Guide to Foreign Investment in India

Guide to Foreign

Investment in India

Wisdomsmith Advisors LLP

Foreign Investment in India - Primer

Jan-17 Wisdomsmith Advisors LLP 2

EXECUTIVE SUMMARY

Why India?

We recently closed a joint venture for a Japanese company in India. Outside of Japan, the company is present in USA (since 1989), China (2003), Thailand (2009) and Vietnam (2013). India was the 5 country where it established an equity linked presence.

In case you are not already here, and are actively looking to expand outside your home country, chances are, India may figure in the discussion.

There are some very good reasons to be in India, lets look at a few:

1. India is now the fastest growing major economy in the world, having overtaken China in 2015.

2. India is now expected to grow faster than China going forward. China’s ‘demographic dividend’ profile, as measured by proportion of working age population within total population, peaked in 2015. For India, it will peak in 2040. In other words, till 2040, this ratio will continue to rise.

3. India will become the world’s most populous nation around 2022, overtaking China. It is already the world’s largest democracy.

A stable democracy, growing faster than most other nations on earth – you have to be here sooner or later.

Why now?

The promise of India has existed for a long time, given its sheer size. Every one in six persons on this planet is an Indian. However, poverty was what India was about in its initial years.

India opened its economy in 1991, and started growing faster. By 2001, when the terms BRIC was coined, India was being talked about with China, Russia and Brazil as the top 4 emerging economies in the world.

After 2 decades of good growth, India is no longer so poor. Indian economy crossed USD2 trillion mark in 2014. It is now a middle income economy. Segments of population are quite rich.

India's growth rate is expected to accelerate to 8 per cent in the current financial year and the economy will surpass USD 3 trillion mark in less than five years.

The present government is aggressively courting foreign investment. The Indian PM Narendra Modi wants India to become “the most open economy in the world for FDI”. He has launched an ambitious ‘Make in India’ initiative, which seeks to promote FDI in 25 sectors. As part of this, ‘Invest India’, an official investment promotion and facilitation agency of the Government of India was set up. It is mandated to facilitate investments into India and is envisaged to be the first point of reference for potential investors.



EXECUTIVE SUMMARY

Foreign investment is rising

The world is beginning to take note of India’s increasing attractiveness as an investment destination. In several global surveys, India is beginning to get rated as the world’s top investment destination.

In the annual survey by Japan Bank for International Cooperation (JBIC), India replaced China as the top investment destination in 2013; and has held the position ever since.

A global survey by consulting firm E&Y in 2015 also placed India as the top investment destination, well ahead of second placed China as a market to invest in.

Similarly, the 2016 Best Countries rankings, conducted in partnership with brand strategy firm BAV Consulting and the Wharton School of the University of Pennsylvania, ranked India at No 1.

A consequence of government’s steps, and India’s rising rating on global investment surveys, is the actual rise of foreign investment. FDI crossed USD50B in FY16; consider this in the context that FDI crossed USD10B for the first time only in FY04.

Cumulatively, over 2000-16, India has recorded USD 292 billion of equity FDI, or about USD 18B per year on an average.

About Wisdomsmith

Wisdomsmith Advisors LLP is a young corporate transaction advisory firm with strong reach across India. Our partners have cumulative experience of over 150 years, have worked in a variety of roles, bringing in complementary skill sets.

Over the course of their professional careers, our partners have handled multitude of clients and business situations.

Our strengths:

• Strong network for connections: We canreach out to most people in India

• Diverse skill sets: Our partners haveworked across corporate banking,investment banking, buy side investing,equity research, strategy consulting andbusiness media.

• Research focus: We understand businessmodels across various sectors. We don’tmerely execute, we can add value to yourIndia plans.


1 India at a Glance 5 3.3 Incorporating a company 21

1.1 World’s largest democracy 6

1.2 Fastest growing large economy 6 4 Tax, Labour and IPR Framework 22

1.3 Most populous nation by 2022 7 4.1 Tax 23

1.4 Largest working age population by 2025

7 4.2 Labour laws 25

1.5 India’s job creation challenge 8 4.3 IPR regime 25

1.6 India’s GDP composition 8

1.7 Federal structure 9 5 Where to Invest 27

5.1 Opportunities galore 28

2 Foreign Investment 11 5.2 Make in India 28

2.1 FDI and FPI 12 5.3 India’s global FDI rating is rising 30

2.2 Sources of Inbound FDI 13

2.3 Among top 10 destinations 14 7 About Wisdomsmith 32

2.4 Legal Framework for FDI 15 7.1 A research focussed firm 33

2.5 FIPB 17 7.2 Key People 34

2.6 Sector Specific Conditions on FDI 17

3 Corporate Framework 19

3.1 Types of business enterprises 20

3.2 New Companies Act 2013 20


CONTENTS

1

India at a Glance



1.1 World’s largest democracy

India is the world’s largest and most vibrant democracy, with a six decade record of peaceful elections, something rare outside the developed world.

1.3 B people, 17.5% of world’s population Will surpass China by 2022, to become world’s most populous country 29 states, 640 districts 53 cities with population over 1m

1.2 Fastest growing large economy

With a nominal GDP of USD 2.3 trillion, India is the world’s 7th largest economy currently, trailing USA, China, Japan, Germany, UK and France. India’s economy is now bigger than Italy, Brazil, Canada, Korea, Russia, Australia and Spain.

India is also the world’s fastest growing large economy, having overtaken China’s GDP growth rate in 2015. India is set to maintain growth leadership going forward, as per projections of World Bank.

10.6%

9.5%

7.7% 7.7%7.3%

6.9%6.5% 6.2% 6.0% 6.0% 6.0% 6.0%

10.3%

6.6%

5.6%

6.6%7.2% 7.3% 7.5% 7.5% 7.6% 7.7% 7.7% 7.8%

2.5%1.6%

2.2%1.5%

2.4% 2.4% 2.4% 2.5% 2.4% 2.1% 2.0% 2.0%

4.7%

-0.5%

1.7% 1.4%

0.0%0.5% 0.5%

-0.1%0.4% 0.7% 0.7% 0.7%

2010 2011 2012 2013 2014 2015 2016P 2017P 2018P 2019P 2020P 2021P

China India USA Japan



1.3 Will become world’s most populous nation by 2022

India has 17.5% of the world’s population. It is expected to surpass China by 2022.

-

200

400

600

800

1,000

1,200

1,400

1,600

POPULATION (million)

1.4 Will have world’s largest working age population by 2025

Working age population in India increased by 300 million between 1991 and 2013.In the same period, working age population in China increased by 241 million. India is not doing too well in generating jobs though. China generated 144 million jobs, while India generated 140 million jobs in the 1991-2013 phase.

Year of maximum share of working age population



China’s working age population as a share of total workforce started declining from 2015, while India will hit a peak in share of working population only by 2040. By 2025, India should exceed China and become the country with the world’s largest working age population.

1.5 India’s job creation challenge

By 2050, more than 280 million more people will enter the job market in India. According to labour ministry data, around 1 million people enter the workforce in India every month. There is also the challenge of finding jobs for the backlog, which reached 60 million by 2014.Job creation capacity of the formal sector is woefully inadequate. Estimates suggest the formal sector creates less than 2 million jobs every year. The rest drift away into informal sector with irregular earnings. Finding employment for rapidly expanding workforce is the biggest challenge facing India.

1.6 India’s GDP composition

Part of the challenge of job creation comes from the composition of Indian GDP. Agriculture, which is only about 14% of GDP, supports almost 50% of population. The challenge is to migrate people from agri to industry or services, which then need to create sufficient job opportunities

13.7%, Agriculture

27.0%, Industry59.3%,

Services

Composition of Indian GDP



1.7 Federal structure

India is a federal union comprising twenty-nine states and seven union territories. The states and union territories are further subdivided into districts and further into smaller administrative divisions. The following table shows basic data on Indian states

State When formed Capital Largest CityState Population

(mn)Area

(sq.km)

Andhra Pradesh 01-Oct-53 Hyderabad Visakhapatnam 50 1,60,205

Arunachal Pradesh 20-Feb-87 Itanagar Itanagar 1 83,743

Assam 26-Jan-50 Dispur Guwahati 31 78,550

Bihar 26-Jan-50 Patna Patna 104 99,200

Chhattisgarh 01-Nov-00 Naya Raipur Raipur 26 1,35,194

Goa 30-May-87 Panaji Vasco da Gama 1 3,702

Gujarat 01-May-60 Gandhinagar Ahmedabad 60 1,96,024

Haryana 01-Nov-66 Chandigarh Faridabad 25 44,212

Himachal Pradesh 25-Jan-71 Shimla Shimla 7 55,673

Jammu and Kashmir 26-Jan-50 Srinagar (Summer) Srinagar 13 2,22,236

Jammu (Winter)

Jharkhand 15-Nov-00 Ranchi Jamshedpur 33 74,677

Karnataka 01-Nov-56 Bengaluru Bengaluru 61 1,91,791

Kerala 01-Nov-56 Thiruvananthapuram Kochi 33 38,863

Madhya Pradesh 01-Nov-56 Bhopal Indore 73 3,08,252

Maharashtra 01-May-60 Mumbai Mumbai 112 3,07,713

Manipur 21-Jan-72 Imphal Imphal 3 22,347

Meghalaya 21-Jan-72 Shillong Shillong 3 22,720

Mizoram 20-Feb-87 Aizawl Aizawl 1 21,081

Nagaland 01-Dec-63 Kohima Dimapur 2 16,579

Odisha 26-Jan-50 Bhubaneswar Bhubaneswar 42 1,55,820

Punjab 01-Nov-66 Chandigarh Ludhiana 28 50,362

Rajasthan 01-Nov-56 Jaipur Jaipur 69 3,42,269

Sikkim 16-May-75 Gangtok Gangtok 1 7,096

Tamil Nadu 26-Jan-50 Chennai Chennai 72 1,30,058

Telangana 02-Jun-14 Hyderabad Hyderabad 35 1,14,840

Tripura 21-Jan-72 Agartala Agartala 4 10,492

Uttar Pradesh 26-Jan-50 Lucknow Kanpur 200 2,43,286

Uttarakhand 09-Nov-00 Dehradun Dehradun 10 53,483

West Bengal 26-Jan-50 Kolkata Kolkata 91 88,752



As is often said, India is not one market, but a multitude of markets. This is because most states have their own language, food and customs. As a consequence, media industry is also vastly fragmented along language lines. Building a business plan and a media budget can be a complicated exercise.

Political situation can be vastly different across states, and there are several states which are ruled by local parties. As a result, there is big difference in development between states.

The following table shows top states by their contribution to GDP, and their annual per capita income. As can be seen, amongst top 15 states, per capital income can range from as low as ~$600 for Bihar, to ~$2300 for Maharashtra, the largest state economy in India. This is a difference of 4x! Bihar has a population almost similar to Maharashtra, so one can imagine the drag Bihar causes to overall economic averages in India. Bihar has been ruled by inefficient local parties for more than 2 decades, this has stymied local development.

State Contribution to GDP Per Capital GDP (Rs)

Maharashtra 13.4% 1,49,500

Tamil Nadu 7.8% 1,35,279

Uttar Pradesh 7.8% 48,846

Gujarat 7.0% 1,44,938

West Bengal 6.4% 87,646

Karnataka 5.6% 1,14,902

Rajasthan 4.5% 83,153

Andhra Pradesh 4.1% 1,05,036

Madhya Pradesh 4.1% 69,947

Delhi 3.6% 2,05,000

Telangana 3.4% 1,22,857

Bihar 3.2% 38,617

Kerala 3.2% 1,18,541

Haryana 3.1% 1,53,443

Punjab 2.5% 1,14,262

2

Foreign Investment



2.1 FDI and FPI

Both foreign direct investment (FDI) and foreign portfolio investment (FPI) have seen robust growth. This report will concentrate more on FDI.

FDI reached an all time high of US$ 56B in 2015-16, 6x more than the figure a decade ago.

FPI flows, chiefly into listed traded securities, both equtiy and debt, have been far more volatile

0

10000

20000

30000

40000

50000

60000 Gross FDI (US$ m)

Source: Reserve Bank of India

-20000

-10000

0

10000

20000

30000

40000

50000

Net Portfolio Investment (US$ m)

Source: Reserve Bank of India



Country-wise Inflows of Foreign Direct Investment (FDI) in India

(2014 to 2016-upto March, 2016)

(Amount in INR Million)

Country 2,014 2,015 2016-upto Mar. 2016

Cumulative Total

(from Jan. 2000 to Mar. 2016)

(In Rs.) (In US$)

Mauritius 4,29,457 5,90,309 1,52,000 48,11,694 96,097

Singapore 4,32,861 8,62,991 1,83,150 25,66,715 45,881

United Kingdom 65,855 58,795 26,577 11,56,497 23,122

Japan 1,42,684 1,10,844 1,02,879 11,10,158 21,046

U.S.A 1,01,476 2,52,420 45,923 9,51,763 18,083

Netherlands 1,98,193 1,92,549 33,499 9,46,192 17,334

Germany 70,662 72,409 13,210 4,49,154 8,640

Cyprus 39,935 33,187 7,283 4,26,816 8,553

France 37,389 27,549 15,647 2,65,635 5,120

Uae 17,013 33,473 39,283 2,16,507 4,030

Switzerland 22,485 17,185 5,646 1,69,434 3,320

Luxembourg 39,074 50,724 6,742 1,22,075 2,046

Spain 15,621 8,943 2,558 1,15,505 2,209

Italy 14,112 15,151 9,568 1,04,460 2,026

Hongkong 5,499 36,585 2,146 1,01,629 1,888

South Korea 8,289 15,877 2,447 93,932 1,798

China 8,667 54,875 2,408 82,370 1,358

Caymen Islands 7,532 15,194 17,372 78,937 1,518

Russia 28,661 6,889 7,794 68,431 1,230

Sweden 3,174 6,870 3,488 62,304 1,238

British Virginia 1,258 4,300 9,647 51,697 1,033

Belgium 15,106 4,430 2,011 48,107 901

Malaysia 5,656 3,942 1,373 43,155 808

Australia 4,053 8,862 1,997 42,564 815

Poland 2,744 248 369 33,381 625

Canada 5,002 5,322 2,202 32,688 634

Indonesia 630 145 24 29,123 625

The Bermudas - - - 22,522 502

Others 30,049 35,548 15,348 7,84,371 16,834

Grand Total 17,53,133 25,25,615 7,12,589 149,87,819 2,89,314

2.2 Sources of Inbound FDI

Mauritius and Singapore are top FDI investors in India; this is due to tax regime. India has double tax avoidance treaties, and lower local tax rates in those countries mean that investors are routing FDI through them. Also, several investors prefer Singapore as a legal jurisdiction as well.

Source : Ministry of Commerce & Industry, Govt. of India.



2.3 Among top 10 destinations globally

India has become an important destination for inbound FDI in a global context. In2015, for ex, it was the seventh significant nation, behind the likes of USA, China,Brazil, Canada, UK and Germany.

We are ignoring some of the other nations higher up on the list, like Ireland, HongKong, Switzerland etc, since these are routing destinations. Often, what is shownas inbound FDI here, is actually meant for other countries, but is routed throughthese countries as an intermediate step. This is often for tax reasons, andsometimes for better legal jurisdiction.

On the other hand, the FDI coming to countries like India is actual investmentgoing in the country.

Country Name 2007 2008 2009 2010 2011 2012 2013 2014 2015

World 30,65,354 24,43,685 13,60,736 18,58,943 22,85,754 21,10,881 20,86,334 17,71,462 21,64,659

United States 3,40,065 3,32,734 1,53,788 2,59,344 2,57,410 2,43,011 2,76,978 2,07,367 3,79,434

China 1,56,249 1,71,535 1,31,057 2,43,703 2,80,072 2,41,214 2,90,928 2,68,097 2,49,859

Ireland 59,941 23,259 53,935 37,764 23,665 40,962 49,960 86,766 2,03,463

Hong Kong SAR, China 62,121 67,035 54,276 82,709 96,135 74,887 76,857 1,29,847 1,80,844

Switzerland 48,688 2,991 47,659 17,671 23,198 26,288 (24,898) 18,375 1,19,714

Netherlands 7,34,010 1,95,192 95,931 1,15,730 3,31,838 2,39,755 3,28,684 1,01,394 1,01,789

Brazil 44,579 50,716 31,481 88,452 1,01,158 86,607 69,181 96,895 75,075

Singapore 47,733 12,201 23,821 55,076 48,329 57,150 66,067 68,496 65,263

Canada 1,20,423 70,117 20,931 29,713 38,318 49,378 69,428 65,441 55,685

British Virgin Islands 37,140 52,583 41,590 51,226 57,576 74,502 1,12,128 49,986 51,606

United Kingdom 2,09,515 2,53,454 14,547 66,735 27,012 46,751 54,473 71,364 50,439

Germany 50,845 30,926 56,669 86,054 97,481 65,464 62,712 9,445 46,227

India 25,228 43,406 35,581 27,397 36,499 23,996 28,153 34,577 44,009

Australia 44,440 45,160 28,683 35,211 65,555 57,550 53,997 45,979 38,639

France 83,781 67,999 18,380 38,900 44,192 32,950 31,589 (1,048) 34,969

Mexico 32,419 29,352 18,054 26,455 24,552 20,548 46,903 26,948 32,056

Spain 73,773 79,558 13,479 41,020 31,782 24,915 52,288 35,776 25,299

Luxembourg (29,679) 7,117 27,255 39,129 8,843 1,43,003 15,371 12,073 24,596

Chile 12,534 15,150 12,887 15,725 23,444 28,457 19,362 22,342 20,457

Source: World Bank

Foreign direct investment, net inflows (BoP, current US$)



2.4 Legal Framework for FDI

The Government has put in place a policy framework on FDI. This framework is embodied in the Circular on Consolidated FDI Policy, which may be updated every year, to capture and keep pace with the regulatory changes, effected in the interregnum.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy pronouncements on FDI through Press Notes/Press Releases which are notified by the Reserve Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of Security by Persons Resident Outside India) Regulations, 2000 (notification No. FEMA 20/2000-RB dated May 3, 2000).

These notifications take effect from the date of issue of Press Notes/ Press Releases, unless specified otherwise therein. In case of any conflict, the relevant FEMA Notification will prevail. The procedural instructions are issued by the Reserve Bank of India vide A.P. (DIR Series) Circulars. The regulatory framework, over a period of time, thus, consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc.

2.4.1 Consolidated FDI Policy 2016

In Jun’2016, DIPP released its annual Consolidated FDI Policy circular. The presentconsolidation subsumes and supersedes all Press Notes/PressReleases/Clarifications/Circulars issued by DIPP, which were in force as on June 06,2016 and reflects the FDI Policy as on June 07, 2016.T

This Circular accordingly will take effect from June 07, 2016 and will remain inforce until superseded in totality or in part thereof. Reference to any statute orlegislation made in this Circular shall include modifications, amendments or re-enactments thereof.

2.4.2 Eligible Investor

A non-resident entity can invest in India, subject to the FDI Policy except in thosesectors/activities which are prohibited. There are certain country specificrestrictions as well, for entities or persons from countries like Pakistan, whereIndia does not have particularly friendly relations.



Foreign Institutional Investor (FII) and Foreign Portfolio Investors (FPI) may in terms of Schedule 2 and 2A of FEMA Regulations, as the case may be, respectively, invest in the capital of an Indian company under the Portfolio Investment Scheme which limits the individual holding of an FII/FPI below 10% of the capital of the company and the aggregate limit for FII/FPI investment to 24% of the capital of the company.

This aggregate limit of 24% can be increased to the sectoral cap/statutory ceiling, as applicable, by the Indian company concerned through a resolution by its Board of Directors followed by a special resolution to that effect by its General Body and subject to prior intimation to RBI. The aggregate FII/FPI investment, individually or in conjunction with other kinds of foreign investment, will not exceed sectoral/statutory cap.

A SEBI registered Foreign Venture Capital Investor (FVCI) may contribute up to100% of the capital of an Indian company engaged in any activity mentioned inSchedule 6 of Notification No. FEMA 20/2000, including startups irrespective ofthe sector in which it is engaged, under the automatic route. A SEBI registeredFVCI can invest in a domestic venture capital fund

There are more details to definition of Eligible Entity; Wisdomsmith can help youunderstand the fine print.

2.4.3 Eligible Investee Entities

Indian companies can issue capital against FDI. FDI is not permitted in Trusts otherthan in ‘VCF’ registered and regulated by SEBI and ‘Investment vehicle’. FDI in LLPsis permitted subject to the certain conditions, but the policy is not significantlydifferent from the policy for limited companies.

2.4.4 Investment Vehicle

An entity being ‘investment vehicle’ registered and regulated under relevantregulations framed by SEBI or any other authority designated for the purposeincluding Real Estate Investment Trusts (REITs) governed by the SEBI (REITs)Regulations, 2014, Infrastructure Investment Trusts (InvIts) governed by the SEBI(InvIts) Regulations, 2014, Alternative Investment Funds (AIFs) governed by theSEBI (AIFs) Regulations, 2012 and notified under Schedule 11 of Foreign Exchange



Management (Transfer or Issue of Security by a Person Resident outside India)Regulations, 2000 is permitted to receive foreign investment from a personresident outside India (other than an individual who is citizen of or any otherentity which is registered / incorporated in Pakistan or Bangladesh), including anRegistered Foreign Portfolio Investor (RFPI) or a non-resident Indian (NRI).

2.4.5 Entry route for investment

Investments can be made by non-residents in the equity shares/fully, compulsorilyand mandatorily convertible debentures/fully, compulsorily and mandatorilyconvertible preference shares of an Indian company – essentially no debt likeinstrument, through the Automatic Route (no government approval needed, butcap of percentage of shareholding may be applicable) or the Government Route(which requires approval). Proposals for foreign investment under Governmentroute, are considered by Foreign Investment Promotion Board or FIPB. There isan application process involved in such cases, once FIPB approval comes through,FDI can be made.

2.4.6 Caps on investment

Investments can be made by non-residents in the capital of a resident entity onlyto the extent of the percentage of the total capital as specified in the FDI policy.

2.5 Foreign Investment Promotion Board or FIPB

The Foreign Investment Promotion Board (FIPB) offers a single window clearancefor applications on Foreign Direct Investment (FDI) in India that are under theapproval route. The sectors under automatic route do not require any priorapproval from FIPB and are subject to only sectoral laws.

Guidelines for e-filing of applications, filing of amendment applications andinstructions to applicants are available at FIPB’s website (http://finmin.nic.in/) and(http://fipb.gov.in).

2.6 Sector Specific Conditions on FDI

FDI is prohibited in very sectors. Some are ‘sin’ setors like lottery, gambling andcasinos, and tobacco. Others are strategic like atomic energy and railwayoperations.



2.6.1 Permitted Sectors

Sectoral cap i.e. the maximum amount which can be invested by foreign investors in an entity, unless provided otherwise, is composite and includes all types of

foreign investments, direct and indirect. Info on key sectors and guidelines is in the table below:

Sector Name FDI Limit Approval Route

Agriculture & Animal Husbandry 100% Automatic

Plantation Sector 100% Automatic

Mining 100% Automatic

Petroleum & Natural Gas 100% Automatic

Defence 49% Automatic

Broadcasting 100% Automatic up to 49%, Govt approval beyond 49%

Broadcasting Content Services 49% Government

Print Media 26% Government

Civil Aviation - Greenfield Airports 100% Automatic

Civil Aviation - Existing Airports 100% Automatic up to 74%, Govt approval beyond 74%

Scheduled Air Transport Service 49% Automatic

Non-Scheduled Air Transport Service 100% Automatic

Construction Development 100% Automatic

Industrial Parks 100% Automatic

Satellites- establishment and operation 100% Government

Private Security Agencies 49% Government

Telecom Services 100% Automatic up to 49%, Govt approval beyond 49%

Trading 100% Automatic

E-commerce activities 100% Automatic

Single Brand product retail trading 100% Automatic up to 49%, Govt approval beyond 49%

Multi Brand Retail Trading 51% Government

Duty Free Shops 100% Automatic

Railway Infrastructure 100% Automatic

Financial Services 100% Automatic

Banking- Private Sector 74% Automatic up to 49%, Govt approval beyond 49% upto

74%

Banking- Public Sector 20% Government

Credit Information Companies 100% Automatic

Infrastructure Company in the Securities Market

49% Automatic

Insurance 49% Automatic

Pension Sector 49% Automatic

Power Exchanges 49% Automatic

White Label ATM Operations 100% Automatic

Non-Banking Finance Companies 100% Automatic

Pharmaceuticals - Greenfield 100% Automatic

Pharmaceuticals - Brownfield 100% Government

3

Corporate Framework



3.1 Types of business enterprises in India

While there are several types of business enterprises, the common ones are

1. Private limited company: Needs a minimum paid up capital of Rs 0.5m, and 7shareholders.

2. Public limited company: Needs a minimum paid up capital of Rs 0.1m, and canhave between 2-200 shareholders. If number of shareholders exceeds 50, thenthe company becomes a deemed public limited company.

3. LLP: These are allowed since 2009, under LLP Act 2008. Need minimum 2partners, can take foreign investment.

4. Partnership

5. Sole proprietorship

The first 3 are more important from foreign investment perspective

3.2 New Companies Act 2013

The Companies Act 1956 had undergone several amendments over the years, butwas still felt to be outdated. The new act comprises 29 chapters, 470 sections and7 schedules. NCA 2013 introduced several new concepts to the Indian corporateframework. Some of these are:

• One person company, Small compay, Dormant Company and Inactive company

• Women Directors

• Corporate Social Responsibility

• Registered Valuers

• Rotation of Auditors

• Class Action

• Fast Track Mergers

• Serious Fraud Investigation Office



3.3 Procedure for incorporating a company

A new limited company can be set up in less than a month, and at negligible cost,less than Rs 10,000. The key steps are as follows:

• Identify persons who will be directors of the new company

• Apply for Digital Signature Certificate. A licensed Certifying Authority (CA) issuesthe digital signature.

• Apply for Director Identification Number (DIN). It is only after the DIN isapproved, the incorporation documents can be filed with the Registrar FormNo.-DIR-3. However, the name approval can be obtained prior to approval ofDIN. It takes about 7 days for getting the DIN approved, provided all properdocuments are furnished.

• Filing the Proposed Name of Company For Approval to The RegistrarofCompanies (ROC)

• Drafting of Memorandum of Association (MoA)

• Drafting of Articles of Association (AoA)

• Application for Incorporation of Company

• Commencement of Business

• Registered Office. The company on and from the 15 days of its incorporationand at all times thereafter, have a registered office capable of receiving andacknowledging all communications and notices as may be addressed to it

4

Tax, Labour and IPR Framework



4.1 Tax

India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.

Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.

Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments.

Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.

4.1.2 Tax Resident

This is relevant for expats living in India. An individual is treated as resident in a year if present in India:

• For 182 days during the year or

• For 60 days during the year and 365 days during the preceding four years.

4.1.3 Corporate Taxation (Direct)

Foreign companies are taxable on income that arises out of their Indianoperations, or, in certain cases, income that is deemed to arise in India. Royalty,interest, gains from sale of capital assets located in India (including gains from saleof shares in an Indian company), dividends from Indian companies and fees fortechnical services are all treated as income arising in India.

The rate at which Corporates are taxed in India is 30% plus a 3% cess. Thus the total comes to 30.9%.

Other direct taxes applicable to corporates:

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend tax. So if a company declares divided, it has to pay an effective rate of 16.995% on the dividends declared. This is apart from the 30.9 % taxes mentioned above. Minimum Alternative Tax (MAT)

When a company has a positive book profit, no tax liability due to depreciation benefits, or other tax reliefs, then it liable to pay MAT. The present rate of MAT is 19.05%. MAT paid can be credited against regular taxes paid in later years.



Tax Deduction at Source (TDS)

This point is being specifically mentioned because the penalties of non-compliance are very stringent. As per the provisions of the Indian tax laws, certain payments are covered under tax withholding norms.

Areas where TDS is applicable are: salaries, payment to contractors, professional services etc.

4.1.4 Double taxation relief

India has Double Taxation Avoidance Agreements (DTAA) signed with 88 countries,out of which 85 have entered into force. Under the Income Tax Act 1961 of India,there are two provisions, Section 90 and Section 91, which provide specific reliefto taxpayers to save them from double taxation. Section 90 is for taxpayers whohave paid the tax to a country with which India has signed DTAA, while Section 91provides relief to tax payers who have paid tax to a country with which India hasnot signed a DTAA. Thus, India gives relief to both kinds of taxpayers.

A large number of foreign institutional investors who trade on the Indian stockmarkets operate from Singapore and the second being Mauritius. According to thetax treaty between India and Mauritius, capital gains arising from the sale ofshares are taxable in the country of residence of the shareholder and not in thecountry of residence of the company whose shares have been sold. Therefore, acompany resident in Mauritius selling shares of an Indian company will not pay taxin India. Since there is no capital gains tax in Mauritius, the gain will escape taxaltogether. The Indian and Cypriot tax treaty is the only other such Indian treaty toprovide for the same beneficial treatment of capital gains.

4.1.5 Indirect Tax Regime

The big event happening in indirect taxes, is the planned introduction of acommon Goods and Services Tax (GST), which will make it possible for companiesto set off input taxes paid against output taxes for both goods and services.

The Constitution Amendment Bill for Goods and Services Tax (GST) has beenapproved by The President of India post its passage in the Parliament (Rajya Sabhaon 3 August 2016 and Lok Sabha on 8 August 2016) and ratification by more than50 percent of state legislatures. The Government of India is committed to replaceall the indirect taxes levied on goods and services by the Centre and States andimplement GST by April 2017. With GST, it is anticipated that the tax base will becomprehensive, as virtually all goods and services will be taxable, with minimumexemptions.



GST will be a game changing reform for the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. It will impact the tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and reporting, leading to a complete overhaul of the current indirect tax system.

GST will have a far-reaching impact on almost all the aspects of the business operations in the country, for instance, pricing of products and services, supply chain optimization, IT, accounting, and tax compliance systems.

4.2. Labour Regime

India is a federal form of government and because labour is a subject in theconcurrent list of the Indian Constitution, labour matters are in the jurisdiction ofboth central and state governments; both central and state governments haveenacted laws on labour relations and employment issues.

The Industrial Employment (Standing Orders) Act 1946 requires that employershave terms including working hours, leave, productivity goals, dismissalprocedures or worker classifications, approved by a government body.

The Minimum Wages Act 1948 sets wages for the different economic sectors thatit states it will cover. It leaves a large number of workers unregulated. Central andstate governments have discretion to set wages according to kind of work andlocation, and they range between as much as ₹ 143 to 1120 per day for work inthe so-called central sphere. State governments have their own minimum wageschedules.

The Employees' Provident Fund and Miscellaneous Provisions Act 1952 createdthe Employees' Provident Fund Organisation of India. This functions as a pensionfund for old age security for the organised workforce sector.

4.3 IPR Regime

India is committed to a number of international treaties and conventions relatingto Intellectual Property Rights. During the last few years, Indian IP offices haveundergone major improvements in terms of upgradation of IP legislation,infrastructure facilities, human resources, processing of IP applications,computerization of the IP offices, IP databases, quality services to stakeholders,transparency in functioning and free access to IP-data through a dynamic website.



Ministry/Office administering the IPR:• Department of Industrial Policy and Promotion, Ministry of Commerce &

Industry• Controller General of Patents, Designs and Trade MarksConcerned IP Act:• The Patents Act, 1970 (as amended in 2005)

State of the art, integrated and IT- enabled office buildings have been setup in the last few years in Delhi, Kolkata, Chennai, Mumbai and Ahmedabad, housing offices of Patents, Designs, Trademarks and Geographical Indications. The Patent Office is headquartered in Kolkata with branches in Delhi, Chennai, and Mumbai. The Trade Marks Registry, headquartered at Mumbai has branches in Ahmedabad, Chennai, Delhi, and Kolkata. The Design Office is located in Kolkata and the GI Registry is in Chennai. Separate facilities house the International Searching Authority (ISA) / International Preliminary Examining Authority (IPEA) in Delhi; an Intellectual Property Office Archives center has been setup at Ahmedabad.

5

Where to invest



5.1 Opportunities galore

India is a sizeable, high growth economy. Hence there are opportunities across theboard. Several large global companies have already established presence in India,some have been around for decades. Others came in after 1990, when Indiastarted opening its economy by easing investment guidelines.

A good way to see where the action is to check sectoral flows of FDI (see table‘Sector-wise Foreign Direct Investment (FDI) Equity Inflows in India’ on next page).

As can be seen, FDI has grown sharply, and several sectors are witnessingmeaningful investments. Given services contribute a large part of Indian GDP, FDIcomposition shows a tilt towards services, as compared to manufacturing or basicsectors like mining.

According to Department of Industrial Policy and Promotion (DIPP), the total FDIinvestments India received during April - September 2016 rose 30 per cent year-on-year to US$ 21.6 billion, indicating that government's effort to improve ease ofdoing business and relaxation in FDI norms is yielding results.

The current government is strongly focussed on increasing FDI. Their efforts havebore results. "During October 2014 to May 2016, FDI equity inflow has increasedby 46% from $42.31 billion to $61.58 billion in comparison to previous 20 months”Commerce and Industry Minister Nirmala Sitharaman was quoted saying recently.

5.2 Make in India

Make in India is a big initiative of the Narendra Modi government. The initiativewas launched by the Prime Minister in September 2014 as part of a wider set ofnation-building initiatives to transform India into a global design andmanufacturing hub.

The Make in India initiative has been built on layers of collaborative effort. DIPPinitiated this process by inviting participation from Union Ministers, Secretaries tothe Government of India, state governments, industry leaders, and variousknowledge partners. These exercises resulted in a road map for the single largestmanufacturing initiative undertaken by a nation in recent history.

Make in India thus aims to boost investment and industrial production to increasethe GDP share of manufacturing from the current 16 percent to 25 percent. Toachieve this, the government has identified 25 focus sectors for development.



Sectors 2012-2013 2013-2014 2014-2015 2015-2016

Services Sector (Fin., Banking, Insurance, R&D,

Outsourcing, Courier, others)4,833 2,225 4,443 6,889

Computer Software and Hardware 486 1,126 2,296 5,904

Construction (Infrastructure) Activities 284 485 870 4,511

Trading 718 1,343 2,728 3,845

Automobile Industry 1,537 1,517 2,726 2,527

Chemicals (Other Than Fertilizers) 292 787 763 1,470

Hotel and Tourism 3,259 486 777 1,333

Telecommunications 304 1,307 2,895 1,324

Information and Broadcasting (including Print Media) 404 429 255 1,009

Power 536 1,066 707 869

Non-Conventional Energy 1,107 414 616 777

Drugs and Pharmaceuticals 1,123 1,279 1,498 754

Hospital and Diagnostic Centres 257 685 568 742

Miscellaneous Industries 229 469 766 669

Industrial Machinery 504 477 717 568

Mining 58 13 684 521

Consultancy Services 142 286 458 517

Food Processing Industries 401 3,983 516 506

Metallurgical Industries 1,466 568 359 456

Electrical Equipments 196 134 575 445

Sea Transport 65 20 333 429

Air Transport (Including Air Freight) 16 46 75 361

Rubber Goods 642 371 285 296

Miscellaneous Mechanical and Engineering 89 288 187 275

Retail Trading 22 11 169 262

Education 172 262 79 231

Textiles (Including Dyed,Printed) 104 199 197 230

Electronics 38 133 97 208

Fermentation Industries 107 815 225 202

Soaps, Cosmetics and Toilet Preparations 160 108 177 193

Medical and Surgical Appliances 83 173 146 173

Prime Mover (Other Than Electrical Generators) 185 213 231 159

Machine Tools 101 65 24 126

Printing of Books 14 114 73 123

Construction Development : Real Estate 1,332 1,226 769 113

Sugar 12 3 28 106

Petroleum and Natural Gas 215 112 1,079 103

Others 921 1,051 1,536 771

Total 22,424 24,299 30,931 40,001

Sector-wise Foreign Direct Investment (FDI) Equity Inflows in India

(In US$ Million)



5.3 India’s global FDI rating is rising

India is way behind China and Brazil in FDI, this shows India is under-invested byforeign companies. Going forward, we expect India’s FDI to continue to growstrongly. The government’s efforts, coupled with the strong showing of theeconomy, are increasing India’s ratings as an FDI destination. This has come out inseveral recent surveys

A global survey by consulting firm E&Y in 2015 placed India well ahead of China asa market to invest in. A leading 32% of the investors ranked India as the mostattractive market, while 60% placed the country among the top three investmentdestinations.

India’s ranking has been steadily improving in Japan’s key investment survey‘Report on Overseas Business Operations by Japanese ManufacturingCompanies’, conducted annually by Japan Bank for International Cooperation(JBIC).

In fact, in 2013, India overtook China as the No 1 destination for FDI in the eyes ofJapanese companies. Actual flows may take some time coming, but this result wasa huge positive for India. India has held on the top rank in 2014, and 2015, the lastavailable survey. The table on the next page shows results of the 2015 survey.



It must be noted that China was the number 1 destination for well more than adecade, before India displaced China.

Source. JBIC

The 2016 Best Countries rankings, conducted in partnership with brand strategyfirm BAV Consulting and the Wharton School of the University of Pennsylvania,ranked India at No 1. The top rankings were:1. India2. Singapore3. Vietnam4. Indonesia5. Ireland

6



6.1 A research focused corporate transaction advisory firm

Wisdomsmith Advisors LLP is a young corporate transaction advisory firm withstrong reach across India. Our partners have cumulative experience of over 150years, have worked in a variety of roles, bringing in complementary skill sets.

Over the course of their professional careers, our partners have handled multitudeof clients and business situations.

6.1.1 Our strengths

• Strong network for connections: We can reach out to most people in India

• Diverse skill sets: Our partners have worked across corporate banking,investment banking, buy side investing, equity research, strategy consulting andbusiness media.

• Research focus: We understand business models across various sectors. Wedon’t merely execute, we can add value to your India plans.

6.1.2 Select MNC client experience

Consumer Health growth strategy

Joint venture to help enter India market

Helped rationalise business for a local business they acquired

India entry strategy for Consumer Health business



6.2 Key People

Sanjay Kumar Maheshka: Sanjay is a graduate from IIT Kanpur and post graduate inbusiness management from XLRI, Jamshedpur. He has over 20 years of experience infinancial services sector including more than 14 years with India’s second largest bankICICI Bank. During his stint at the bank, he was instrumental in setting up and runningTreasury, was heading Financial Restructuring group, was responsible for setting upand running Commercial Banking subsidiary in Russia, was the Global Head of TreasuryMid-Office and lastly was Global Head of Trading Operations and Balance SheetManagement Group. Subsequently, he worked as senior management with a financialservices group where he was responsible for setting up of retail network fordistribution of financial products besides being involved in the strategy for the Group.

Ajay Jindal,CFA: Ajay has two decades of equity research, investment banking and PEinvesting, with over 10 years in leadership roles. With The Times of India group he setup their research division; led several transactions for their proprietary investmentarm, and also worked with their corporate strategy team. Earlier, he worked aninstitutional equity analyst Caspian Securities, ranked in top 5 in India by bothEuromoney and Institutional Investor. He started his career with investment bankingfirm Lazard India.

Ajay is an MBA from IIM Bangalore, B. Tech from IIT Kanpur, and CFA from AIMR USA

[email protected]

[email protected]

Anil Khanna: With over 20 years of experience, Anil is among India’s foremoststrategic marketing experts in Pharma and Healthcare. He has led multiple strategicconsulting assignments for leading MNC and Indian pharma companies in areas likeIndia entry strategies, category entry strategies, brand portfolio analysis, identifyingM&A opportunities. He supplemented domain expertise with deal making with the PEarm of of The Times of India Group, wherein he was instrumental in investments to thetune of $75 mn across companies in Pharma / Healthcare, education and IT sectors.

A post graduate business management, Anil in the past, has been part of the OTC(Over the Counter medicines) Committee of OPPI (Organisation of Pharma Producersof India).

Nirjhar Gupta: Nirjhar has two decades of experience with Indian Equity Markets. Hisexperience varies from broking research to marketing equities, investment banking andmoney management. Nirjhar has worked with diverse organisations like SBI MutualFund, Tata TD Waterhouse, Motilal Oswal, Lehman, Nomura and also headed equitiesat Alchemy Securities. Nirjhar has extensive reach in Indian and Asian equity markets,with all top fund managers.

Nirjhar has a management degree from XLRI, Jamshedpur after doing his BTech fromIIT Kanpur in Chemical Engineering.

[email protected]

[email protected]



Wisdomsmith Advisors LLP is a limited liability partner, registered in India with the registration number LLP no: AAA-1067. The information cited in this document is from public sources. We have made best efforts to quote the source of information; any omission is inadvertent.

No part of this publication may be reproduced or utilized, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Wisdomsmith.

Economy & Finance

Guide to Foreign Investment in India