings

India has a well-organized capital market with several financial agencies, which provide term borrowings, guarantees and underwriting facilities to the industrial sector. The principal agencies for term borrowings are the All India Financial Institutions, the Commercial Banks and State Financial Corporations.

Commercial banks provide term loans and specialize in providing working capital for the industrial sector.

Commercial Bnaks play an important role in financing the short-term requirements of business concerns. They provide finance in the following ways :-

� Loans :- When a bank makes an advance in lump sum, the whole of which is withdrawn to

cash immediately by the borrower who undertakes to repay it in one single installment, it is

called a loan. The borrower is required to pay the interest on the whole amount.

� Cash credit :- It is the most popular method of financing by commercial banks. When a

borrower is allowed to borrow up to a certain limit against the security of tangible assets or

guarantees, it is known as secured credit but if the cash credit is not backed by any security, it

is known as clean cash credit. In case of clean cash credit the borrower gives a promissory

note which is signed by two or more sureties. The borrower has to pay interest only on the

amount actually utilised.

� Overdrafts :- Under this, the commercial bank allows its customer to overdraw his current

account so that it shows the debit balance. The customer is charged interest on the account

actually overdrawn and not on the limit sanctioned.



� Discounting of bills :- Commercial banks finance the business concern by discounting their

credit instruments like bills of exchange, promissory notes and hundies. These documents are

discounted by the bank at a price lower than their face value.

State Financial Corporations are state -level financial institutions, operating as regional development banks playing crucial role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyze investment, generate employment and widen the ownership base of industry.

State financial corporations provide financial assistance by way of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/special capital.

The State financial corporations operate a number of schemes of refinance and equity type assistance on behalf of IDBI/SIDBI in addition to special schemes for artisans and special target groups such as SC/ST, women, ex-servicemen, physically handicapped, etc.

Venture Capital

Venture capital is most attractive for new companies with limited operating history that are too small to raise capital in the public markets and are too immature to secure a bank loan or complete a debt offering. In exchange for the high risk that venture capitalists assume by investing in smaller and less mature companies, venture capitalists usually get significant control over company decisions, in addition to a significant portion of the company's ownership.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

• Finance new and rapidly growing companies • Purchase equity securities • Assist in the development of new products or services • Add value to the company through active participation • Take higher risks with the expectation of higher rewards • Have a long-term orientation

Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously.

In India, these funds are regulated by the SEBI Regulations. According to the SEBI Regulations venture capital fund means a fund established in the form of a company or trust, which raises monies through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.

The investment of capitalists in Indian industries in the first half of 2006 is $3 billion and is expected to reach $6.5 billion at the end of the year. Most VC firms in India are either divisions or subsidiaries of Silicon Valley funds. They are primarily centered in Bangalore and Mumbai. Some VCs also operate from Delhi and other parts of the National Capital Region.



Credit Rating

Credit rating is a requirement for debenture issue, fixed deposits and commercial paper programmes.

External Commercial Borrowing (ECB)

External Commercial Borrowings (ECBs) include bank loans, suppliers' and buyers' credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation. Euro-issues include Euro-convertible bonds and GDRs. Indian companies/entities can raise money abroad through the External Commercial Borrowing (ECB) route as follows:

1. Automatic route

External Commercial Borrowings (ECB) up to USD 500 million during a financial year under Automatic Route with minimum average maturity period of 5 years.

2. Approval by Reserve Bank

Borrowers proposing to avail ECB up to $20 million for rupee expenditure for permissible end-uses would require prior approval of the Reserve Bank of India under the approval route.

Mutual Funds

Mutual funds are money-managing institutions set up to professionally invest the money pooled in

from the public. These schemes are managed by Asset Management Companies (AMC), which are sponsored by different financial institutions or companies.

Each unit of these schemes reflects the share of investor in the respective fund and its appreciation is judged by the Net Asset Value (NAV) of the scheme. The NAV is directly linked to the bullish and

bearish trends of the markets as the pooled money is invested either in equity shares or in debentures or treasury bills. Indian Mutual Funds unveils this multi-dimensional avenue, with its intricacies, in a fashionable manner as mutual funds up-hold ample scope of generating decent returns by some thoughtful investment

Unit Trust of India, India's first mutual fund was established in 1964. Banks, Financial Institutions, Insurance Companies, companies in the private sector including foreign companies have established mutual funds in India.

M. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) regulates and promotes an orderly development of the capital market in India.

The functions of SEBI are:

• To regulate the Capital Market • To check trading of securities. • To check the malpractices in the securities market. • To enhance investor's knowledge on the securities market by providing education. • To regulate the stockbrokers and sub-brokers. • To promote research and investigation



Mutual Funds, merchant bankers, FIIs, portfolio managers, stock brokers, sub-brokers, share transfer agents, bankers and registrars to the issue, underwriters, investment advisors and any other intermediaries who may be associated with the securities market in any manner have been brought under the purview of the regulatory powers of SEBI.

Some of the important rules, regulations and guidelines issued by SEBI are:

a. SEBI (Insider Trading) Regulations 1992; b. SEBI (Merchant Bankers) Rules/Regulations 1992; c. SEBI (Mutual Fund) Regulations 1996; d. SEBI (Portfolio Managers) Rules/Regulations 1993; e. Disclosure and Investor Protection Guidelines; f. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations 1995; g. SEBI (Depositories and Participants)Regulations 1996; h. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997; i. SEBI (Buy Back of Securities) Regulations 1998; j. SEBI (Stock Brokers and Sub-brokers) Rules/Regulations 1992; k. SEBI (Underwriters) Rules/Regulation 1993; l. SEBI (Debentures Trustees) Rules/Regulation 1993; m. SEBI (Bankers to an Issue) Rules/Regulation 1994; n. SEBI (Registrars to an Issue and Share Transfer Agents) Rules/Regulation 1993; o. SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines 1999; p. SEBI (Credit Rating Agencies) Regulations 1999; q. SEBI (Collective Investment Schemes) Regulations 1999; r. Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules 1999; s. SEBI (Custodian of Securities) Regulations 1996; t. SEBI (Venture Capital Funds) Regulations 1996; u. SEBI (Foreign Institutional Investors) Regulations 1995.

N. LABOUR RELATIONS

India has a pool of trained English speaking, technical and managerial personnel. India also has a comprehensive legislation to protect staff from arbitrary dismissal, regulate working conditions, terms of employment, provision for employee benefits, collective bargaining and settlement of disputes through agencies constituted by law. There is no requirement for employee's representation on the Board of directors of companies incorporated in India.




SECTION III - TAXATION

A. INCOME-TAX

India has a single Income-tax law, which is the Income-tax Act, 1961 (IT Act) and the Rules framed there under. The Indian Constitution prohibits states from imposing tax on income other than income derived from agriculture.

B. ADMINISTRATIVE SYSTEM

At the apex of the Income-tax department is the Central Board of Direct Taxes (CBDT). The CBDT is part of the Finance Ministry in the Government of India and administers direct tax laws. Under the CBDT is a large organization with commissioners in charge of specified areas assisted by deputy commissioners and officers, who issue assessment orders and collect taxes.

C. ASSESSMENTS

All taxpayers are required to file a Return of Income on or before specified dates each year.

Assessments of more than 90% non-corporate taxpayers are completed in a summary manner by accepting the returns furnished by them. Assessments in the remaining cases are made after requisite scrutiny and investigation.

Assessment of a non-resident can be made either directly or through his/her agent. In some cases, an Income-tax officer can treat a person in India as an agent of a non-resident and collect taxes of the non-resident through such an agent.

D. ADVANCE RULING [Defined in Section 245N-245V]

A person can seek an advance ruling on questions of law or of fact that relate to a transaction undertaken or proposed to be undertaken by a non-resident or a transaction undertaken by a resident with a non-resident.

An advance ruling would be binding for the specific transaction on the tax authorities and the applicant who has sought it. The advance ruling would be binding unless there is a change in the law or in the facts. Advance rulings are communicated within six months from the date of application.

E. RESIDENCE [Section 6]

The liability to tax under the 'IT Act' depends upon residential status of the taxpayer, irrespective of his nationality or domicile.

An individual is said to be resident in India in any tax year if he is

• In India for a period or periods amounting in all 182 days or more in a tax year; or • In India for an aggregate period of 60 days or more (182 days in certain cases) in the

tax year and has been in India for an aggregate period of 365 days or more in the four tax years preceding that tax year.




A person is said to be "resident but not ordinary resident" (NOR) in India in any tax year if such person is

a) an individual i) who has been non-resident in India in nine out of ten tax years preceding that tax

year; and ii) who has been a non-resident during the seven tax years preceding that tax year,

been in India for a period or periods aggregating to 729 days or less.

b) a manager of Hindu undivided family i) who has been non-resident in India in nine out of ten tax years preceding that

tax year; and ii) who has been a non-resident during the seven tax years preceding that tax

year, been in India for a period or periods aggregating to 729 days or less.

A non-resident is a person who is not resident in India.

A company, whether Indian or foreign, is said to be resident in India if the control and management of its affairs is situated wholly in India.

A foreign company will generally have a part of its management and control outside India and hence, will be a 'non-resident in India’.

F. SCOPE OF TOTAL INCOME [Section 5]

A Person resident in India pays tax in India on his global income.

A non-resident is liable to pay tax on its income received in India and also on income sourced in India. There are certain provisions in the IT Act which deems the income to accrue or arise in India (ie, sourced in India).

A 'resident but not ordinary resident' is not liable to tax in respect of income which accrues or arise to him outside India unless that income is derived from a business controlled in or a profession set up in India.

G. TAXABLE INCOME

The income of the taxpayer is determined under five heads - Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Specific deductions are available under each source and there are specific rules as to what constitute income from each source. Tax charge is at the rates in force for the relevant tax year.

Income under each head is computed after adjusting any loss against any income from sources under the same head. The income for an assessment year is determined after adjusting income computed under each head against loss under any other head in the same assessment year and unabsorbed depreciation of earlier years. The only exceptions are capital losses and losses sustained in speculation business which may be set off only against capital gains or income from any other speculation business respectively. Such adjusted income is the gross total income.Further, business losses cannot be set off against salary income. Gross total income less certain specified deductions and tax incentives provided under the 'IT Act' is the total taxable income of a taxpayer for a relevant assessment year.

Certain types of income and receipts are fully exempt from tax and do not form part of gross total income.



H. Taxable Expenses under Fringe Benefit Tax

FBT is levied on an employer having an employee’s base in India providing therewith specified facilities, which are known as fringe benefits.

Employer can be:

• AOP/BOI • Trust (only if not eligible for exemption u/s 10(23C) • Companies except companies covered u/s 25 • Partnership firms • Clubs not registered under section 12AA

Exclusions in FBT:

• Persons EXEMPT u/s 10 (23C) • Persons registered u/s (12aa) • Political party u/s 29a • Individual

• Hindu Undivided Family

• Central government

Other Points for Consideration

• NO FBT shall be levied on perquisites taxable under the head salary i.e. u/s 17 • NO FBT shall be levied on benefits exempt u/s 10( eg.Conveyance Allowance upto Rs.800/-) • Any payment made under statutory obligation not liable to FBT • Assessee is liable to FBT if he fulfills the following conditions:

� He is an employer. � FBT shall be charged in proportion of employess based in india (based in india means their

salary is taxable under the head salary) � Expenses can pertain to any operations (not necessarily bussiness or profession) carried

out in India. � Fulfills the conditions of subsection (1) of section 115WB & subsection (2) of section 115WB � Valuation should be prescribed in Section115WC � Actual expense incurred would not be considered.i.e, it is a presumptive taxation.

Fringe Benefits [Section 115WB]

Fringe benefits means any consideration for the employment provided by way of- [Sub section (1) of section 115WB]

Sub

sec Detail

Valuation[115WC] Qualifying

Quantum Other Points

a. Any privilage, service, facilty Directly /indirectly provided by employer as reimbursement or otherwise to his employees

� Not prescribed

100% � Not liable to FBT since ‘where the computation principal fails ,charging section could not be effectauted.

b � Free or concessional tickets � For private journey � Employees or their members

� Cost at which same is provided to general public

� Less recovered from the employee

100% � Applicable only to employers engaged in carriage of passengers or goods or agents of such employers.



Sub

sec Detail

Valuation[115WC] Qualifying

Quantum Other Points

c � Contribution to an approved supperannuation fund

� Amount of contribution

� Less Rs 1,00,000 in respect of each employee

100% � Contribution to approved gratuity fund, provident fund is not covered

d � Specified security or sweat equity shares

� Alotted or transferred � Directly or indirectly � Free of cost or concessional

rate

� FMV on the date on which option vests

� Less recovered from the employee

(See Note Below)

100% � Valuation shall be done as per FMV on date of option but liability to pay shall arise on the date of allotment.

NOTE:-

Situation FMV Remarks

Shares listed on only one

recongnised stock

exchange(Section 40C)

Average of opening and closing

prices on the date of vesting

If there is no trading, closing price

is taken as fair market value.

Shares listed on more than one

recongnised stock exchange

(Section 40C)

Average of opening and closing

prices, of the stock exchange

which records highest volume of

trading on the date of vesting

If there is no trading, closing price

is taken as fair market value.

Shares not listed (Section 40C) Value determined by Category (i)

Merchant banker on specified

date.

Specified date means:

Date of vesting of option or Date

earlier than date of vesting the

option but not earlier than 180

days.

Security other than equity share

(Section 40D)

Value determined by Category (i)

merchant banker on specified

date

Specified date means:

Date of vesting of option or Date

earlier than date of vesting the

option but not earlier than 180

days.




Deemed Fringe Benefit [Sub section (2) of section 115WB]

If the employer has, in course of his business or profession incurred any expense on or made any payment for the following purposes namely: -

Sub

Sec Details

Rate Other points

A � Entertainment 20% � Not liable to FBT � Expense in connection with exhibition,

amusement, gratification B � Provision of hospitality of any kind to

employee but doesnot include � Payment for food & beverages

by employer at work place � Non transferable paid vouchers

which are not transferable and usable only at eating joints or outlets.

20% � Not liable to FBT � Permanent training centre is a part of office,

hence not liable � Liable to FBT

� Expense on Inhouse training centre � Reimbursement of expenditure

� Exceptions (Concessional Rate)

� Hotel � Carriage of passengers or 5%

goods by ship/aircraft C � Conference including conveyance tour

& travel, hotel, boarding, lodging 20% � Not liable to FBT

� Fees for participation

� Liable to FBT � Attending training programmes by trade

bodies, institutions � Conference for agents, dealers, advisors.

D � Sales promotion excluding expenditure

on � Advertisment in print / electronic

/transport system. � Holding/ participation in any press

confrence, fair, exhibition. � Sponsorship of sports event, event

organised by govt. Agency, or AOP/BOI.

� Publication of notice in electronic/print media legally required.

� Advertisment by any means including display of products

� Payment to adverisement agency for any of above mentioned purposes

� Distribution of samples free of cost or at concessional rate.

20% � Not liable to FBT being ordinary selling expenses � Brokerage and selling commission � Discount allowed to whole sale

dealers/customers � Incentives given in cash or in kind for meeting

sales target. � Carrying out post sale activities � Expenses on advertisement films covered under

first exclusion

� Liable to FBT � Expenses on free offers/ freebies like tattoos,

cricket cards

E � Employee welfare but excluding � For statuary obligation � First aid facility in hospital/ dispensary

run by employer � Creche facilty for employees children � Organise sports event for employees

20% � Not liable to FBT � Insurance if statutorily required � Medical reimbursement exceeding Rs.15,000

being covered under salary

� Liable to FBT � Insurance if statutorily not required � Medical reimbursement upto Rs.15,000 � Reimbursement of expense on books and

periodicals to employees � Prizes/rewards on achievement of employees



Sub

Sec Details

Rate Other points

F � Conveyance 20% � Reimbursement of car expenses is liable to tax � Exceptions (Concessional Rate)

� Construction of business � Manufacturers of pharmaceuticals 5% � Software manufacturers/ producers

G � Use of hotel, boarding, lodging facilities 20% � Per day allowance is taxable � Expense may pertain to customer/clients � Exceptions (Concessional Rate)

� Carriage pf passengers or goods by ship/aircraft 5% � Manufacturers of pharmaceuticals � Software manufacturers/ producers

H � Repair, running, maintenance of motor

cars (does not include trucks, ambulance, lorries, tractor, display van)

� Depreciation thereon

20% � Not liable to FBT � Perquisite value of motor cars, liable to tax under

salary � Rent paid for operating lease, covered under the

head conveyance

� Liable to FBT � Rent paid for the finacal lease of a motor car � Depreciation as per IT Act on the complete block � Interest on car loan

� Exceptions (Concessional Rate) � Carriage of passengers or goods by motor car. 5%

I � Repair, running, maintenance of aircrafts

20% � Liable to tax � Salary of pilot � Rent paid for garages, parking slot, etc

J � Use of telephone, excluding leased telephone lines

20% � Not liable to FBT � Telephone installed in office

K � Festival celebrations 20% � liable to FBT

� Festival include Navratari, Diwali, Id, Christmas, New year, but does not include 15 august (Independence day), 26 january (Republic day, annual day.

L � Health club and similar facilities 50% � Include entrance fees, membership fees.

M � Other club facilty 50% � Depreciation on club not covered

N � Gifts (anything given without consideration)

50% � Liable to FBT � Gifts to employees on marriage or otherwise � Gift in kind (cost to the employer)

O � Scholarship 50% � Liable to FBT � Scholarship to students of employees or their



Sub

Sec Details

Rate Other points

relatives � Emloyeees sent to educational institutions

(not covered under employee welfare), being specific section

P � Tour & travel (including foreign travel) 5%

Note:

The FBT is levied at the Corporate Tax rates i.e. 33.99% [i.e. 30% Tax + 10% surcharge + 3% cess on Tax and surcharge]

The FBt provisions are further explained through an example:-

Example: - Company ‘A’ incurs an expense of Rs. 1 million on entertainment and Rs. 0.2 million on tiickets for tour & travelling both of which are liable for FBT.

Qualifying Quantum of entertainment expense on which FBT shall be leviable

(20 % of total expense incurred) : Rs. 0.20 millions

FBT @ 33.99% : 0.20 * 0.3399

FBT = Rs. 0.067 millions.

Qualifying Quantum of tickets for tour & travelling on which FBT shall be leviable

(5 % of total expense incurred) : Rs. 0.01 millions

FBT @ 33.99% : 0.01 * 0.3399

FBT = Rs. 0.003 millions.

Hence, total amount of FBT payable by the Company ‘A’ is Rs. 0.07 millions.




I. AGRICULTURAL INCOME [Section 10(1)]

Agriculture is a state subject and there is no central income tax on agricultural income. However, agricultural income is aggregated with other income for the purpose of determining the rate of tax applicable to other income.

J. TAX CONCESSIONS

The IT Act offers several tax incentives to industrial units in the country in computing taxable income from business and profession. These incentives reduce the tax incidence substantially.

Depreciation Allowance [Section 32]

Depreciation is available on tangible and intangible capital assets used in business, except land.

Tangible assets are classified into four blocks, i.e., buildings, machinery, plant or furniture.

Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature, being acquired on or after 1

st day of April, 1998.

Depreciation is restricted to 50% of the rates in the year of acquisition if the asset is used for less than 180 days. Depreciation can also be claimed on assets owned wholly or partially by the assessee.

It is mandatory to claim depreciation allowance. Unabsorbed depreciation can be carried forward and set off against income of subsequent years without any time limit.

The IT Act permits depreciation allowance on written down value method. However, in respect of assets acquired on or after 1st April 1998 by undertakings engaged in the business of generation or generation and distribution of power, depreciation is allowed under straight line method on individual asset instead of block of assets.

Deduction for assessee engaged in tea business [Section 33AB]

Deduction will be allowed to the assessee engaged in the business of growing and manufacturing tea to the extent of 40% of the profits computed under the head profits and gains of business and profession or amount deposited with the National Bank for Agriculture and Rural Development whichever is less. The amount is required to be deposited within 6 months from the end of the previous year/before the filing of the return of income, whichever is earlier.

Deduction for assessee engaged in business of prospecting for, or extracting or production of petroleum or natural gas or both in India [Section 35ABA]

Deduction will be allowed to an assessee who has entered into an agreement with Central Government and is engaged in the business of prospecting for, or extracting or production of, petroleum or natural gas or both in India. Amount eligible for deduction will be to the extent of 20% of the profits computed under the head profits and gains of business or profession or amount deposited in an account called 'Site restoration account' which ever is less

Expenditure on scientific research [Section 35]

Any expenditure incurred on scientific research, which is related to business, shall be allowed as a deduction from the taxable income. Contributions made to the National laboratory or to the scientific research association for the object of undertaking research will be allowed at a weighted rate of 125%. Weighted deduction of 150% will be allowed to companies engaged in the business of biotechnology.



Expenditure on eligible projects/schemes [Section 35AC]

A deduction is allowed in respect of the expenditure incurred for an eligible project or scheme for promoting social and economic welfare or upliftment of the public as may be specified by the Central Government on the recommendations of the National Committee. Companies shall, however, be allowed the deduction also in cases where the expenditure is incurred by them directly on an eligible project or scheme.

Expenditure for obtaining license to operate telecommunication services [section 35ABB]

An expenditure being in the nature of capital expenditure, incurred for acquiring any right to operate telecommunication services and for which payment has actually been made to obtain a licence, shall be allowed as deduction in equal installments over the period starting from the year in which such payment has been made and ending in the year in which the license comes to an end.

Expenditure by way of payment to association and institution for carrying out rural development programmes [Section 35CCA]

Any amount paid to any association or institution which has the object of rural development, or training of persons for implementing programmes of rural development, or any contribution made to a rural development fund set up by the central government or to the National Urban Poverty Eradication Fund shall be allowed as deduction during the previous year in which the expenditure is incurred.

Expenditure incurred in case of amalgamation or demerger [Section 35DD]

Any Indian company which has incurred expenditure on or after 1st April 1999, wholly for the purpose of amalgamation or demerger of an undertaking, deduction will be allowed over a period of 5 years in equal installments from the previous year in which the amalgamation or demerger takes place.

Voluntary retirement expenses [section 35DDA]

Deduction in respect of payments made to employees on voluntary retirement in accordance with prescribed guidelines shall be allowed as deduction in 5 equal installments commencing from the year in which expenditure is incurred.

Expenditure on prospecting for certain minerals [section 35E]

An Indian company or a person (other than a company) who is resident of India and non resident company, both can claim deduction in respect of expenditure incurred on prospecting for development of certain minerals listed in Schedule VII of the 'IT Act'. The deduction can be claimed in respect of expenditure incurred during the period of 5 years till the year in which commercial production is commenced. It can be claimed over a period of 10 years in equal installments.

Concession for newly established Industrial Undertakings in Free Trade Zones [Section 10A]

Profits and gains derived by an undertaking from the export of articles or things or computer software are exempt from tax for a period of 10 consecutive years from the year in which production commences.

Deduction will not be allowed to any undertaking for the assessment year beginning on the 1st day ofApril 2011 and subsequent years, thereafter.



Undertaking in the Special Economic Zone (SEZs) which begin to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year beginning from 1st April 2003 or thereafter, the deduction will be allowed at 100% of the profits derived from the export of such articles or things or computer software for a period of five consecutive assessment year beginning with the year in which the undertaking begins to manufacture or produce. Thereafter the deduction will be allowed at 50% of such profits and gains for further two assessment years.

Concession for newly established 100% export oriented undertakings (EOUs) [Section 10B]

Profits and gains derived by an undertaking from the export of articles or things or computer software are exempt from tax for a period of 10 consecutive years from the year in which production commences.

Deduction will not be allowed to any undertaking for the assessment year beginning on the 1st day of April 2011 and subsequent years, thereafter.

Concession in respect of industrial undertaking in North-Eastern region [Section 10C]

Profits and gains derived by an industrial undertaking, which begins to manufacture or produce any article or thing on or after 1st April 1998 in any Integrated Infrastructure Development Centre or Industrial Growth Centre located in the North Eastern Region shall not be included in its total income for ten consecutive assessment years from the tax year in which the undertaking begins to manufacture or produce articles or things.

However no deduction shall be allowed to any undertaking for the assessment year beginning on the 1

st day of April, 2004 and subsequent years, thereafter.

Tax Holidays

Business profits of an enterprise engaged in developing, maintaining and operating any infrastructure facility are eligible for a deduction of 100% of the profits and gains derived from such business for 10 consecutive years, falling within a block of fifteen years from the year in which the operations commence. The activity should have commenced on or after 1st April 1995. The block period of fifteen years is extended to twenty years for certain specified infrastructure facilities.

Business profits of an undertaking which begins providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, or network of trunking and electronic data interchange services between April 1, 1995 and March 31, 2005 are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years, in the ten year period falling within a block of 15 years from the year in which such enterprise starts providing telecommunication services.

Business profits of a developer who is involved in the business of developing a Special Economic Zones (SEZs), notified on or after 1st day of April, 2005 under the Special Economic Zone Act, 2005, be allowed in computing its total income a deduction of an amount equal to 100% of the profits and gains derived from such business for ten consecutive assessment years. The deduction shall be claimed by the assessee for any 10 consecutive assessment years out of fifteen years beginning from the year in which such Special Economic Zone has been notified by the Central Government.




Business profits of an undertaking which begins generation and distribution of power between April 1, 1993 and March 31, 2010 and an undertaking which starts transmission or distribution of power by laying a network of new transmission or distribution lines between April 1, 1999 and March 31, 2010,and an undertaking which starts substantial renovation and modernization of the existing network of transmission or distribution lines at any time during the period beginning on the 1

st day of

April,2004 and ending on the 31st day of March,2010 are eligible for a deduction of 100% of profits for

10 consecutive years, falling within a block of 15 years from the year in which the undertaking generates power or commences distribution or transmission of power.

Business profits of an industrial undertaking situated in a specified industrially backward state and engaged in the manufacture or production of articles or things or operation of cold storage plant or plants between April 1, 1993 and March 31, 2004, are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years.

Business profits of a hotel located in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may having regard to the need for development of infrastructure for tourism, which begins to function between April 1, 1997 and March 31, 2001 are eligible for a deduction of 50% of the profits for a period of ten years.

The deduction in respect business profits of other hotels is allowed at 30% for a period of 10 years beginning with the year in which it starts functioning any time between 1st April 1997 and before 31st March 2001.

Business profits of an undertaking engaged in developing and building housing projects which commence development and construction on or after 1

st day of October, 1998 and complete such

construction:

1. in a case where a housing project has been approved by the local authority before the 1st day of April ,2004 on or before the 31

st day of March 2008;

2. in a case where a housing project has been approved by the local authority on or after 1

st day of April,2004 within four years from the end of the financial year in which

the housing project is approved by the local authority are eligible for a deduction of 100% of profits.

Business profits of an industrial undertaking operating, a cold chain facility for agriculture produce between April 1, 1999 and April 1, 2004 are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years.

The amount of deduction in the case of the business of ship is 30% of the profits and gains derived from such ship for a period of 10 consecutive assessment years provided that the ship is wholly used for the purpose of business carried on by it and is brought into use between 1st April 1991 and 31st March 1995.

Business profits of an undertaking engaged in a business of scientific and industrial research and development approved by the prescribed authority after 31st March 2000 but before 1st April 2007 are eligible for a deduction of 100% of the profits for a period of ten years.

Business profits of an undertaking which begins commercial production of mineral oil in North Eastern Region before 1st April 1997 and in other regions on or after 1st April 1997 will be eligible for a deduction of 100% of the profits for the first 7 years.

Business profits of an undertaking, which begins refining of mineral oil on or after 1st October 1998, will be eligible for a deduction of 100% of the profits for the first 7 years. Where such undertaking begins refining of mineral oil on or after the 1

st day of April, 2009 no deduction under this section shall

be allowed in respect of such undertaking unless such undertaking fulfils certain conditions.



Business profits of an undertaking, which is engaged in integrated business of handling, storage and transportation of food grains on or after 1st April, 2001 will be eligible for a deduction of 100% of the profits for the first five years and 30% of the profits for a further period of next five years.

In case of any multiplex theatre 50% of the profits and gains derived from the business of building, owning and operating a multiplex theatre will be allowed as deduction for a period of five consecutive years from the year in which the theatre starts operation on commercial basis. The deduction is allowable only if such multiplex theatre is constructed at any time during the period beginning on 1st day of April 2002 and ending on 31st day of March 2005.

In case of any convention centre 50% of the profits and gains derived from the business of building, owning and operating a convention center will be allowed as deduction for a period of five consecutive years from the year in which the convention center starts operation on commercial basis. The deduction is allowable only if such convention center is constructed at any time during the period beginning on 1st day of April 2002 and ending on 31st day of March 2005.

Dividend and Income distribution

From April 1, 2003, domestic companies are required to pay tax on dividends declared, distributed and paid by them. In addition, any income distributed by Unit trust of India (UTI) /Mutual Funds/Specified Companies to their unit holders shall be liable to tax at the following rates. Such dividends/income received from UTI, mutual funds and specified companies will not be taxable in the hands of the recipient.

S. No. Particulars of Income Rate of Tax**

1. Dividend declared, distributed and paid by a domestic company [Section 115-O]

16.995%

2. Income distributed by Unit Trust of India [Section 115-R] 11.33%

3. Income distributed by Mutual Funds/Specified Companies:

(a) Income distributed by a money market mutual fund or a liquid fund 28.325%

(b) Income distributed by any other fund to an individual or HUF 14.1625%

(c) Income distributed by any other fund to a person other than individual or Hindu Undivided Family

22.66%

** Including Surcharge @ 10% and Cess @ 3%

However, from April 1 2005, no such tax is payable on any dividends declared, distributed and paid by an undertaking or enterprise engaged in developing; or developing and operating; or developing, operating and maintaining a Special Economic Zone.




Inter corporate dividend

A domestic company is eligible to claim deduction in respect of dividend income received from its subsidiary company if such subsidiary company has paid tax on such dividend, under Section 115-O and the domestic company is not a subsidiary of any other company.

A company that controls the composition of the Board of Directors of other company or, where the first- mentioned company holds more than half of the voting power in the stock of the company is termed as ‘Holding Company‘.

A company other than the Holding company is a ‘Subsidiary Company’.

For example :- Holding Comapany (H co.) and Subsidiary Company (S Co.).

Company ‘S’ declares Rs. 10 million as dividend, pays Rs. 1.6995 millions as Dividend Distribution Tax (DDT) and pays the balance amount as dividend i.e, Rs. 8.3005 millions to Company ‘H’

When ‘Company H’ declares dividend to its shareolders ,it can claim tax credit of Rs. 1.6995 million DDT paid by ‘Company S’.Thus, Compnay ‘H’ gets credit of DDT paid by company ‘S’ on dividend income earned by Company ‘H’

K. SPECIAL PROVISIONS FOR COMPUTATION OF TAXABLE INCOME OF NON-RESIDENTS ENGAGED IN SPECIFIED BUSINESS

Taxable income of non-resident individuals and foreign companies is computed at a flat rate varying from 5% to 10% of the amount paid or payable (whether in or outside India) or an amount received or deemed to be received in India by or on behalf of the tax payer on account of the following:

• Business of operation of aircraft [Section 44BBA] • Shipping business [Section 44B] • Business of civil construction for turnkey power projects [Section 44BBB] • Business of providing services or facilities in connection with or supplying plant and

machinery on hire used in the prospecting for or extraction or production of mineral oils. [Section 44BB]

• Income from prospecting for mineral oil.[Section 44BB] • Income by way of royalities etc. in case of foreign companies. [Section 44D] • Income by way of royalities etc. in case of non resident. [Section 44DA] • Deductions of head office expenditure. [Section 44C]

L. TAXATION OF NON-RESIDENT INDIANS

1. Non-resident Indians having only "Investment income" and/or income by way of "Long term capital gains" may opt to be charged at 20% on Investment income and at 10% on long term capital gains. [Section 115E]

2. Income other than the above earned by the Non-resident Indian will be treated as a separate block and charged to tax in accordance with other provisions of the IT Act. [Section 115E]

3. Overseas corporate bodies are charged to Income tax at the following rates in respect of the following incomes

• Long term Capital gains at 20% • Interest income at 20% • Other income at 40%

4. Capital gains arising in respect of transfer of specified bonds or Global Depository Receipt by one non-resident to another non-resident made outside India shall not be liable to any capital gains tax.[section 47(viia)]



5. Exemption from Wealth Tax is available to the returning Indians in respect of moneys brought into India or value of asset brought by him, or assets purchased by him out of moneys brought into India within a period of one year prior to the date of return and at anytime thereafter for seven successive assessment year from the date of return.

6. Tax on the following incomes of non-resident individuals and foreign companies/Overseas financial organisation is applied at a flat rate varying from 10% to 30% as given below:

• Dividend, Interest on foreign currency loans and income received from mutual fund units purchased in foreign currency by Non-residents and foreign company are taxed at 20%.

• Income by way of dividend, received by a resident employee from investment made in foreign currency of an Indian company engaged in IT Software and IT Services from GDR issued in accordance with employee's stock options under notified scheme and income by way of long term capital gain arising from transfer of such GDR are taxed at 10%.

• Winnings from lottery or crossword puzzles or race including horse race or card games and other games of any sort of gambling or betting are taxed at 30%

• Income received by foreign national non-resident sportsman from participation in any game or sport or advertisement or contribution of articles relating to any game or sport in India in Journals, Newspapers etc are taxed at 10%;

• Income received by Non-resident sports association or institution by way of amount guaranteed to be paid or payable in relation to any game or sport played in India are taxed at 10%.

M. TAXATION OF OFFSHORE FUNDS/FOREIGN INSTITUTIONAL INVESTORS

Income derived by approved offshore funds from units of specified mutual funds and capital gains on the transfer of these units are taxed at a rate of 10% if the units are purchased in foreign currency. [Section 115AB]

Income from interest on bonds or income in the nature of long-term capital gains from transfer of shares or bonds by non-resident which are issued in accordance with notified scheme or shares or bonds of a public sector company sold by the Government, are taxed at 10% if the shares/bonds are purchased in foreign currency. [Section 115AB]

Income of notified Foreign Institutional Investors from securities listed on an Indian Stock Exchange and capital gains on their transfer are charged to tax as under: [Section 115AD]

• Income from Securities 20% • Short Term Capital Gains 30% • Long Term Capital Gains 10%




N. Commodities Transaction Tax (CTT)

The Commodities Transaction Tax has been recently introduced in India, through the Finance Act

2008 with effect from 1st April 2008. There shall be charged a commodities tax in respect of every

taxable commodities transaction specified in column (2) of the table below, at the rates specified in

the corresponding entry in column (3) of the said table, on the value of such transaction and such tax

shall be payable by the seller or the purchaser, as the case may be, specified in the corresponding

entry in column (4) of the said table.

O. BUSINESS LOSS

Business loss incurred in a tax year and not adjusted against other income in the same tax year,can be carried forward for eight years, and set off against future business profit. Unabsorbed depreciation of any previous year which is unabsorbed can be carried forward indefinitely and can be set off against income under any head of income.

P. CAPITAL GAINS

Profits and gains from transfer of capital assets other than those held for business purposes are charged to tax as 'capital gains' in the year in which the transfer takes place.

Capital gains are classified as long-term capital gains if they arise from the transfer of capital assets held:

1. In the case of shares held in a company or other securities listed on a recognized stock exchange in India, or units of specified mutual funds, for a period of 12 months or more; and

2. In the case of other assets, for a period of 36 months or more.

Long-term capital gains are computed after deducting from sale proceeds the indexed cost of acquisition, indexed cost of improvement and expenditure incurred in connection with the transfer. The indexed cost of acquisition and indexed cost of improvement refers to costs duly indexed and adjusted for inflation as prescribed in the Act. Bonds and debentures (other than capital indexed bonds issued by the government) are not eligible for cost indexation.

For the purpose of computation of capital gains the assessee has the option to take either the actual cost or the fair market value of the asset (other than depreciable asset as given under Section 50 ), as on April 1, 1981 as cost of acquisition where the capital asset became the property of the assessee by any modes as specified in the IT Act.

Sl. No.

(1)

Taxable commodities transaction

(2)

Rate

(3)

Payable

by

(4)

1. Sale of an option in Goods or an option in

Commodities derivatives

0.017 per cent Seller

2. Sale of an option in goods or an option in

commodity Derivative, where option is exercised

0.125 per cent Purchas

er

3. Sale of any other commodity derivatives 0.017 per cent Seller



In the case of an assessee who is a non-resident capital gains arising from transfer of capital assets being the shares or debentures of an Indian company shall be computed by converting cost of acquisition, expenses incurred for the transfer and sale consideration into the same foreign currency as was utilised for the purchase of shares or debentures. The capital gains so computed in such foreign currency shall be reconverted into Indian currency on the date of transfer.

Profits arising on transfer of intangible assets such as goodwill of a business, the right to manufacture, produce or process any article or thing, right to carry on any business, tenancy rights, stage carriage permits or loom hours, trade mark or brand name associated with a business are chargeable to tax as capital gains as well in India.

In case of land and building where consideration declared as a result of transfer of land or building or both, is less than the value adopted by any State Government Authority, for the purpose of payment of stamp duty in respect of such transfer, the value so adopted, is deemed to be the consideration for the transfer and capital gains is required to be computed accordingly. The IT Act provides for reference of disputed value to a valuation officer.

Gains arising in the following transactions, among others, are chargeable to tax as capital gains:

1. Gains arising on buy-back of shares;

2. Gains arising on transfer of securities acquired under stock option scheme or as"sweat

equity";

3. Insurance compensation on account of destruction or damage of a capital asset;

4. Profits or gains arising on sale of one or more undertakings as a "slump sale".

5. Gains arising to shareholders on distribution of assets by companies in liquidation.

6. Gains arising on conversion of capital asset into stock in trade.

7. Gains arising on transfer of a capital asset by a partner to the firm by way of capital

contribution or otherwise.

8. Gains arising on transfer of a capital asset by way of distribution on dissolution or otherwise of

a firm or association of persons.

9. Gains arising out of transfer of a capital asset by way of compulsory acquisition under any

law.

Long-term capital gains are charged to tax at the rate of 20% in the case of all resident taxpayers. However, in the case of capital gains on transfer of listed securities or units of UTI or mutual fund, capital gain tax is restricted to either at 10% of such capital gain computed without the benefit of indexation or at the rate of 20% of such gain after the benefit of indexation, whichever is beneficial to the tax payer. Any income arising from the transfer of a long term capital asset being an equity share in a company or a unit of an equity oriented fund are exempt subject to fulfillment of certain conditions.

However, Section 10(38) of the Income tax Act, exempts following income:

Any income arising from the transfer of a long-term capital asset, being an equity share in a company or a unit of an equity oriented fund where—

(a) The transaction of sale of such equity share or unit is entered on or after October 1st “ 2004

(b) Such transaction is chargeable to securities transaction tax



Securities Transaction Tax (STT)

The STT is applicable at different rates on the value of the “taxable securities transaction” which again

is defined to mean a transaction of purchase and sale of securities entered into in a recognized stock

exchange in India on or after the date on which Chapter VII of the Finance (No 2) Bill, 2004 comes

into force and is payable by the buyer and the seller of the securities.

STT is levied on the value of taxable securities transactions as under:

Transaction Purchase/Sale of equity shares, units of equity oriented mutual fund

(Delivery based)

Sale of equity shares, units of equity oriented mutual fund

(Non delivery

based)

Sale of

Futures /

Options

Sale of unit of

an equity

oriented fund to

the Mutual

Fund

Sale of option

where option is

exercised

Rates 0.125 per cent 0.025 per cent 0.017 per

cent

0.25 per cent 0.125 per cent

Payable Purchaser / Seller Seller Seller Seller Purchaser

Business reorganization

Under the IT Act, demergers and amalgamations are recognized as a means of business reorganization under the IT Act. Tax benefits and concessions available to an undertaking continue upon its transfer to a resulting company under a scheme of demerger.

Transfer of capital asset, by the demerged company to the resulting Indian company, in a demerger is not chargeable to capital gains tax.

Consideration received by way of issue of shares by the resulting company, in a scheme of demerger, to the shareholders of the demerged company, on demerger of an undertaking, is not chargeable to capital gains tax.

Benefits of unabsorbed business loss and/or unabsorbed depreciation of the amalgamating company/undertaking can be availed by the amalgamated company/resulting company, subject to certain conditions.




Q. TAX RATES AND ADVANCE TAX FOR INDIVIDUALS AND NON-CORPORATE ASSESSEES

India follows a progressive taxation system,wherein the Income tax rates for individuals irrespective of residential status are as follows:

Taxable Income Taxable Income Rates of Income-tax for Assessment Year 2009-2010

Rs. Rs.

0 – 1,50,000 NIL

1,50,001 - 300,000 10% of excess over 150,000

3,00,001 – 5,00,000 15,000 + 20% of excess over 300,000

Above 5,00,000 55,000 + 30% of excess over 500,000

All taxpayers are required to pay surcharge at 10% on income tax. The above surcharge is not payable by an Individual, Hindu Undivided Family and Association of Persons having income less than Rs. 10,00,000/-

Advance tax by Non-Corporate Assessee

Non – corporate tax payers are required to estimate their net tax Liability for a relevant tax year and make advance tax payments in three installments as given below:

Due date of installments on or before

Amount payable as a % of net tax liability

On or before 15th September At least 30%

On or before 15th December At least 60%

On or before 15th March Balance amount




R. CORPORATE TAX RATES AND ADVANCE TAX

The corporate tax year is the year ended March 31 and is taxed at the rates applicable in the assessment year commencing on the succeeding April 1. The current corporate tax rates are

Type of company Rates of Income-tax for the Assessment year 2009-2010 % of total taxable income

1. Domestic Company 30%

2.Other than domestic company (Foreign company)* (a) Income from royalty and technical fees. (Royalties received from government or an Indian concern in pursuance of an agreement made by it with the Indian concern after march 31, 1961 but before April 1, 1976,or fees for rendering technical services in pursuance of an agreement made by it after February 29,1964 but before April 1,1976 and where such agreement has, in either case, been approved by the central government.

50%

(b) Any other income if any 40%

*A foreign company under the IT Act is a company, which is not a domestic company. Surcharge** applicable in India on taxes: Domestic company 10% Foreign Company 2.5%

Note:-

** Surcharge is applicable if the net income exceeds Rs.10 million during the previous year to the relevant Tax Assessment year..

Advance tax by Corporate Assessees

Corporate tax payers are required to estimate their net tax and make advance payments in four installments as given below:

Due date of installments on or before Amount payable as a % of net tax liability

On or before 15th June On or before 15th September

At least 15% At least 45%

On or before 15th December At least 75%

On or before 15th March Balance amount

Income of a foreign company

Income of a foreign company from royalty, dividends, fees for technical services, interest and income from units of notified Mutual Funds purchased in foreign currency is taxed at 20%. If the rate of tax provided under any applicable Double Taxation Agreement is lower, such lower rate will apply.



Minimum Alternate Tax

If the tax liability of a company is less than 10% of its book profits, such book profits are deemed to be the total income chargeable to tax at the rate of 10%.

''Book profits'' means the net profit for the relevant tax year as shown in the profit and loss account prepared in accordance with the provisions of the Companies Act, 1956 as increased or reduced by the specified adjustments in the Income Tax Act.

S. WITHHOLDING TAXES

Every person other than an individual not subject to audit under IT Act. making certain payments including salary, interest, contract payments, rent, commission and brokerage and fees for professional and technical services rendered is required to deduct tax at source at prescribed rates.

In the case of a non-resident and a foreign company, tax is deducted at source at the rates prescribed for a particular source of income under section 195 of the Income Tax Act,1961 with realtion to certain sourced income which is deemeed to accrue and arise in india on which withholding taxation provisions are applicable.

The following incomes are deemeed to accrue and arise in india.

(i) All income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India;

T. BUSINESS CONNECTION

The term "Business connection" under the IT Act is significant for a non-resident because any profit earned by a non-resident is taxable in India if it is earned through or from any business connection in India.

Business connection normally contemplates:

• a business in India; • a connection with the non-resident and that business; • a direct or an indirect earning of income by virtue of or through that connection.

(i) A "business connection" requires an element of continuity and a stray or isolated transaction is not regarded as a business connection. The existence of a business connection is a question of fact and would be based upon the circumstances of each case.

(ii) Income, which falls under the head "Salaries", if it is earned in India;

(iii) Income chargeable under the head "Salaries" payable by the Government to a citizen of India for service outside India;

(iv) A dividend paid by an Indian company outside India;




(v) Income by way of interest payable by -

(a) The Government; or

(b) A person who is a resident, except where the interest is payable in respect of any debt incurred or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person in India;

(vi) Income by way of royalty payable by –


(b) A person who is a resident, except where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or

(c) A person who is a non-resident, where the royalty is payable in respect of any right, property or information used or services utilised for the purposes of a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source in India:

"ROYALTY" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for –

� The transfer of all or any rights (including the granting of a licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property;

� The imparting of any information concerning the working of or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property;

� The use of any patent, invention, model, design, secret formula or process or trade mark or similar property;

� The imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill;

� The transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films.

(vii) Income by way of fees for technical services payable by –


(b) A person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or



(c) A person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:

U. DOUBLE TAXATION RELIEF

The Government of India has entered into comprehensive agreements with various countries to avoid double taxation of income. Agreements have also been entered with certain countries to avoid double taxation in respect of income from shipping and air transport.

Unilateral relief is available in India from double taxation where there is no Double Taxation Avoidance Agreement. This relief is by way of deduction from the Indian income tax of a sum, which is calculated on the doubly taxed income at the lower of Indian rate of tax or the rate of tax of the other country where tax has been paid.

Countries with which comprehensive double tax agreements exist:

Armenia, Australia, Austria, Bangladesh, Belarus, Belgium, Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hungary,Indonesia, Ireland, Israel, Italy, Japan, Jordan, Kazakistan, Kenya, Korea, Kuwait, Kyrgyz Republic, Libya , Malaysia, Malta, Mauritius, Mongolia, Morocco, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic, Qatar, Romania, Russian federation, Saudi Arabia, Singapore ,Slovenia, South Africa, Spain, Sri Lanka, Sweden, Swiss Confederation, Syrian, Tanzania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, United Arab Emirates, United Arab Republic, UGANDA, United Kingdom, United States of America, Ukraine, Uzbekistan, Vietnam, Zambia.(Appendix V)

Countries with which double tax agreement exist for the limited purpose of shipping and air transport

Afghanistan, Bulgaria, Czechoslovakia, Ethiopia, Iran, Kuwait, Lebanon, Oman, Pakistan, Russian Federation, Saudi Arabia, Switzerland, United Arab Emirates, Yemen Arab Republic, Yemen (People's Democratic Republic).

V. TRANSFER PRICING

The IT Act contains provisions relating to transfer pricing in relation to an international transaction with an associated enterprise where either party to the transaction is a non-resident.

Income arising from an "international transaction" between "associated enterprises" is to be computed at arms length price.

Following are the methods, which are considered appropriate to determine the arms length price:

• Comparable uncontrolled price method • Resale price method • Cost plus method • Profit split method • Transactional net margin method; or • Any other method which may be prescribed.(No method has been prescribed till date

by the Central board of direct taxes)

Documentation in respect of international transaction is mandatorily required to be maintained. An Accountant's report is to be obtained by the enterprises entering into the international transactions in prescribed format before the due dates for filing tax returns which is required to be submitted manually to the IT Authorities before the due date of filing of IT Returns.



W. WEALTH-TAX

Wealth-tax in India under the Wealth-tax Act, 1957 is payable each year on the taxable wealth and depends upon residential status and on citizenship and location of assets.

Taxable wealth includes residential and farm houses, (one property is exempt for individuals) motor cars, jewellery, bullion, utensils of gold, silver, yachts, boats, aircrafts, urban land and cash exceeding specified limits as reduced by debts owed and incurred in relation to such assets.

A resident Indian citizen pays tax on his global net wealth. A non-resident pays tax on his net wealth in India.

A foreign citizen, whether resident in India or abroad, pays wealth-tax only on his net wealth in India.

Wealth-tax in case of individual and companies are chargeable at 1% of the net taxable wealth exceeding Rs. 1.5 million.

X. INDIRECT TAXES

India has the following indirect taxes:

Excise duty

Excise duty is imposed on a large variety of manufactured items on ad valorem basis or at specified rates. Central Value Added Tax (CENVAT) scheme facilitate the manufacturer to take the credit of the excise duty levied on inputs and capital goods used for the production of finished goods on which excise duty is levied.

Stamp duty

Stamp duty is charged at varying rates for documents, agreements and financial instruments executed in India.

Central sales tax

The Central sales tax is levied under the provisions of the Central Sales Tax act ,1956 on the sale of goods on the course of inter-state trade or commerce.

State Level Value Added Tax (VAT)

The State Vat has replaced the earlier Sales Tax systems of the states. It’s a tax on sale or purchase of goods within a state.

Customs Duty

Customs duty is charged either on advalorem basis i.e., value of goods imported in India or on the basis of quantity of products/goods imported into India.

Octroi duty

Octroi duty is a tax levied on entry of goods within city limits.



Service tax

At present, service tax @ 12.36% is levied on certain specified services provided by specified person. Generally person rendering specified services are responsible for collecting the service tax and paying it to the central government. In few cases person receiving the services are responsible for paying service tax. Services rendered in India with respect to overseas projects for which payment is made in convertible foreign exchange are exempt from services tax. The exemption is not available for projects located in India, or where services are rendered outside India but payment is not received in convertible foreign exchange. Foreign enterprises may render services from outside India that may relate to projects located in India. Such services will be subject to the levy of service tax because the government is of the view that services used in India are within the definition of "taxable services".




SECTION IV – ACCOUNTING AND AUDITING

A. ACCOUNTING PROFESSION

The Institute of Chartered Accountants of India (ICAI) is the governing professional body which

represents the Accountancy profession at national and international levels. Regional councils and

local chapters of the ICAI, which are spread all over India, undertake the task of continuing

professional education.

B. AUDITING REQUIREMENTS

Audit of the accounts of a company is compulsory under the Companies Act, 1956. Companies

prepare their financial statements based on historical cost as per the provisions of the Companies Act,

1956. These financial statements are required to be audited by Chartered Accountants and an Audit

Report is to be submitted to the members of the Company.

The Annual Report circulated to the members every year generally consists of:

• Director's Report • Auditor's Report • Balance Sheet • Profit and Loss Account • Notes to Account • Report on Corporate Governance

Audit under the Central Government Cost Audit Rules

The Central Government may direct certain companies for Cost Audit of accounts. The Cost auditor

has to be a Cost Accountant under the Cost and Works Accountants Act, 1959.

Audit under the Income tax law

The Income-tax Act, 1961 requires a Tax Audit to be conducted by a Chartered Accountants for tax

payers with sales from business in excess of Rs. 4 million a year or with gross receipts from a

profession in excess of Rs. 1 million. Audit report is required to be issued by a Chartered Accountant

in order to claim tax incentive/holiday/benefit.

Limited Review of Accounts

As per the clause 41 of the listing Agreement issued by the Securities Exchange Board of

India(SEBI),every listed company on stock exchange is required compulsory Quarterly limited

review of its accounts by the statutory auditor before the publish of their results.In case of public

undertaking Quarterly results can also be reviewed by the practicing Chartered Accountant.




C. ACCOUNTING STANDARDS AND PRINCIPLES

Statements of Accounting Standards are issued by the Accounting Standard Board of the ICAI

which prescribe methods of accounting approved by the ICAI for application to financial

statements.The Central Government in exercise of its power under the Companies Act,have

notified these Accounting Standards as “The Companies (Accounting Standard)Rules 2006 on

December 7,2006. In addition to Accounting Standards, generally accepted accounting principles

and guidance notes issued by the ICAI are followed.In the Indian context, the ICAI has also

mandated convergence with IFRS from the accounting period commencing on or after April1,

2011 for all listed and other public interest entities such as banks, insurance and large sized

entities.




SECTION V - APPENDICES

Appendix I

List of Industries reserved for the Public Sector

1. Atomic Energy

2. Railway transport

3. The substances specified in the scheduled to the notification of the Government of India in the

Department of Atomic Energy number S.O.212(E), dated the 15th March, 1995.

Appendix II

List of Industries for which Industrial licensing is compulsory

1. Distillation and brewing of alcoholic drinks.

2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes.

3. Electronic Aerospace and defence equipment: all types.

4. Industrial explosives including detonating fuses, safety fuses, gun powder, nitrocellulose and

matches.

5. Hazardous chemicals.

6. Drugs and Pharmaceuticals (according to modified Drug Policy issued in September, 1994 as

amended in 1999).

Note

The compulsory licensing provision would not apply in respect of the small scale units taking up the manufacture of any of the items reserved for exclusive manufacture in small scale industries.



Appendix III

List of cities with Population of 1 million and above according to the provisional results of 2001 Census

1. Greater Mumbai

2. Kolkata

3. Delhi

4. Chennai

5. Bangalore

6. Hyderabad

7. Ahmadabad

8. Pune

9. Surat

10. Kanpur

11. Jaipur

12. Lucknow

13. Nagpur

14. Patna

15. Indore

16. Vadodara

17. Bhopal

18. Coimbatore

19. Ludhiana

20. Kochi

21. Visakhapatnam

22. Agra

23. Varanasi

24. Madurai

25. Meerut

26. Nashik

27. Jabalpur

28. Jamshedpur

29. Asansol

30. Dhanbad

31. Faridabad

32. Allahabad

33. Amritsar

34. Vijayawada

35. Rajkot



Appendix IV

Sectoral cap on Investments by Persons Resident Outside India

Sr.No. Sector Investment Cap

Description of activity/items/conditions

1 Private Sector Banking 74% Subject to guidelines issued by RBI from time to time

2 Non Banking Financial Companies

100% FDI /NRI investments allowed in the following 18 NBFC activities shall be as per the levels indicated below : a) Activities covered 1. Merchant Banking 2. Under writing

3. Portfolio Management Services 4. Investment Advisory Services 5. Financial Consultancy 6. Stock-broking 7. Asset Management 8. Venture Capital 9. Custodial Services 10. Factoring 11. Credit Rating Agencies 12. Leasing & Finance 13. Housing Finance 14. Forex-broking 15. Credit Card Business 16. Money-changing Business 17. Micro-credit 18. Rural credit

b) Minimum Capitalization norms for fund based NBFCs

i) for FDI up to 51%, US $ 0.5 million to be brought in upfront ii) If the FDI is above 51 % and up to 75 %, US $ 5 million to be brought upfront iii) If the FDI is above 75 % and up to 100 %, US $ 50 million out of which $ 7.5 million to be brought in upfront and the balance in 24 months

c) Minimum Capitalization norms for non-fund based activities

Minimum Capitalization norm of US$0.5 million is applicable in respect of non-fund based NBFCs with foreign investment.

d) Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US $ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e) Joint Venture operating NBFCs that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e., (b)(i) and (b)(ii) above.



f) FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard.

3 Insurance 26% FDI upto 26% in the Insurance sector is allowed on the automatic route subject to obtaining license from Insurance Regulatory & Development Authority (IRDA)

4

Telecommunications 49% i) In basic, Cellular, Value Added Services, and Global Mobile Personal Communications by Satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which the investment is being made) to the license conditions for foreign equity cap and lock-in period for transfer and addition of equity and other license provisions. ii) ISP with gateways, radio paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. iii) No equity cap is applicable to manufacturing activities. iv) FDI up to 100% is allowed for the following activities in the telecom sector:

a) ISPs not providing gateways (both for satellite and submarine cables) b) Infrastructure Providers providing dark fibre (IP Category 1) c) Electronic Mail, and d) Voice Mail

The above would be subject to the following conditions: a) FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. b) The above services would be subject to licensing and security requirements, wherever required c) Proposal for FDI beyond 49% shall be considered by FIPB on case-to-case basis.

5 Petroleum Refining(Private sector)

100% FDI permitted up to 100 % in case of private Indian Companies.

Petroleum Product Marketing

100% Subject to the existing sectoral policy and regulatory framework in the oil – marketing sector.

Oil Exploration in both small and medium sized fields

100% Subject to and under the policy of Government on private participation in-

a) Exploration of oil and b) The discovered fields of national oil companies.



Petroleum Product Pipelines

100% Subject to and under the Government Policy and regulation thereof.

6 Housing and Real Estate 100% ONLY NRIs are allowed to invest in the areas listed below: a) Development of serviced plots and construction of built-up residential premises b) Investment in real estate covering construction of residential and commercial premises including business centres and offices c) Development of townships d) City and regional level urban infrastructure facilities, including both roads and bridges e) Investment in manufacture of building materials f) Investment in participatory ventures in (a) to (e) above g) Investment in housing finance institutions which are also opened to FDI as an NBFC.

7 Coal and Lignite i) Private Indian companies setting up or operating power projects as well as coal and lignite mines for captive consumption are allowed FDI up to 100%. ii) 100% FDI is allowed for setting up coal processing plants subject to the condition that the company shall not do coal mining and shall not sell washed coal or sized coal from its coal processing plants in the open market and shall supply the washed or sized coal to those parties who are supplying raw coal to coal processing plants for washing or sizing. iii) FDI up to 74% is allowed for exploration or mining of coal or lignite for captive consumption. iv) In all the above cases, FDI is allowed up to 50% under the automatic route subject to the condition that such investment shall not exceed 49%of the equity of a PSU.

8 Venture Capital Fund (VCF) and Venture Capital Company(VCC)

Offshore Venture Capital Funds/companies are allowed to invest in domestic venture capital undertaking as well as other companies through the automatic route, subject only to SEBI regulations and sector specific caps on FDI.

9 Trading Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/ trading house / super trading house/ star trading house. However, under the FIPB route: i) 100% FDI is permitted in case of trading companies for the following activities:

a) exports; b) bulk imports with export/ ex-bonded warehouse sales; c) cash and carry wholesale trading; d) other import of goods or services provided at least 75% is for procurement and sale of the same group and not for third party use or onward transfer/ distribution/sales.

ii) The following kinds of trading are also permitted, subject to provisions of Exim Policy.



a) Companies for providing after sales services (that is not trading per se) b) Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their Joint ventures in which they have equity participation in India c) Trading of hi-tech items/items requiring specialized after sales service d) Trading of items for social sector e) Trading of hi-tech, medical and diagnostic items f) Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name g) Domestic sourcing of products for exports h) Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing. i) FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

10 Power 100% FDI allowed up to 100 % in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment.

11 Drugs & Pharmaceuticals

100% FDI permitted up to 100% for manufacture of drugs and pharmaceuticals provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology and specific cell/tissue targeted formulations. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology and specific cell/tissue targeted formulations will require prior Govt. approval.

12 Road and highways, Ports and harbours

100% In projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbours.

13 Hotel and tourism 100% The term hotels include restaurants, beach resorts and other tourist complexes providing accommodation and/ or catering and food facilities to tourists. Tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is



granted if i) Up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy ii) Up to 3% of the net turnover is payable for franchising and marketing/publicity support fee, and

Up to 10% of gross operating profit is payable for management fee, including incentive fee.

14 Mining 74% i) For exploration and mining of diamonds and precious stones FDI is allowed up to 74 % under automatic route

100% ii) For exploration and mining of gold and silver and minerals other than diamonds and precious stones, metallurgy and processing FDI is allowed up to 100 % under automatic route iii) Press Note 18 (1998 series) dated 14/12/98 would not be applicable for setting up 100 % owned subsidiaries in so far as the mining sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/or the particular mineral.

15. Advertising 100% Advertising sector –FDI upto 100% allowed on the automatic route

16. Films 100% Film Sector (Film production, exhibition and distribution including related services/products) FDI up to 100% allowed on the automatic route with no entry-level condition

17 Airports 74% Govt. approved required beyond 74%

18

Mass Rapid Transport Systems

100% FDI up to 100% is permitted on the automatic route in mass rapid transport system in all metros including associated real estate development

19 Pollution Control & Management

100% In both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route

20 Special Economic Zones 100% All manufacturing activities except: i) Arms and ammunition , Explosives and allied items of defense equipments, Defense aircrafts and warships, ii) Atomic substances, Narcotics and Psychotropic Substances and hazardous Chemicals, iii) Distillation and brewing of Alcoholic drinks and iv) Cigarette/cigars and manufactured tobacco substitutes.

21 Air Transport Services (Domestic Airlines)

100% for NRIs 49% for others

No direct or indirect equity participation by foreign airlines is allowed

22 Townships, housing, built-up infrastructure and construction - development projects

100% The investment shall be subject to the following guidelines: (a) Minimum area to be developed under each project shall be as under :

(i) In case of development of serviced housing plots – 10 hectares.



The sector would include, but not be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, city and regional level infrastructure.

(ii) In case of construction -development project - 50,000 sq.mtrs. (iii) In case of combination project, any one of the above two conditions.

(b) The investment shall be subject to the following conditions: (i) Minimum capitalization of US $ 10 Million for wholly owned subsidiaries and US $ 5 Million for joint ventures with Indian partners. The funds would have to be brought in within six months of commencement of business of the Company. (ii) Original investment cannot be repatriated before a period of three years from completion of minimum capitalization. However, the investor may be permitted to exit earlier with prior approval of the Government through the FIPB.

(c) At least 50% of the project must be developed within a period of five years from the date of obtaining all statutory clearances. The investor shall not be permitted to sell undeveloped plots. (d)The project shall conform to the norms and standards, as laid down in the applicable building control regulations, bye-laws, rules, and other regulations of the State Government / Municipal / Local Body concerned. (e) The investor shall be responsible for obtaining all necessary approvals, including those of the building / layout plans, developing internal and peripheral areas and other infrastructure facilities, payment of development, external development and other charges and complying with all other requirements as prescribed under applicable rules / bye-laws / regulations of the State Government / Municipal / Local Body concerned. (f) The State Government / Municipal / Local Body 5concerned, which approves the building / development plans, shall monitor compliance of the above conditions by the developer.



Appendix V

Upper limits of withholding taxed in India's agreements for avoidance of double taxation

Dividends Interest Royalty Fees for Technical Services

Sr. Name of the Country

Right of the State to tax

Rate Right of the State to tax



Rate

(1) (2) (3) (4) (5) (6) (7) (8) (9)

1 Armenia Both 10% Both 10% Both 10% Both 10%

2 Australia Both 15% Both 15% Both (Note 1) Both (Note 1)

3 Austria Both 10% Both 10% Both 10% Both 10%

4 Bangladesh Both 10%(if at least 10% of the capital of the company paying the dividend is held by the recipient)

Both 10% (Note 2) Both 10% No separate provision

5 Belarus Both 10% if paid to a company holding 25% Shares; otherwise 15%

Both 10%(Note2) Both 15% Both 15%

6 Belgium Both 15% Both 15% (10% if granted by a bank)

Both 10% Both 10%

7 Brazil Both 15% Both 15%(Note 2) Both 25% for use of trademark;15% for others

No separate provision

8 Bulgaria Both 15% Both 15%(Note 2) Both 15% of Royalty relating to literary, artistic, scientific works other than films or tapes use for radio or television broadcasting;20% in other cases

Both 20%




9 Canada Both 15% if at least 10% of the shares of the company paying the dividends is held by the recipient of dividend;25% in other cases

Both 15% (Note 2) Both 10% - 20% Both 10% - 20%

10 China Both 10% Both 10%(Note 2) Both 10% Both 10%

11 Cyprus Both 10% if at least 10% of the capital of the company paying dividend is held by the recipient, 15% in all other cases

Both 10%(Note 2) Both 15% Both 10%

12 Czech Republic

Both 10% Both 10%(Note 2) Both 10% Both 10%

13 Denmark Both 15% if at least 25% of the shares of the company paying the dividend is held by the recipient;20% in other cases

Both 10% if loan is granted by bank; 15% for others(Note 2)

Both 20% Both 20%

14 Finland Both 15% Both 10%(Note 2) Both 15% - 20% during 1997 – 2001 , 15% for subsequent years; 10% for equipment royalty

Both Same as in case of Royalty

15 France Both 10% Both 10% Both 10% Both 10%

16 Germany Both 10% Both 10%(Note 2) Both 10% Both 10%

17 Greece Source 20% Source 20% Source 30% No separate provision

18 Hungary Both 10% Both 10% Both 10% Both 10%




19 Indonesia Both 10% if at least 25% of the shares of the company paying the dividend is held by the recipient; 15% in other cases

Both 10%(Note 2) Both 15% No separate provision

20 Iceland Both 10% Both 10% Both 10% Both 10%

21 Ireland Both 10% - 15% Both 10%(Note 2) Both 10% Both 10%

22 Israel Both 10% Both 10%(Note 2) Both 10% Both 10%

23 Italy Both 15% if at least 10% of the shares of the company paying dividend is beneficially owned by the recipient company;20% in other cases

Both 15% (Note 2) Both 20% Both 20%

24 Japan Both 10% Both 10% Both 10% Both 10%

25 Jordan Both 10% Both 10%(Note 2) Both 20% Both 20%

26 Kazakhstan Both 10% Both 10% (Note 2) Both 10% Both 10%

27 Kenya Both 15% Both 15%(Note 2) Both 20% Both 17.5%

28 Korea Both 15% if at least 20% of the capital of the company paying dividend is held by the recipient ;20% in other cases

Both 10% if interest is paid to a bank ; 15% for others (Note 2)

Both 15% Both 15%

29 Kuwait Both 10% Both 10% Both 10% Both 10%

30 Kyrgyz Republic

Both 10% Both 10% Both 15% Both 15%

31 Libyan Arab Jamahiriya

Source 20% Source 20% Source 30% No separate provision

32 Malaysia Both 10% Both 10% Both 10% Both 10%




33 Malta Both 10% if at least 25% of the shares of the company paying dividend is held by the recipient company ;15% in other cases


34 Mauritius Both 5% if at least 10% of the capital of the company paying dividend is held by the recipient ;15% in other cases

Both 20%(Note 2) Both 15% No separate provision

35 Mongolia Both 15% Both 15%(Note 2) Both 15% Both 25%

36 Morocco Both 10% Both 10%(Note 2) Both 10% Both 10%

37 Namibia Both 10% Both 10%(Note 2) Both 10% Both 10%

38 Nepal Both 10% if at least 10% of the shares of the company paying dividend is held by the recipient company ;20% in other cases

Both 10% if interest is paid to bank ;15% for others (Note 2)

Both 15% No separate provision

39 Netherlands Both 10% Both 10%(Note 2) Both 10% - 20% Both 10% - 20%

40 New Zealand Both 15% Both 10%(Note 2) Both 10% Both 10%

41 Norway Both 15% if at least 25% of the capital of the company paying dividend is held by the recipient ; 20% in other cases


42 Oman Both 10% if at least 10% of shares are held by recipient ; 12.5% in other cases





43 Philippines Both 15% if at least 10% of the shares of the company paying dividend is held by the recipient company ;20% in other cases

Both 10% if interest is received by a financial institution or insurance company ; 15% in other cases

Both 15% if it is payable in pursuance of any collaboration agreement approved by the government of India

- -

44 Poland Both 15% Both 15% (Note 2) Both 22.5% Both 22.5%

45 Portuguese Republic

Both 10% Both 10% Both 10% Both 10%

46 Qatar Both 5% - 10% Both 10%(Note 2) Both 10% Both 10%

47 South Africa Both 10% Both 10% (Note 2) Both 10% Both 10%

48 Romania Both 15%, if at least 25%of the shares of the company paying the dividend is held by the recipient ; 20% in other cases

Both 15% (Note 2) Both 22.5% Both 22.5%

49 Russian Federation

Both 10% Both 10% (Note2) Both 10% Both 10%

50 Saudi Arabia Both 5% Both 10% Both 10% No separate provision

51 Singapore Both 10%, if at least 25%of the shares of the company paying the dividend is held by the recipient ; 15% in other cases

Both 10% if loan is granted by bank/similar institute including an insurance company;15% for others

Both 10% Both 10%

52 Slovenia Both 5-15% Both 10% Both 10% Both 10%

53 Spain Both 15% Both 15% (Note 2) Both (Note 3) Both (Note 3)

54 Sri Lanka Both 15% Both 10%(Note 2) Both 10% Both 10%

55 Sudan Both 105 Both 10% Both 10% No Separate provision

56 Sweden Both 10% Both 10% (Note2) Both 10% Both 10%

57 Swiss Both 10% Both 10% (Note4) Both 10% Both 10%

58 Syria Residence Nil Both 7.5% (Note2) Both 10% No separate provision




59 Tanzania Both 10% if at least 10% of the shares of the company paying the dividend is held for a period of at least 6 months prior to the date of payment of the dividend;15% in other cases

Both 12.5% Both 20% No separate provision

60 Thailand Both 15% if dividend is paid by an industrial company and at least 10% of capital of such company is held by the receipient;20% in other cases

Both 10% for financial institution and insurance company;20% for others(Note 2)


61 Trinidad and Tobago

Both 10% Both 10% (Note2) Both 10% Both 10%

62 Turkmenistan Both 10% Both 10% (Note 2) Both 10% Both 10%

63 Turkey Both 15% Both 10% if recipient is a bank ,etc;15% in other cases(Note 2)

Both 15% Both 15%

64 Uganda Both 10% Both 10% Both 10% Both 10%

65 United Kingdom

Both 15% Both 10% if interest is paid to a bank;15% for others(Note 2)

Both Note 1 Both Note 1

66 USA Both 15% if at least 10% of the voting stock of the company paying the dividend is held by the recipient;20% in other cases

Both 10% if loan is granted by a bank/similar institute including insurance company;15% for others

Source Note1 Source Note 1

67 Uzbekistan Both 15% Both 15%(Note 2) Both 15% Both 15%




68 United Arab Emirates

Both 5% if at least 10% of the capital of the company paying dividend is held by the recipient;15% in other cases

Both 5% if loan is granted by a bank/similar financial institute;12.5% for others


69 United Arab Republic

Source 10% Source 20% Source 30% No separate provision

70 Ukraine Both 10% - 15% Both 10%(Note 2) Both 10% Both 10%

71 Vietnam Both 10% Both 10% (Note2) Both 10% Both 10%

72 Zambia Both 5% if at least 25% of the shares of the company paying the dividend is held for a period of at least 6 months prior to the date of payment of the dividend;15% in other cases

Both 10% (Note2) Both 10% No Separate provision

Note 1: Royalties and fees for technical services would be taxable in the country of the source at the following rates:

a. 10 percent in case of rental of equipment and services provided along with know-how and technical services;

b. any other case-

i. during first five years of the agreement –

15% if the payer is Government or specified organization;

20% in other cases

ii. subsequent years,15%in all cases.

Income of Government and certain institutions will be exempt from taxation in the country of source

Note 2: Dividend/interest earned by the government and certain institutions like Reserve Bank of India is exempt from taxation in the country of source.



Note 3: Royalties and fees for technical services would be taxable in the country of source at the following rates:

a. 10% in case of royalties relating to the payments for the use of, or the right to use, industrial, commercial or scientific equipment

b. 20% in case of fees for technical services and other royalties.

Note 4: 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institutions carrying on bonafide banking or financing business or by an enterprise which holds directly or indirectly at least 20% of the capital of the company paying the interest.




Appendix VI Transfer of Shares/Convertible Debentures, from a Person Resident in India to a Person Resident outside India and from a Person Resident outside India to a Person Resident in India

In order to address the concerns relating to pricing, documentation, payment/ receipt and remittance in respect of the shares/convertible debentures of an Indian company, other than a company engaged in financial service sector, transferred by way of sale; the parties involved in the transaction shall comply with the guidelines set out below. 1. Parties involved in the transaction are

(a) seller (resident/non-resident), (b) buyer (resident/non-resident), (c) duly authorized agent/s of the seller and/or buyer, (d) Authorized Dealer bank (AD) branch and (e) Indian company, for recording the transfer of ownership in its books.

2. Pricing Guidelines

The under noted pricing guidelines are applicable to the following types of transactions:

i. Transfer of shares, by way of sale under private arrangement by a person resident in

India to a person resident outside India ii. Transfer of shares, by way of sale under private arrangement by a person resident

outside India to a person resident in India 3. Transfer by Resident to Non-resident (i.e. to incorporated non-resident entity other than

erstwhile OCB, foreign national, NRI, FII)

Price of shares transferred by way of sale by resident to a non-resident shall not be less than

(a) the ruling market price, in case the shares are listed on stock exchange, (b) fair valuation of shares done by a Chartered Accountant as per the guidelines issued

by the erstwhile Controller of Capital Issues, in case of unlisted shares.

The price per share arrived at should be certified by a Chartered Accountant. 4. Transfer by Non-resident (i.e. by incorporated non-resident entity, erstwhile OCB, foreign

national, NRI, FII) to Resident



Sale of shares by a non-resident to resident shall be in accordance with the following conditions:

(a) Where the shares of an Indian company are traded on stock exchange,

i) The sale is at the prevailing market price on stock exchange and is affected through a merchant banker registered with Securities and Exchange Board of India or through a stock broker registered with the stock exchange;

ii) if the transfer is other than that referred to in clause (i), the price shall be

arrived at by taking the average quotations (average of daily high and low) for one week preceding the date of application with 5 percent variation. Where, however, the shares are being sold by the foreign collaborator or the foreign promoter of the Indian company to the existing promoters in India with the objective of passing management control in favour of the resident promoters the proposal for sale will be considered at a price which may be higher by up to a ceiling of 25 percent over the price arrived at as above,

(b) Where the shares of an Indian company are not listed on stock exchange or are thinly

traded, i) if the consideration payable for the transfer does not exceed Rs.20 lakhs per

seller per company, at a price mutually agreed to between the seller and the buyer, based on any valuation methodology currently in vogue, on submission of a certificate from the statutory auditors of the Indian company whose shares are proposed to be transferred, regarding the valuation of the shares, and

ii) if the amount of consideration payable for the transfer exceeds Rs.20 lakhs

per seller per company, at a price arrived at, at the seller’s option, in any of the following manner, namely:

A) a price based on earning per share (EPS linked to the Price Earning

(P/E) multiple or a price based on the Net Asset Value (NAV) linked to book value multiple, whichever is higher, or

B) the prevailing market price in small lots as may be laid down by the Reserve Bank so that the entire shareholding is sold in not less than five trading days through screen based trading system, or

C) Where the shares are not listed on any stock exchange, at a price which is lower of the two independent valuations of share, one by statutory auditors of the company and the other by a Chartered Accountant or by a Merchant Banker in Category 1 registered with Securities and Exchange Board of India.

5. Responsibilities / Obligations of the parties

All the parties involved in the transaction would have the responsibility to ensure that the relevant regulations under FEMA are complied with and consequent on transfer of shares, the relevant individual limit/sectoral caps/foreign equity participation ceilings as fixed by Government are not breached. Settlement of transactions will be subject to payment of applicable taxes, if any.

6. Method of payment and remittance/credit of sale proceeds

The sale consideration in respect of the shares purchased by a person resident outside India shall be remitted to India through normal banking channels. In case the buyer is a Foreign Institutional Investor (FII), payment should be made by debit to its Special Non-Resident Rupee Account. In case the buyer is a NRI, the payment may be made by way of debit to his NRE/FCNR (B) accounts. However, if the shares are acquired on non-repatriation basis by NRI, the consideration shall be remitted to India through normal banking channel or paid out of funds held in NRE/FCNR (B)/NRO accounts.



The sale proceeds of shares (net of taxes) sold by a person resident outside India may be remitted outside India. In case of FII, the sale proceeds may be credited to its special Non- Resident Rupee Account. In case of NRI, if the shares sold were held on repatriation basis, the sale proceeds (net of taxes) may be credited to his NRE/FCNR(B) accounts and if the shares sold were held on non repatriation basis, the sale proceeds may be credited to his NRO account subject to payment of taxes.

The sale proceeds of shares (net of taxes) sold by an OCB may be remitted outside India directly if the shares were held on repatriation basis and if the shares sold were held on non-repatriation basis, the sale proceeds may be credited to its NRO (Current) Account subject to payment of taxes, except in the case of OCBs whose accounts have been blocked by Reserve Bank.

7. Documentation

Besides obtaining a declaration in the enclosed form FC-TRS (in quadruplicate), the AD branch should arrange to obtain and keep on record the following documents:

8. For sale of shares by a person resident in India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating the details of transfer i.e. number of shares to be transferred, the name of the investee company whose shares are being transferred and the price at which shares are being transferred. In case there is no formal Sale Agreement, letters exchanged to this effect may be kept on record.

ii. Where Consent Letter has been signed by their duly appointed agent, the Power of

Attorney Document executed by the seller/buyer authorizing the agent to purchase/sell shares.

iii. The shareholding pattern of the investee company after the acquisition of shares by a

person resident outside India showing equity participation of residents and nonresidents category-wise (i.e. NRIs/OCBs/foreign nationals/incorporated non-resident entities/FIIs) and its percentage of paid up capital obtained by the seller/buyer or their duly appointed agent from the company, where the sectoral cap/limits have been prescribed.

iv. Certificate indicating fair value of shares from a Chartered Accountant.

v. Copy of Broker’s note if sale is made on Stock Exchange

vi. Undertaking from the buyer to the effect that he is eligible to acquire

shares/convertible debentures under FDI policy and the existing sectoral limits and Pricing Guidelines have been complied with.

vii. Undertaking from the FII/sub account to the effect that the individual FII/ Sub account

ceiling as prescribed by SEBI has not been breached. 9. For sale of shares by a person resident outside India

i. Consent Letter duly signed by the seller and buyer or their duly appointed agent indicating the details of transfer i.e. number of shares to be transferred, the name of the investee company whose shares are being transferred and the price at which shares are being transferred.

ii. Where the Consent Letter has been signed by their duly appointed agent the Power

of Attorney Document authorizing the agent to purchase/sell shares by the seller/buyer. In case there is no formal Sale Agreement, letters exchanged to this effect may be kept on record.



iii. If the sellers are NRIs/OCBs, the copies of RBI approvals evidencing the shares held

by them on repatriation/non-repatriation basis. The sale proceeds shall be credited NRE/NRO account, as applicable.

iv. Certificate indicating fair value of shares from a Chartered Accountant.

v. No Objection/Tax Clearance Certificate from Income Tax authority/Chartered

Account.

vi. Undertaking from the buyer to the effect that the Pricing Guidelines have been adhered to.

10. Reporting requirements

For the purpose the Authorized Dealers may designate branches to specifically handle such transactions. These branches could be staffed with adequately trained staff for this purpose to ensure that the transactions are put through smoothly. The ADs may also designate a nodal office to coordinate the work at these branches and also ensure the reporting of these transactions to the Reserve Bank.

When the transfer is on private arrangement basis, on settlement of the transactions, the transferee/his duly appointed agent should approach the investee company to record the transfer in their books along with the certificate in the form FC-TRS from the AD branch that the remittances have been received by the transferor/payment has been made by the transferee. On receipt of the certificate from the AD, the company may record the transfer in its books.

The actual inflows and outflows on account of such transfer of shares shall be reported by the AD branch in the R-returns in the normal course.

In addition the AD branch should submit two copies of the Form FC-TRS received from their constituents/customers together with the statement of inflows/outflows on account of remittances received/made in connection with transfer of shares, by way of sale, to IBD/FED/or the nodal office designated for the purpose by the bank in the enclosed proforma (which is to be prepared in MS-Excel format). The IBD/FED or the nodal office of the bank will in turn submit a consolidated monthly statement in respect of all the transactions reported by their branches together with a copies of the FC-TRS forms received from their branches to Foreign Exchange Department, Reserve Bank, Foreign Investment Division, Central Office, Mumbai .

Shares purchased / sold by FIIs under private arrangement will be by debit /credit to their Special Non Resident Rupee Account. Therefore, the transaction should also be reported in (LEC FII) by the designated bank of the FII concerned.

Shares/convertible debentures of Indian companies purchased under Portfolio Investment Scheme by NRIs, OCBs cannot be transferred, by way of sale under private arrangement.

On receipt of statements from the AD, the Reserve Bank may call for such additional details or give such directions as required from the transferor/transferee or their agents, if need be.



Abbreviations

ADR : American depository receipt

CBDT : Central Board Of Direct Taxes

CENVAT : Central Value Added Tax

DGFT : Director General of Foreign Trade

DTA : Domestic Tariff Area

DTAA : Agreement For Avoidance of Double Taxation

ECB : External Commercial Borrowing

EEFC : Exchange Earners Foreign Currency

EHTP : Electronic Hardware and Technology Park

EOU : Export Oriented Units

EPZ : Export Processing Zone

ESOP : Employee Stock Option Scheme

EXIM : Export Import

FCCB : Foreign Currency Convertible Bonds

FCNR : Foreign Currency (Non-resident) Account

FCVI : Foreign Venture Capital Investor

FDI : Foreign Direct Investment

FII : Foreign Institutional Investors

FIPB : Foreign Investment Promotion Board

FOB : Free on Board

FTZ : Free Trade Zone

GDR : Global Depository Receipts

GOI : Government Of India

HUF : Hindu Undivided Family

ICAI : Institute of Chartered Accountants Of India

IT Act : Income Tax Act, 1961

IVCU : Indian Venture Capital Undertaking

JV : Joint Venture

MOC : Ministry Of Commerce

NOR : Not Ordinary Resident

NRE : Non-Resident (External) Rupee Account Scheme (NRE)

NRI : Non-Resident Indian

NRNR : Non-Resident (Non-Repatriable) Rupee Deposit Account

NRO : Non-Resident Ordinary Rupee Account

NRSR : Non-resident (Special) Rupee (NRSR) Account

OCB : Overseas Corporate Body

OECD : Organisation For Economic Co-operation and Development

OTCEI : Over The Counter Exchange of India

PIS : Portfolio Investment Scheme

RBI : Reserve Bank of India

SAARC : South Asian Association for Regional Co-operation

SEBI : Securities and Exchange Board of India

SEZ : Special Economic Zone

SIA : Secretariat of Industrial Assistance

SIDBI : Small Industries Development Bank Of India



STP : Software Technology Park

VC : Venture Capital

VCC : Venture Capital Company

VCF : Venture Capital Funds

WOS : Wholly Owned Subsidiary

WPI : Wholesale Price Index

WTO : World Trade Organisation

IDRA : Industries (Development and Regulation) Act, 1951,

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