MBA Project On Stress Management of Employees

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After being a part of entire MBA PROJECT REPORT ON STRESS MANAGEMENT OF EMPLOYEES survey i.e. from preparation of questionnaire to the preparation of final report, I was able to identify the benefits from the survey conducted and also recognized

FOREIGN DIRECT INVESTMENT AND ITS GROWTH IN INDIA

ABSTRACT Foreign direct investment(FDI) in all over the world in general and in India in particular after the opening up of our market with the adoption of the policies namely globalization, privatization and liberalization has no doubt emerged as one of the most significant source and contributor of external inflow of resources and is one of the most crucial contributors to the capital formation despite their share in the world arena still catching up. When we talk about the term FDI we are talking about a bundle of resources that usually flow into a country including besides capital, production technology, global managerial skills, innovative marketing strategies and access to new markets. In this project it has been tried to provide a comprehensive picture about the foreign direct investment ranging from its conception as a potent source of investment the world over, its various types, the methodology adopted top FDI countries and agencies engaged and other important aspects. A cumulative and an exhaustive study of the over all scenario of FDI in India starting from the introduction of FDI in the country, share of top investing countries, sectors attracting highest FDI flows, sector wise technology transfer and approvals. We will also look at the determinants for attracting FDI in the country and also the causes for low flow of FDI and the mechanisms that can be undertaken to make our country attractive enough for investors. This study entirely relies on secondary data collected after a thorough and exhaustive study of various websites, text books, journals, newspapers, magazines and great inputs form various professors and professionals specializing In this area. Though the policy is reviewed frequently we lack when compared with countries like china, so it’s high time the government takes steps to further liberalize the economy and streamline and liberalize the policies to make India the most preferred FDI destination in the world.

ACKNOWLEDGEMENT I take this opportunity to thank all those who have been of help to me in the completion of this project.

I would like to appreciate the guidance and co-operation provided to me by our project guide Mr. V. XXXXX (faculty of Business Management) in the completion of this project.

I am also grateful to XXXX, Director XXX and all the faculty members who have directly or indirectly helped me in preparing this project report.

TABLE OF CONTENTS: 1. LIST OF TABLES 2. LIST OF FIGURES 3. INTRODUCTION 4. REVIEW OF LITERATURE 5. DATA ANALYSIS AND PRESENTATION 6. SUMMARY AND CONCLUSION 7. BIBLOGRAPHY

OBJECTIVES
1To study the trends in the inflow of foreign direct investment 2To study the share of top investing countries of FDI during the period 2003-2006. 3The sector attracting highest FDI equity inflow 4Foreign technology transfer 5Country wise technology transfer 6Country wise technology transfer approvals 7Sector wise technology transfer approvals 8To study the causes and reasons for low FDI inflow in the country 9To study the determinants for attracting the FDI 10To study and understand mechanism of approvals of FDI by RBI and FIPB 11To study the FDI policy in brief.

METHODOLOGY: This project is entirely based on freelance work done by the student and therefore no organisation has been taken as a base for doing the project. AN exhaustive amount of data available on the internet, from the text books, news papers, and various magazines and suggestions from a few experts in the field has been taken in doing this project. As this is a free lance project, the data has been entirely collected from secondary sources and therefore its authenticity can be vouched for only by going through the same literature which has been used. SCOPE OF THE STUDY as this study is aimed to analyze the trends in the FDI inflows, the main focus is given on the recent trends in the inward FDI inflows, sectors attracting highest FDI, and the share of top investing countries, it covers only equity capital components. The scope is limited to the availability of the secondary data. LIMITATIONS OF THE STUDY the study is conducted in a short period, which was not detailed in all aspects. Non-availability of accurate data to FDI Data in one secondary source do not match with that of another source.

FOREIGN DIRECT INVESTMENT INTRODUCTION: Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment. HISTORY: In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP. TYPES OF FOREIGN DIRECT INVESTMENT: BY DIRECTION: Inward Inward foreign direct investment is when foreign capital is invested in local resources. Inward FDI is encouraged by: > Tax breaks, subsidies, low interest loans, grants, lifting of certain restrictions > The thought is that the long term gain is worth short term loss of income Inward FDI is restricted by: > Ownership restraints or limits > Differential performance requirements. OUTWARD Outward foreign direct investment, sometimes called "direct investment abroad", is when local capital is invested in foreign resources. Yet it can also be used to invest in imports and exports from a foreign commodity country. Outward FDI is encouraged by: > Government-backed insurance to cover risk Outward FDI is restricted by: > Tax incentives or disincentives on firms that invest outside of the home country or on

repatriated profits > Subsidies for local businesses Leftist government policies that support the nationalization of industries (or at least a modicum of government control) Self-interested lobby groups and societal sectors who are supported by inward FDI or state investment, for example labour markets and agriculture. Security industries are often kept safe from outwards FDI to ensure the localised state control of the military industrial complex. BY TARGET: Greenfield investment Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nation’s promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. The Organization for International Investment cites the benefits of greenfield investment (or insourcing) for regional and national economies to include increased employment (often at higher wages than domestic firms); investments in research and development; and additional capital investments. Criticism of the efficiencies obtained from greenfield investments include the loss of market share for competing domestic firms. Another criticism of greenfield investment is that profits are perceived to bypass local economies, and instead flow back entirely to the multinational's home economy. Critics contrast this to local industries whose profits are seen to flow back entirely into the domestic economy. Mergers and Acquisitions Transfers of existing assets from local firms to foreign firms takes place; the primary type of FDI. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Unlike greenfield investment, acquisitions provide no long term benefits to the local economy-- even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. Nevertheless, mergers and acquisitions are a significant form of FDI and until around 1997, accounted for nearly 90% of the FDI flow into the United States. Mergers are the most common way for multinationals to do FDI. Horizontal FDI Investment in the same industry abroad as a firm operates in at home. Vertical FDI Backward Vertical FDI Where an industry abroad provides inputs for a firm's domestic production process. Forward Vertical FDI

Where an industry abroad sells the outputs of a firm's domestic production. By Motive FDI can also be categorized based on the motive behind the investment from the perspective of the investing firm: Resource-Seeking Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe. Market-Seeking Investments which aim at either penetrating new markets or maintaining existing ones. FDI of this kind may also be employed as defensive strategy; it is argued that businesses are more likely to be pushed towards this type of investment out of fear of losing a market rather than discovering a new one. This type of FDI can be characterized by the foreign Mergers and Acquisitions in the 1980’s by Accounting, Advertising and Law firms. Efficiency-Seeking Investments which firms hope will increase their efficiency by exploiting the benefits of economies of scale and scope, and also those of common ownership. It is suggested that this type of FDI comes after either resource or market seeking investments have been realized, with the expectation that it further increases the profitability of the firm. Strategic-Asset-Seeking A tactical investment to prevent the loss of resource to a competitor. Easily compared to that of the oil producers, whom may not need the oil at present, but look to prevent their competitors from having it.

OPPOSITION: The late 1960s and early 1970s foreign direct investment became increasingly politicized. Organized labor, convinced that foreign investment exported jobs, undertook a major campaign to reform the tax provisions which affected foreign direct investment. The Foreign Trade and Investment Act of 1973 (or the Burke-Hartke Bill) would have eliminated both the tax credit and tax deferral. The Nixon Administration, influential members of Congress of both parties, and well-financed lobbying organizations came to the defense of the multinational. The massive counterattack of the multinational corporations and their allies defeated this first major challenge to their interests.

List of countries by received FDI: This is a list of countries by FDI in 2006 mostly based on CIA fact book accessed in January 2008. 1United states 2United kingdom 3Hong kong 4Germany 5China 6France 7Belgium 8Netherlands 9Spain 10Canada INTERNATIONAL ACCREDITATIONS AND AGENCIES INTERNATIONAL INVESTMENT POSITION: A country's international investment position (IIP) is a financial statement setting out the value and composition of that country's external financial assets and liabilities. The IIP is one component of the capital account of a country's balance of payments, containing for example stock of companies, real estate, financial instruments, and so on. By comparison, imports and exports of goods and services are part of the current account. The difference between a country's external financial assets and liabilities is the net international investment position (NIIP). International Investment Position = domestically owned foreign assets - foreign owned domestic assets INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES (ICSID) The International Centre for Settlement of Investment Disputes (ICSID), an institution of the World Bank group based in Washington, D.C., was founded in 1966 pursuant to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention or Washington Convention). As of May 2005, 155 countries had signed the ICSID Convention. ICSID has an Administrative Council, chaired by the World Bank's President, and a Secretariat. It provides facilities for the conciliation and arbitration of investment disputes between member

countries and individual investors. During the past decade, with the proliferation of bilateral investment treaties (BITs), most of which refer present and future investment disputes to the ICSID, the caseload of the ICSID has substantially increased. As of June 30, 2005, ICSID had registered 184 cases more than 30 of which were pending against Argentina – Argentina's economic crisis in the late 1990s and subsequent Argentine government measures led several foreign investors to file cases against Argentina. Bolivia, Nicaragua, Ecuador and Venezuela have announced their intention to withdraw from the ICSID . World Association of Investment Promotion Agencies The World Association of Investment Promotion Agencies, or WAIPA, is an international NGO hosted by UNCTAD that acts as a forum for investment promotion agencies, provides networking and promotes best practice in investment promotion. Having spoken elaborately about the definition, history, types, top countries and various types of agencies related to foreign direct investment the other aspect that gains importance is the factors that actually stand in favor or against a country’s interests in encouraging or discouraging countries from investing in that particular nation. FACTORS THAT ENOCURAGE FDI: LOCATION SPECIFIC ADVANTAGES: The location specific advantages involve a number of factors that favor a location in comparison to an alternative location. The factors deciding location of the foreign direct investment involve labor costs, marketing factors, trade barriers and government policy. 1.MARKET FACTORS: The size of a country’s market acts as the most important determinant for attracting foreign investors, market related variables are the most important fundamentals and the scope of investment depends upon two factors i.e, current market size and potential market size. while a large market size generates scale economies , a growing market improves the prospects of market potential and there by attracts FDI inflows. In some markets domestic brands are preferred and a presence in a specific market is needed for success. The location of FDI in that specific market is essential to be able to label products “made locally” 2.TRADE BARRIERS: The existence of trade barriers is a factor that influences the choice of locations for FDI. Trade barriers encourage companies to make FDI in markets that would be too expensive to export to due to tariffs and quotas. 3. LABOUR COSTS: Labor costs are affected by an imperfection in the international market for labor. Since regulations for immigration exist worldwide, the mobility of labor is reduced and

differences in wage costs arise. This creates different production clusters around the world, each specialized in different wage levels. An example of this is the low wage area in the south east Asia producing toys and clothing and on the other hand western Europe with its high tech production and high wage levels. 4. COST FACTORS: Cost factors are nothing but factors that cause investment cost differentials across countries . They usually include factors like cost of labour, cost of capital and cost of infrastructure. Cost factors most significantly influence the choice of an investment location for the resource seeking and efficiency- seeking foreign direct investment. Usually it is seen that higher lending rates may have a positive impact on the FDI inflows i.e. higher the cost of capital in the host country the more capital can be brought in by the foreign firms. Alternatively It can also be said that the hostr country’s cost of capital impact directly on the domestic consumption. Thus the lower the interest rates, the higher the domestic consumption and hence higher the FDI inflows. As far as infrastructure costs are concerned, it is found that higher the availability of infrastructure lower is the infrastructure cost and higher is the ability of the host country to attract FDI. 5.EXCHANGE RATES: This factor presents a rather ambiguous picture as far as the impact of depreciation of real exchange rate in the host country on FDI inflows is concerned. A devalued exchange rate may or may not be gainful for the foreign investors. The investor may gain because of factors like huge purchasing power of the host country, cheap production costs which would lead to easy exports and this surely catches the fancy of the resource and efficiency seeking investor. But then the foreign firms may get taken aback if they believe that depreciation may continue to be too high to justify their investments in the first place and their continuation. 6.MACRO ECONOMIC STABILITY: Macro economic variables like inflation, budget deficit, balance of payments etc. have a big impact on the FDI across countries. The volatility of the macro economic conditions presents both opportunities and impediments to companies investing in the host country. They require not only the ability to manage the risk inherent in volatile countries but also present an opportunity of moving production to lower cost facilities. Exchange rate volatility is one of the macro economic volatility where in if exchange rate changes merely offset price movements so that real purchasing power parity is maintained, the exchange rate movements would have little real effects. 7.RATE OF INFLATION: Low inflation is taken to be a sign of internal economic stability in the host country. High inflation indicates inability of the government to balance its budget and failures of the central bank to conduct appropriate monetary policy. 8.OVERALL ECONOMIC STABILITY:

The financial well being of the host country is gauged by external debts to Exports. It is expected that lower this ratio higher is the probability of economic stability in the country. 9.RESEARCH AND DEVELOPMENT: The location of FDI also depends a lot on the importance given to the research and development activities by the host country. Many multi national companies would definitely look forward to investing in a country which provides very good incentives in the field of research and development in the form of tax cuts and provision of abundant raw material at affordable rates and so on as this would help the MNCS to shift their activities from high cost countries to low cost ones. 10.POLICY INITIATIVES AND ENVIRONMENT: In the current era of liberalization where a host of countries are vying to attract foreign investors to invest in their respective nations, the FDI policies and other policy measures adopted by them have assumed great significance. A multi national company or for that matter a country that wants to invest in a country would first of all look for the governments attitude towards FDI which is best reflected in its policies. Measures like investor friendly incentives, lower rates of taxes or relaxation for a particular period of time or provision of rebates, provision of land and other infrastructure facilities at reasonable rates and other measures would surely go a long way in making a country a chosen location for parking FDI. Apart from the above mentioned factors and initiatives companies evaluate the investment climate in the home country, meaning the political, social and economic environment. This climate affects the perceived risk of locating operations in the specific location. 11. INCENTIVES: The FDI incentives offered by the host countries can be categorized into two main types, they are 1: fiscal incentives and 2: financial incentives. Fiscal incentives refer to the policies designed to reduce tax burden of a firm and Fiscal incentives include tax concessions in the form of reduction of the standard corporate income tax rate, tax holidays, accelerated depreciation allowances on the capital taxes, exemption from import duties and duty drawbacks on exports. Financial incentives refer to the direct contributions to the firm from the government including direct capital subsidies or subsidized loans. They also include grants, subsidized loans and loan guarantees, publicly funded ventures capital participating in investment involving high commercial risks and governments insurance at preferential rates.

ELIMINATION OF RESTRICTIONS:

Developing countries have applied various forms of restrictions to FDI in the pre liberalized era mostly because of their troubled past and exploitation by their colonial rulers. Various controls like ownership and control and other operational restrictions like closing down certain sectors to private enterprises, screening regularization authorization of investment and minimum capital requirements. For example allowing only fixed percentage of foreign owned capital in an enterprise, compulsory joint ventures, compulsory transfer of ownership to local private firms and restrictions on reimbursement of capital upon liquidation. Even when the foreign firms enter the host country’s market they could face certain restrictions on their operations such as restrictions on employing key foreign personnel and performance requirements such as sourcing or local content requirements, training requirements and export targets. The best example is the erstwhile Indian economy which followed the license permit raj before embarking upon economic reforms. But the whole scenario of controlling the economy in most of the developing nations has been done away with, in most of the countries and they have seriously embarked upon many liberal measures like quick licensing, many tax incentives and so on which have changed the economic scenario of many a nations. FACTORS THAT DISCOURAGE FDI: Country experiences indicate that while favorable economic environment and regulatory or policy framework help induce foreign direct investment flows, there are a number of forces that tend to discourage such flows. Many developing countries have, during the past decade or so, begun liberalizing their national policies to establish a hospitable regulatory framework for foreign direct investment by relaxing rules regarding market entry and foreign ownership, improving the standards of treatment accorded to foreign firms and improving the functioning of markets. These core policies are important because FDI will not take place where it is forbidden or strongly impeded. However, changes in policies have an asymmetric effect on the location of foreign direct investment, changes in the direction of greater openness allows firms to establish themselves in a particular location. In contrast, changes in the direction of less openness will ensure a reduction in foreign direct investment (UNCTAD, 1998) The regulatory restrictions including tariffs, quotas tend to discourage cross-border acquisitions by multinational enterprises. Countries that impose restrictions on foreign entry and ownership and foreign transactions, as well as discriminatory tax provisions, tend to hamper foreign direct investment flows. For example, in Kenya, foreign investors face multiple licensing requirements and high withholding taxes on royalties, and foreign direct investment remained less than 0.2 percent of GDP. Also, in Yemen where sizeable outflows of FDI have been recorded since the mid 1990’s, licensing requirements discouraged new investments, despite incentives like tax holidays and customs exemptions. Some of the developing countries have not achieved the improvements in the investment climate necessary to encourage higher FDI flows. While the poor prospect for growth and unfavourable economic environment have impeded the foreign direct investment flows to many countries, a number of other factors ( such as political and structural factors ) have

also been the important discouraging factors. For instance, the economic uncertainty has restrained Greenfield foreign direct investment in Brazil, and private sector merger and acquisition transactions has slowed down with the increasing economic difficulties in Argentina. In Indonesia, the severe recession, un certainty over economic policies, and political disturbances that reduce future economic prospects have discouraged foreign investment inflows since 1996 due to concerns over political developments. In addition, recent analysis find that developing countries with stronger policy environments attract a larger share of the total foreign investments flows to developing countries, whereas the higher levels of corruption acts as a deterrent ( IMF 2001 ). Moreover, in Korea, the process of corporate and financial restructuring has slowed the foreign direct investment flows. FDI AND INDIA – A COMPREHENSIVE STUDY. INTRODUCTION: TIME LINE OF THE ECONOMY OF INDIA: Pre-colonial period 5 BC
•

Silver punch-marked coins were minted by the Mahajanapadas

1
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India's economy had a 32.9% share of world income, the largest in the world.

1000
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India's economy had a 28.9% share of world income, the largest in the world.

1500
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India's economy had a 24.5% share of world income, the second largest in the world after China, which had a 25% share.

1600
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India had an income of £17.5 million, under Akbar's Mughal Empire, in contrast to the entire treasury of Great Britain in 1800, which totalled £16 million.

1700
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India's economy had a 24.4% share of world income, the largest in the world, under Aurangzeb's Mughal Empire.

Colonial period East India Company 1793
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1793 Cornwallis' Permanent Settlement Instituted in Bengal

1820
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India's economy had a 16% share of world income, the second largest in the world after Japan

British Raj 1868
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First estimation of India's national income by Dadabhai Naoroji

1870
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India's economy had a 12.2% share of world income under the British Empire.

1913
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India's economy had a 7.6% share of world income under the British Empire.

1943
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Famine of Bengal

Post-Independence period Nehruvian era 1952
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India's economy had a 3.8% share of world income

1973
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India's economy was $494.8 billion, which accounted for a 3.1% share of world income

1980 - 1991 Virtually Closed 1991-present 1991

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Economic liberalisation was initiated by Indian prime minister P. V. Narasimha Rao and his finance minister Manmohan Singh in response to a macroeconomic crisis.

1998
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India's economy was $1,702.7 trillion, which accounted for a 5% share of world income

2005
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India's economy is $3,815.6 trillion (purchasing power parity) which accounts for a 6.3% share of world income, the fourth largest in the world in terms of real GDP.

The economy of India, when measured in USD exchange-rate terms, is the twelfth largest in the world, with a GDP of US $1.25 trillion (2008). It is the third largest in terms of purchasing power parity. India is the second fastest growing major economy in the world, with a GDP growth rate of 9.4% for the fiscal year 2006–2007. However, India's huge population has a per capita income of $4,542 at PPP and $1,089 in nominal terms (revised 2007 estimate).The World Bank classifies India as a low-income economy. Indian economy is very diverse ranging from agriculture which provides direct and indirect employment to more than 65% of the population to the services sector which contributes about 55%of the GDP and still growing strong. India also ranks among the most promising countries in other sectors like industry,manufacturing, telecommunications etc. After independence India’s economy was influence by the colonial policy though exploitative and also by the Fabian socialist ideas of our leaders. India followed a socialistic policy for most part of its independent history with strict governmental control over private sector participation, foreign trade and foreign direct investment, with a strong emphasis on import substitution, self sustainability and central planning which led to a lot of bottle necks being created in the way of the nations development with extremely low growth rate termed as the Hindu rate of growth. The collapse of the soviet union as the major trade partner and the first gulf war which spiked the oil prices caused a major balance of payments crisis in India which found the prospect of defaulting on its loans. In response, Prime Minister Narasimha Rao along with his finance minister Manmohan Singh initiated the economic liberalization of 1991. The reforms did away with the Licence Raj (investment, industrial and import licensing) and ended many public monopolies, allowing automatic approval of foreign direct investment in many sectors. Since 1990 India has emerged as one of the wealthiest economies in the developing world; during this period, the economy has grown constantly, but with a few major setbacks. This has been accompanied by increases in life expectancy, literacy rates and food security. The credit rating of India has been raised to investment level in 2007 by S&P and Moody's. In 2003, Goldman Sachs predicted that India's GDP in current prices will overtake France and Italy by 2020, Germany, UK and Russia by 2025 and Japan by 2035. By 2035, it was projected to be the third largest economy of the world, behind US and China.

FOREIGN DIRECT INVESTMENT As the third-largest economy in PPP terms, India is a preferred destination for foreign direct investments (FDI) with strengths being information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery. But its rigid FDI policies were a significant hindrance in this regard. However, as a result of a series of ambitious and positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population at 300 million exceeds the population of both the US and the EU, and represents a powerful consumer market. India's recently liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and FDI. The upward moving growth curve of the real-estate sector owes some credit to a booming economy and liberalized FDI regime. A number of changes were approved on the FDI policy to remove the caps in most sectors. Restrictions will be relaxed in sectors as diverse as civil aviation, construction development, industrial parks, petroleum and natural gas, commodity exchanges, creditinformation services and mining. But this still leaves an unfinished agenda of permitting greater foreign investment in politically sensitive areas such as insurance and retailing. FDI inflows into India reached a record US$19.5bn in fiscal year 2006/07 (April-March), according to the government's Secretariat for Industrial Assistance. This was more than double the total of

US$7.8bn in the previous fiscal year. Between April and September 2007, FDI inflows were US$8.2bn. FACTORS MAKING INDIA A FAVOURED FDI DESTINATION: India, the largest democracy and 4th largest economy (in terms of purchase power parity) in the world is also the tenth most industrialized country in the world. With its consistent growth performance and abundant high-skilled manpower, India provides enormous opportunities for investment, both domestic and foreign. Since the beginning of economic reforms in 1991, major reform initiatives have been taken in the fields of investment, trade, financial sector, exchange control simplification of procedures, enactment of competition and amendments in the intellectual property rights laws, etc. India provides a liberal, attractive, and investor friendly investment climate. Main features of policy on Foreign Direct Investment are dealt with in this chapter.

10 reasons to Invest in INDIA 1. YOU NEVER HAD IT SO GOOD: • India is the 4th 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. • Among the highest rates of returns on investment. Profitability of US investments in India: 19.33% in 2000 (according to US Department of Commerce). 2. INCREDIBLE SKILLS ON OFFER: • Strong pool of scientific and technical manpower. Prowess of IITs, IIMs well known. 255• Fortune 500 companies getting services. 2nd• largest English-speaking population. • Abundant, high-quality, cost-effective, competitive manpower. Over 100,000 IT professionals added each year. • India rated as the most attractive destination for offshore business processing by global consultancy A T Kearney. IT• Industry $14 billion; growing at 50% p.a.

• Exports $12 billion; 2008 exports target: $60 billion, to be 35% of India's total exports. Job• creation: a million direct & 2-3 million indirect 3. HIGHLY COMPETITIVE ENTREPRENEURSHIP: • Prevalence of foreign technology licensing - Rank 1 in the world. • Availability of scientist and engineers - Rank 2. • Quality of management schools - Rank 9. Firm• level innovation - Rank 12. Firm• level technology absorption - Rank 16. • Company spending on R&D - Rank 32. (Source: Global Competitiveness Report, 2003) • India amongst the leading entrepreneurial hotbeds globally. (Red Herring clubs India with Israel 4. GREAT MACRO-ECONOMIC SHOW: • India among world's fastest growing economies. (Graph on top left shows Indian GDP growth since 1996-97). • Average GDP (gross domestic product) growth of 5.4% during the 9th FiveYear Plan (1997-2002). • Exports registered growth of over 19% in 2002-03. • Foreign exchange reserves at an all-time high of over $90 billion. • Increase in forex during the fiscal year in 2002-03: $20 billion. • India's economic growth is sustained. The• nation's GDP is expected to grow by over 7.0 % this year. 5. EASY INDUSTRIAL LICENSING POLICY: Under the Industries (Development & Regulation) Act, 1951, industrial license is needed only for items: • Falling under the list of compulsory licensing. Reserved for small-scale sector. If location attracts restriction. All• industries exempt from industrial licensing required to file an Industrial Entrepreneur Memorandum. No• approval is required; Only notification need. Industries retained under compulsory licensing under the Industrial (D&R) Act, 1951: • Distillation and brewing of alcoholic drinks. • Cigars and cigarettes of tobacco and manufactured tobacco substitutes. • Electronic aerospace and defence equipment. • Industrial explosives; Hazardous chemicals.

6. MAJOR FINANCIAL SECTOR REFORMS: • Setting up of the Competition Commission; Amendments to Companies Act, Fiscal Responsibilities, and Securitization Act for creditors' security. • Board for Industrial & Financial Reconstruction to be repealed. Computerization of Customs interface. • Stable tax regime. Only 3 rates of indirect tax. Trade facilitation measures introduced. • Foreign Exchange Management Act, 1999 provides a liberal regime; forex procedures eased. • Stocks can be sold on the without prior approval. • Profits, dividends and capital investment can be repatriated. • Royalties can be paid by wholly owned arms to parent companies. 7. TRADE POLICY RATIONALIZATION: • Trade policy liberalized. Most items on Open General License. • Policies fully compatible with WTO. • Functioning of the Director General Foreign Trade (DGFT) computerized: All• 33 locations are Web-enabled. 70%• of the total transactions of exporters/importers are Web-enabled. • Transaction time has reduced to just 6 hours. • On-line banking fully integrated. 8. A PROACTIVE FDI POLICY: FDI under ‘Automatic Route,’ except in areas: • Attracting compulsory licensing; or for acquisition of shares in an existing company. • Sectors not open to FDI. (Gambling, lottery, et cetera.) • Investor can bring automatic route cases for Foreign Investment Promotion Board approval. • Foreign technology collaborations freely allowed under automatic and government approval routes. India FDI Outlook • India rated best destination for outsourcing and 6th most attractive destination for FDI, according to AT Kearney. • Global competitive report ranks India at first place in terms of prevalence of foreign technology licensing. • Among top 10 tourist destinations. Major destination for foreign venture capital funds. Pie chart, left bottom, shows country-wise FDI inflows. 9. GREAT INFRASTRUCTURE, AND A HELPING HAND: $12• billion Highways Development Programme. Over 13,000 Kms of Highways being developed.

The• Electricity Act, 2003 in place to facilitate reforms in power sector. Permits trading in electricity, captive generation freed from prior approval. • Upgradation of airports at New Delhi and Mumbai. • ‘Sagar Mala,’ a major programme aimed at developing ports and shipping sector at an estimated investment of $22 billion. • Major advances in telecommunications sector. Bandwidths of terabit available. Sharp decline in telecommunications costs. • Foreign Investment Implementation Authority helps solve foreign investors' problems. It meets periodically with investors to sort out operational difficulties and facilitates implementation. An• Empowered Sub-Committee of the National Development Council set up on creating an investor friendly climate and removing regulatory barriers to investments. • Modernization of legislations on intellectual property. All IPR Laws are TRIPS compliant. Intellectual Property Appellate Tribunal functional. • Simplification and re-engineering of work procedures. More• information on www.ipindia.com 10. BOOMING SECTORS & OPPORTUNITIES GALORE: • Roads: Capacity enhancement of highways. 7000 kms of National Highways being offered during the current year. Many more opportunities in the States. Opportunities for equipment manufacturers. technical support. • Urban Infrastructure: Development of townships for the rapidly growing, increasingly affluent urban middle class. City level infrastructure. roads, bridges, IT Parks, sanitation and water supply, etc. Consultancy in urban planning. • Ports: Government of India's initiative of developing ports – ‘Sagar Mala' with an investment of $22 billion. Development of Ports. Shipping. Up gradation and operation of cruise terminal. Operation of Dry Port at Mumbai. • Power: Addition of 100,000 MW required over the next 10 years. Installed capacity 106,000 MW. Hydro-electric initiative to develop 50,000 MW. Detailed project reports to be prepared to facilitate private investment. • Telecommunications: Cellular phones increasing @ 1.5 million every month. To increase by 20 million this year. Figure to rise to 100 million in the next 3-4 years. Telephone connections to rise to 75 million by 2005 and 175 million by 2010. Investment Opportunities. Setting up manufacturing base. Value-added services. A number of studies in the recent past have highlighted the growing attractiveness of India as an investment destination. According to the study ‘Dreaming with BRICS’ by Goldman Sachs, Indian economy is expected to continue growing at the rate of 5% or more till 2050. Some of these conclusions are listed below: ? 2nd most attractive destination – A. T. KEARNEY Business Confidence Index, 2005 ? 2nd most attractive investment destination among Transnational Corporations – UNCTAD’s ‘World Investment Report, 2005’

? Most attractive location for "offshoring" of services activities - A.T. Kearney Global Services Location Index 2005. India has among the most liberal and transparent policies on FDI among the emerging economies. FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which require prior approval of the Government: i. Manufacture of Cigars & Cigarettes of tobacco and manufactured tobacco substitutes; ii. Manufacture of Electronic aerospace and defence equipments: all types iii. Manufacture of items exclusively reserved for Small Scale Sector with more than 24% FDI; iv. Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field [Refer Press Note No.1 (2005 series)]; v. All proposals falling outside notified sectoral policy/caps. FDI policy is reviewed on continued basis and changes in sectoral policy/sectoral equity cap are notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion (DIPP). All Press Notes are available at DIPP website (www.dipp.gov.in). FDI Policy is also notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA) 1999. FDI up to 100% is permitted on the automatic route in most sectors. Investments under the automatic route do not require any prior approval and require only post-entry notification to the Reserve Bank of India. In limited sectors requiring prior Government approval, proposals are considered in a time bound and transparent manner. There is no restriction on repatriation of original investment and returns on investment. Some of the major sectors where FDI up to 100% is allowed under the Automatic route include most infrastructure sectors, viz., roads and highways, ports and harbours, power generation except nuclear power; almost all manufacturing activity except few activities under compulsory licensing or reserved for exclusive manufacture in small scale sector; and a large number of services. The Policy also encourages acquisition of technology by the Indian companies to become globally competitive. Foreign technology collaborations are also allowed on automatic route within specified ceilings for payment of royalties. Companies, who have entered into foreign technology collaboration agreements on automatic route, can make royalty payments without any restriction on duration. All foreign investments, dividends and profits thereon are fully repatriable. FOREIGN INVESTMENT ACTS- FERA AND FEMA: India’s foreign investment policy since independence has been guided by two important acts namely foreign exchange regulation act 1973 and Foreign exchange management act 1999 among other acts and regulations. As we discuss elaborately the various factors of foreign direct investment it is pertinent to have an overview of these two acts. FOREIGN EXCHANGE REGULATION ACT-1973 The Foreign Exchange Regulation Act, 1947, was enacted as a temporary measure and later

placed permanently in the year 1957. At that time the limited objective of the Act was to regulate the inflow of foreign capital in the form of branches and concerns with the substantial nonresident interest, and the the employment of foreigners. The country attained freedom in 1947, after two centuries of foreign rule and protracted freedom struggle stretched over decades. The prevailing mood then was one of preserving and consolidating the freedom and not to permit once again any type of foreign domination, political or economic. Initial approach on foreign capital was negative to a not-interested attitude. Prime Minister explained that "the stress on the need to regulate, in the national interest, the scope and manner of foreign capital and control (as per the Industrial Policy Statement 48) arose from the past association of foreign capital and control with foreign domination of the economy of the country." However after initiation of a process of rapid industrialization of the country, the need to conserve foreign exchange was keenly felt. Exports were not picking up and imports were surging, putting the country to severe balance of trade and balance of payment crisis. This in trn led to the need to tap the donors or Foreign Aid Givers. This background induced the Government of India to re-focus the FERA act with the main aim of conservation of foreign exchange rather than regulation of entry of foreign capital. The Foreign Exchange Regulation Act, 1973, (hereinafter referred to as FERA) was drafted with the object of introducing the changes felt necessary for the effective implementation of the Government policy and removing the difficulties faced in the working of the previous enactment. FERA is crisis-driven regulation and naturally it contained several draconian provisions. Any offence under FERA was a criminal offence liable for imprisonment. However in the early Nineties due to the major changes in Indian economy and liberalization of industrial and trade policies, consistent with the fast changing international economic and trade relations the need for a more conducive climate for increased inflow of foreign investment and capital in the country to accelerate industrial growth and promotion of trade (especially exports) was felt. In order to remove the special restrictions in respect of companies registered in India and to simplify the regulations in regard to foreign investment to attract better flow of foreign capital and investment was paramount. The Amending Act 29 of 1993 was enacted in order to remove unnecessary restrictions and simplify procedure. Thereby certain provisions dealing with emergencies of different kinds, which were no longer relevant, were removed for improving the climate for investment in India. FOREIGN EXCHANGE MANAGEMENT ACT-1999 As the crisis of foreign exchange melted once for all and the country came to be endowed with sizeable reserves of foreign exchange, the basic aim of foreign exchange policy shifted from one of control and conservation to that of effective management, to facilitate external trade/payment and promote the orderly development and maintenance of the forex market in India. The Act was thoroughly revised and replaced by the by the Foreign Exchange Management Act, 1999. The latter has dropped many of the stringent provisions of the older Act, in the area of transactions involving foreign exchange. The FEMA 1999 took effect from June 1, 2000. To investigate due adherence to the provisions of the Act by the market participants, the Central Govt. have established the Directorate of Enforcement with a Director and other officers as officers of the Enforcement. This Act extends to the whole of India and will also apply to all

branches, offices and agencies outside India owned or controlled by a person resident in India. It will also be applicable to any contravention committed outside India by any person to whom this Act is applicable. INVESTMENT PROMOTION AND FACILITATION: The ministry of Finance, ministry of corporate affairs and the ministry of commerce and industries are the most important ministries which with the help of Reserve bank of India look after the foreign direct investment operations in the country. These ministries have an elaborate set of institutions and agencies to facilitate the flow of foreign direct investment into the country and remove the procedural bottlenecks if any that would take place in the promotion of foreign direct investment. SECRETARIAT FOR INDUSTRIAL ASSISTANCE: SIA has been set up by the Government of India in the Department of Industrial Policy and Promotion in the Ministry of Commerce and Industry to provide a single window for Entrepreneurial assistance, investor facilitation, receiving and processing all applications which require Government approval, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison with other organizations and State Governments) and in monitoring implementation of projects. It also notifies all Government Policy relating to investment and technology, and collects and publishes monthly production data for 209 select industry groups. FOREIGN INVESTMENT PROMOTION BOARD (FIPB): The FIPB is the competent body to consider and recommend Foreign Direct Investment proposals, which do not come into the country through the automatic route. The board has been transferred to Department of economic affairs in the Ministry of Finance from the Ministry of commerce and industries. The functions of the board are:
• • •

• • •

• •

to ensure expeditious clearance of the proposals for foreign investment; to review periodically the implementation of the proposals cleared by the Board; to review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the Administrative Ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investment in various sectors; to undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects; to interact with the Industry Association/Bodies and other concerned government and non-government agencies on relevant issues in order to facilitate increased inflow of FDI; to identify sectors into which investment may be sought keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts; to interact with the Foreign Investment Promotion Council (FIPC) being constituted separately in the Ministry of Industry; and To undertake all other activities for promoting and facilitating foreign direct investment, as considered necessary from time to time. The Board will submit its recommendations to

the Government for suitable action within six weeks. FOREIGN INVESTMENT IMPLEMENTATION AUTHORITY (FIIA): FIIA was established in the Department of Industrial policy and Promotion, Ministry of commerce and Industry to facilitate quick translation of Foreign Direct Investment approvals in implementation, provide a proactive one- stop after care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various government agencies to find solution to problems of the investors. The FIIA may coopt other secretaries to the Government of India, Chief Commissioner (NRI), top functionaries of financial institutions and professional experts from industry and commerce, as and when necessary. The secretariat for Industrial Assistance (SIA) functions as the secretariat of the FIIA. FOREIGN INVESTMENT PROMOTION COUNCIL (FIPC): Apart from making the policy framework investor friendly and Transparent, promotional measures are also taken to attract Foreign Direct Investment into the country. The Government has constituted a Foreign Investment Promotion Council (FIPC) in the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. This comprises of professionals from industry and trade. It has been set up to have a more target oriented approach toward Foreign Direct Investment promotion. The basic functions of the Council are to identify the sectors/projects within the country requiring Foreign Direct Investment and target specific regions/ countries of the world from where FDI can be brought in through special efforts.

INVESTMENT PROMOTION & INFRASTRUCTURE DEVELOPMENT CELL (IP&IDC): Consequent upon the Department of Industrial Policy and Promotion having assumed a promotional role as against the regulatory one prior to the process of liberalization initiated in the year 1991, an Investment Promotion and Infrastructure Development Cell was created in 1996 to give further impetus to facilitation and monitoring of investment as well as for better coordination of infrastructural requirements of industry. The activities handled by the Cell relates to organization of “Destination India” events in foreign countries in collaboration with FICCI, dissemination of information on investment climate in India through publications, promotional films and CD-ROMS. Investment facilitation and coordination of progress made in infrastructure projects, promotion of private investment including foreign investment, compilation of sectoral policy, strategies and guidelines in the infrastructure sector are also the responsibilities assigned to this Cell. Processing and approval of proposals pertaining to setting up of Industrial Parks and Industrial Model Towns is also undertaken by this Cell.

ENTREPRENEURIAL ASSISTANCE UNIT (EAU): The Entrepreneurial Assistance Unit functioning under the Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion provides assistance to entrepreneurs on various subjects concerning investment decisions. The unit receives all papers/applications related to industrial approvals and immediately issues a computerised acknowledgement, which also has an identity/reference number. All correspondence with the SIA should quote this number. In case of papers filed by post, the acknowledgement will be sent by post. The Unit extends this facility to all papers/applications relating to IEMs, Industrial Licenses, Foreign Investment, Foreign Technology Agreements, 100 per cent EOUs, EHTP, STP Schemes, etc.The Unit also attends to enquiries from entrepreneurs relating to a wide range of subjects concerning investment decisions. It furnishes clarifications and arranges meetings with nodal officers in concerned Ministries/Organizations. The Unit also provides information regarding the current status of applications filled for various industrial approvals. INVESTOR EDUCATION AND PROTECTION FUND: INVESTMENT COMMISSION: The Investment commission was set up in 2004 with a view to make the environment in India attractive for investors. The commission has the broad authority of the government to engage, discuss with and invest in India. The recommendations of the commission are to be processed in the Ministry of finance and will be put up to the competent authority for approval. All policy decisions emerging from the recommendations of the Commission would be put up to Cabinet Committee On Economic Affairs for approval. The commission studied 25 key sectors spanning Infrastructure, Manufacturing, Services, Natural Resources and the Knowledge Economy. These sectors are significant and would require an aggregate investment of US $ 550 billion over the next five years. The commission has recommended a need to identify a few National Thrust Areas where all impediments for growth are removed, and where appropriate incentives are provided, to encourage investment. The Thrust Areas could include: 1Tourism 2Power 3Textiles 4Agro-processing NRI UNIT: Major functions of the NRI Unit which is a part of the Investment Division are as under: a)Euro-equity/foreign currency convertible bonds policy.

b)Foreign Institutional Investors Portfolio Investment Policy. c)Investment policy for Non-Resident Indian. d)Policy governing opening up of branch/liaison/project office by the foreign companies and coordination in respect of individual proposals referred to Government by RBI Matters related to Indian Investment Centre, an autonomous body under the Ministry of Finance. FOREIGN DIRECT INVESTMENT POLICY: The government of India has recently undertaken a comprehensive review of the FDI policy and associated procedures. As a result, a number of rationalization measures like dispensing with the need of multiple approvals from Government and/or regulatory agencies that exist in certain sectors, extending the automatic route to more sectors, and allowing FDI in new sectors. As per the extant policy, FDI up to 100% is allowed, under the automatic route in most sectors/ activities. FDI under the automatic route does not requires prior approval either by the government or the reserve bank of India. Investors are only required to notify the concerned Regional office of RBI within 30 days of issue of shares to foreign investors. Under the Government approval route, applications for FDI proposals, other than by NonResident Indians, and proposals for FDI in “Single Brand” product retailing, are received in the Department of Economic Affairs, Ministry of Finance. Proposals for FDI in “Single Brand” product retailing and the NRI’S are received in the Department of Industrial policy and Promotion, Ministry of Commerce and Industry. Foreign investments in equity capital of an Indian company under the Portfolio Investment Scheme are not within the ambit of FDI policy and are government by separate regulations of RBI/ Securities and Exchange Board of India (SEBI). At present FDI is prohibited in the following sectors: 1234Retail trading (except single brand product retailing) Atomic energy Lottery business Gambling and betting.

All activities/ sectors would require period government approval in the following circumstances: 1where provisions of press note (2005 series) are attracted 2Where more than 24 percent foreign equity is proposed to be inducted for manufacture of items reserved for the small scale sector. FDI is permitted up to 100 percent in the automatic route in most sectors subject to sectoral rules/ regulations applicable.

SECTOR SPECIFIC GUIDELINES FOR FDI IN INDIA: 1FDI up to 100% is allowed under the automatic route in all activities/sectors except the following which will require approval of the following: 2 Activities or items that require an industrial license; 3 Proposals in which the foreign collaborator has a previous/ existing venture/ tie up in India or allied field. 4 All proposals relating to acquisitions of shares in an existing Indian company by a foreign/ NRI investor. 5 All proposals falling outside notified sectoral policy/ caps or under sectors in which FDI is not permitted. AUTOMATIC ROUTE: All activities which are not covered under the automatic route according to para 2.1, prior approval of the Government for FDI shall be compulsory. Areas/ Sectors/ Activities hitherto not open to FDI investment shall continue to be so unless otherwise decided and notified by Government. An investor can make an application for prior government approval even when the proposed activity is under the automatic route. PROCEDURE TO GET GOVERNMENT APPROVAL: The Foreign Investment Promotion Board (FIPB) considers approving all proposals for foreign investment, which requires Government approval. The FIPB also grants composite approvals involving foreign investment, foreign technical collaboration. For seeking the approval for FDI other than NRI Investments and 100% EOU, applications in form FC-IL should be submitted to the department of Economic Affairs (DEA), Ministry of Finance. Application for proposals requiring prior government approval should be submitted to FIPB in FC-IL from, plain paper applications carrying all relevant particulars are also accepted, no fee is charged. The following information should form part of the proposals submitted to FIPB: 1Whether the applicant has had or has any previous/ existing financial/ technical collaboration or trade mark agreement in India in the same or allied field for which approval has been sought; and 2If so, details thereof and the justification for proposing the new venture/ technical collaboration (including trademarks). 3Applications can also be submitted with Indian missions abroad who will forward them to the department of Economic affairs for further processing. 4Foreign investment proposals received in the DEA are placed before the Foreign Investment Promotion Board (FIPB) within 15 days of receipt. The decision of the government in all the cases is usually conveyed by the DEA within 30 days. Reserve Bank Of India’s general permission under FEMA, RBI looks after granting of

general permission under the Foreign Exchange Management Act in respect of proposals approved by the government, Indian companies getting foreign investment approval through FIPB route do not require any further clearance from RBI for the purpose of receiving inward remittances and issue of shares to the foreign investors. The companies are, however required to notify the Regional office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and to file the required documents with the concerned Regional offices of the RBI within 30 days after issue to the foreign investors or NRIs. Besides new companies, automatic route for FDI/NRI investment if also available to the existing companies proposing to induct foreign equity. For existing companies with an expansion programme, the additional requirements are as under: 1The increase in equity level resulting from the expansion of the equity base of the existing company without the acquisition of existing shares by NRI/forign investors 2The money to be remitted should be in foreign currency and 3Proposed expansion programme should be in the sectors under the automatic route. Otherwise, the proposal would need Government approval through the FIPB. For this a board Resolution of the existing Indian company must suppost the proposal. For companies already existing without an expansion programme, the additional requirements for eligibility for automatic approval are: That they are engaged in the industries under automatic route. The increase in equity level must be from expansion of the equity base and the foreign equity must be in foreign currency. The earlier SEBI regulation that was applicable to public limited companies, that shares allotted on preferential basis shall not be transferable in any manner for a period of 5 years from the date of their allotment has now been modified to the extent that not more than 20 percent of the entire contribution brought in by the promoter cumulatively in public or preferential issues shall be locked in. equity participation by international financial institutions such as ADB, IFC, CDC, DEG etc in the domestic companies is permitted through automatic route subject to SEBI/RBI regulations and sector specific cap on FDI. AMERICAN DEPOSITORY RECEIPTS OR GLOBAL DEPOSITORY RECEIPTS (ADR/GDR): An Indian corporate can raise foreign currency resources abroad through the issue of American Depository Receipts (ADRs) or Global Depository Receipts (GDRs) by issuing its Rupee denominated shares to a person resident outside India being a depository for the purpose of issuing Global Depository Receipts (GDRs) and/ or American Depository Receipts (ADRs), subject to the conditions that: A) The ADRs/GDRs are issued in accordance with the Scheme for issue of Foreign Currency

Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government there under from time to time. B) The Indian company issuing such shares has an approval from the Ministry of Finance, Government of India to issue such ADRs and/or GDRs or is eligible to issue ADRs/ GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and C) Is not otherwise ineligible to issue shares to persons resident outside India in terms of these Regulations. There is no limit up to which an Indian company can raise ADRs/GDRs. However, the Indian company has to be otherwise eligible to raise foreign equity under the extant FDI policy. There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real estate and stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements. In addition, 25 per cent of the FCCB proceeds can be used for general corporate restructuring. Regulation 4 of Schedule-I of FEMA Notification No. 20 deal with the issue of ADR/GDR by an Indian company. 1.17 A company engaged in the manufacture of items covered under Automatic route, whose direct foreign investment after a proposed GDRs/ADRs/FCCBs issue is likely to exceed the equity limits under the automatic route, or which is implementing a project falling under Government approval route, would need to obtain prior Government clearance through FIPB before seeking final approval from the Ministry of Finance. FOREIGN CURRENCY CONVERTIBLE BONDS: FCCBs are issued in accordance with the [Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, and subscribed by a non-resident in foreign currency and convertible into ordinary shares of the issuing company in any manner, either in whole, or in part, on the basis of any equity related warrants attached to debt instruments; The eligibility for issue of Convertible Bonds or Ordinary Shares of Issuing Company is as under: A) An issuing company desirous of raising foreign funds by issuing Foreign Currency Convertible Bonds or ordinary shares for equity issues through Global Depositary Receipt. i. Can issue FCCBs up to US$50 Million under the Automatic route, ii. From US$50 –100 Million, the companies have to take RBI approval, iii. From US$100 Million and above, prior permission of the Department of Economic Affairs is

required. PREFERENCE SHARES: Foreign investment through preference shares is: • treated as Foreign Direct equity for the purposes of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. Preference shares structured without such conversion option fall outside the foreign direct equity cap. • considered as part of the share capital and fall outside the External Commercial Borrowing (ECB) guidelines/cap. The route, whether Automatic or Government approval depends upon the activity / sector of the company. The Duration of conversion shall be as per the maximum limit prescribed under the Companies Act or what has been agreed to in the shareholders agreement, whichever is less. The dividend rate would not exceed the limit prescribed by the Ministry of Finance. Issue of preference shares should conform to the guidelines prescribed by the SEBI and and other statutory requirements. INDUSTRIAL LICENSING: Industrial licensing policy: Industrial Licenses are regulated under the Industries (Development & Regulation) Act, 1951. With progressive liberalization and deregulation of the economy the requirement of industrial licensing have been substantially reduced. At present industrial license for manufacturing is required only for the following: i. Industries retained under compulsory licensing, ii. Manufacture of items reserved for small scale sector by non-SSI units; and iii. When the proposed location attracts locational restriction. Industries Requiring Compulsory Licensing: The following industries require compulsory industrial license under I (D&R) Act / appropriate authority: i. Distillation and brewing of alcoholic drinks. ii. Cigars and cigarettes of tobacco and manufactured tobacco substitutes; RBI

iii. Electronic Aerospace and defence equipment: all types; iv. Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and matches; v. Hazardous chemicals; a. Hydrocyanic acid and its derivatives b. Phosgene and its derivatives c. Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified (example: Methyl Isocyanate). Small-Scale Sector: An industrial undertaking is defined as a small-scale unit if the capital investment in plant and machinery does not exceed Rs 10 million. Small-scale units can get registered with the Directorate of Industries/District Industries Centre of the State Government. Such units can manufacture any item, and are also free from locational restrictions. The Government has reserved certain items for exclusive manufacture in the small-scale sector. (List available at www.dipp.gov.in). Manufacture of items reserved for small-scale sector: Non small-scale units can manufacture items reserved for the small-scale sector only after obtaining an industrial license. In such cases, the non-small scale unit is required to undertake an obligation to export 50 per cent of the production of SSI reserved items. Locational Restrictions: Industrial undertakings are free to select the location of their projects. Industrial License is required if the proposed location is within 25 KM of the Standard Urban Area limits of 23 cities having population of 1 million as per 1991 census. These cities are Urban area limits of Greater Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Bangalore, Ahmedabad, Pune, Kanpur, Nagpur, Lucknow, Surat, Jaipur, Kochi, Coimbatore, Vadodara, Indore, Patna, Madurai, Bhopal, Visakhapatnam, Varanasi and Municipal Corporation limits of Ludhiana. . The Locational restriction does not apply: i) If the unit were to be located in an area designated as an ‘’industrial area’’ before the 25th July, 1991. ii) In the case of Electronics, Computer software and Printing and any other industry, this may be notified in future as “non polluting industry”.

The location of industrial units is subject to applicable local zoning and land use regulations and environmental regulations. Procedure for obtaining Industrial License: Industrial License is granted by the Secretariat for Industrial Assistance (SIA) on the recommendation of the Licensing Committee. Application in the prescribed form. (Form FC-IL) accompanied with a crossed demand draft of Rs.2500/- may be submitted to the PR&C section in SIA. Decisions are usually taken within 4-6 weeks of filing the application... Policy for Industries exempt from licensing - IEM Industrial undertakings exempt from industrial license are only required to file an Industrial Entrepreneur Memoranda (IEM) in Part ‘A’, in the prescribed format (Form IEM). Procedure for IEM: The Application in the prescribed form. (Form IEM) can be filed with the PR&C section in SIA either in person or by post. The IEM should be submitted along with a crossed demand draft of Rs.1000/- for up to 10 items proposed to be manufactured For more than 10 items, an additional fee of Rs. 250 for up to 10 additional items needs to be paid. On filing the IEM, an acknowledgement containing the SIA Registration Number, for future reference, is issued. In case IEM is sent by post, the acknowledgement is sent by post & no further approval is required. An IEM would stand cancelled if the proposal requires compulsory license. Upon commencement of commercial production, Industrial undertakings need to file information in Part ‘B’ of the IEM to PR&C Section in SIA. No fee is to be paid for filing Part B. All industrial undertakings whether or not exempt from compulsory industrial licensing, are statutorily required to submit monthly production return in the prescribed proforma every month. This should reach the Industrial Statistics Unit (ISU) of the Department positively by the 10th of the following month. Note: FC-IL and IEM forms are available in the Public Relation and Complaint Section (PR&C) of the SIA, all outlets dealing in Government Publications, Indian Embassies, and can be downloaded from the web site http://www.dipp.gov.in. Carry on Business (COB) License: Small- scale units by virtue of their natural growth may exceed the investment limit prescribed for small-scale units. In such cases these units need to obtain a Carry-on-Business (COB) License based on the best production in the preceding three years. No export obligation is fixed on the capacity for which the COB license is granted.

The application for COB licence should be submitted in revised form “EE”, which can be downloaded from the web site http://www.dipp.gov.in along with a crossed demand draft of Rs.2500/-. However, on further expansion of its capacity beyond the capacity included in COB license, the unit would need to obtain an industrial license.

Payment of prescribed fee: The fee prescribed for various applications, licenses are to be paid through crossed demand draft drawn in favor of the Pay & Accounts Officer, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, payable at New Delhi. Environmental Clearances: Entrepreneurs are required to obtain Statutory clearances relating to Pollution Control and Environment as may be necessary, for setting up an industrial project for 31 categories of industries in terms of Notification S.O. 60(E) dated 27.1.94 as amended from time to time, issued by the Ministry of Environment & Forests under The Environment (Protection) Act, 1986. This list includes petrochemical complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, paper, etc. However, if investment in the project is less than Rs. 1 billion, such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries. Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon valley, Dahanu, etc.) are guided by separate guidelines issued by the Ministry of Environment and Forests. Details can be obtained at the website of Ministry of Environment and Forests (http://envfor.nic.in ). FOREIGN TECHNOLOGY AGREEMENTS General Policy: For promoting technological capability and competitiveness of the Indian industry, acquisition of foreign technology is encouraged through foreign technology collaboration agreements. Induction of know-how through such collaborations is permitted either through automatic route or with prior Government approval.

Scope of Technology Collaboration: The terms of payment under foreign technology collaboration, which are eligible for approval through the automatic route and by the Government approval route, includes technical know how fees, payment for design and drawing, payment for engineering service and royalty. Payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing of indigenous raw material, products, and indigenously developed technology in foreign countries are governed by separate RBI procedures and rules pertaining to current account transactions and are not covered by the foreign technology collaboration approval. For details please refer to the website of the RBI. Automatic Route: Payments for foreign technology collaboration by Indian companies are allowed under the automatic route subject to the following limits: (i) The lump sum payments not exceeding US$2 million; (ii) Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for exports, without any restriction on the duration of the royalty payments. The royalty limits are net of taxes and are calculated according to standard conditions.[Press Note No.19 (1998 series) and Press Note No. 2 (2003 series)]. The royalty will be calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc.

Use of Trademarks and Brand name: Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route for use of trademarks and brand name of the foreign collaborator without technology transfer. Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents’/dealers’ commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts and components imported from the foreign licensor or its subsidiary/affiliated company(Press Note No.1 of 2002). In case of technology transfer, payment of royalty includes the payment of royalty for use of trade mark and brand name of the foreign collaborator. Procedure for Automatic Route:

Authorized Dealers (ADs) appointed by the RBI allow remittances for royalty, payment of lumpsum fee and remittance for use of Trade mark /Franchise in India within the limits prescribed under the automatic route. RBI’s prior approval is required for remittance towards purchase of trade mark/franchise. Government Approval – Project Approval Board (PAB): Royalty payment in the following cases requires prior Govt. approval (through PAB when only technical collaboration is proposed and FIPB where both financial & technical collaboration are proposed): Sectors/activities which are not on the automatic route for FDI. Procedure for Government Approval: Proposals for foreign technology collaboration not covered under the automatic route are considered by the Project Approval Board (PAB) in the Department of Industrial Policy and Promotion. Application in such cases should be submitted in Form FC-IL to the Secretariat for Industrial Assistance. Proposals where both financial & technical collaboration are proposed, application is to be submitted to FIPB. No fee is payable. ENTRY OPTIONS FOR FOREIGN INVESTOR Entry Options: A foreign company planning to set up business operations in India has the following options: As an Incorporated Entity i) By incorporating a company under the Companies Act,1956 through i. Joint Ventures; or ii. Wholly Owned Subsidiaries Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to any equity caps prescribed in respect of the area of activities under the Foreign Direct Investment (FDI) policy. As an Unincorporated Entity ii) As a foreign Company through

i. Liaison Office/Representative Office ii. Project Office iii. Branch Office Such offices can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office of other place of business) Regulations, 2000. Incorporation of Company: For registration and incorporation, an application has to be filed with Registrar of Companies (ROC). Once a company has been duly registered and incorporatedas an Indian company, it is subject to Indian laws and regulations as applicable toother domestic Indian companies. For details please visit the website of Ministry of Company Affairs athttp://dca.nic.in Liaison Office/Representative Office: The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company andcompanies in India. Liaison office can not undertake any commercial activitydirectly or indirectly and can not, therefore, earn any income in India. All expenses of Liasion offices have to be met by inward remittances. 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 can not 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, after meeting the tax liabilities, on its completion. Branch Office: Foreign companies engaged in manufacturing and trading activitiesabroad are allowed to set up Branch Offices in India for t he following purposes: a. Export/Import of goods b. Rendering professional or consultancy services

c. Carrying out research work, in which the parent company is engaged. d. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. e. Representing the parent company in India and acting as buying/selling agents in India. f. Rendering services in Information Technology and development ofsoftware in India. g. Rendering technical support to the products supplied by the parent/ groupcompanies. h. Foreign airline/shipping company. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). Branch Office on “Stand Alone Basis” in SEZ: Such Branch Offices would be isolated and restricted to 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/unitin SEZs to undertake manufacturing and service activities subject to the following conditions: a. Such units are functioning in those sectors where 100% FDI is permitted, b. Such units comply with part XI of the Company’s Act (Section 592 to 602), c. Such units function on a stand-alone basis, d. In the event of winding up of business and for remittance of winding-up proceeds, the branch shall approach an authorized dealer in foreign exchange with the documents required as per FEMA. Application for setting up Liaison Office/ Project Office/ Branch Office may besubmitted to Chief General Manager, Exchange Control Department(ForeignInvestment Division), RBI Central Office, Mumbai-400001, in form FNC 1 (available at RBI website at www.rbi.org.in )

EXCHANGE CONTROL Foreign Exchange Management Act: The Reserve Bank of India’s Exchange Control Department, administers Foreign Exchange Management Act, 1999, (FEMA). Repatriation of Investment Capital and Profits Earned in India: (i) All foreign investments are freely repatriable, subject to sectoral policies and except for cases where NRIs choose to invest specifically under non-repatriable schemes. Dividends declared on foreign investments can be remitted freely through an Authorized Dealer. (ii) Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through a bank the sale proceeds if they hold the shares on repatriation basis and if they have necessary NOC/tax clearance certificate issued by Income Tax authorities (iii) For sale of shares through private arrangements, Regional offices of RBI grant permission for recognized units of foreign equity in Indian company in terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/2000 RB dated May ‘2000. The sale price of

shares on recognized units is to be determined in accordance with the guidelines prescribed under Regulation 10B (2) of the above Notification. (iv) Profits, dividends, etc.,(which are remittances classified as current account transactions) can be freely repatriated. Current Account Transactions Current account transactions are regulated under the Foreign Exchange Management (Current Account Transactions) Rules 2000. { No. G.S.R. 381(E),dated 3.5.2000] . Prior approval of the RBI is required for acquiring foreign currency above specified limits for the following purposes: a. Holiday travel over US$10,000 p.a. b. Gift / donation over US$5,000 / US$10,000 per beneficiary p.a. c. Business travel over US$25,000 per person d. Foreign studies as per estimate of institution or US$100,000 per academic year e. Architectural / consultancy services procured from abroad over US$1,000,000 per project f. Remittance for purchase of Trade Mark / Franchise g. Reimbursement of pre incorporation expenses over US$100,000 h. Remittances exceeding US$25,000 p.a. (over and above ceilings prescribed for other remittances mentioned above) by a resident individual for any current account or capital account transaction. The above figures are for the purpose of general guidance of the investors. It is suggested that investors must reconfirm, the permissible limits before undertaking transactions. Acquisition of Immovable Property By Non-Resident: A person resident outside India, who has been permitted by Reserve Bank of India to establish a branch, or office, or place of business in India (excluding a Liaison Office), has general permission of Reserve Bank of India to acquire immovable property in India, which is necessary for, or incidental to, the activity. However, in such cases a declaration, in prescribed form (IPI), is required to be filed with the Reserve Bank, within 90 days of the acquisition of immovable property. Foreign nationals of non-Indian origin who have acquired immovable property in India with the specific approval of the Reserve Bank of India can not transfer such property without prior permission from the Reserve Bank of India. Please refer to the Foreign Exchange Management (Acquisition and transfer of Immovable Property in India) Regulations’ 2000 [Notification No.FEMA.21/2000-RB dated May 3, 2000].

Acquisition of Immovable Property By NRI An Indian citizen resident outside India (NRI) can acquire by way of purchase any immovable property in India other than agricultural/ plantation /farm house. He may transfer any immovable property other than agricultural or plantation property or farm house to a person resident outside India who is a citizen of India or to a Person of Indian Origin resident outside India or a person resident in India.

PORTFOLIO INVESTMENT Portfolio Investment Scheme(PIS): Foreign Institutional Investors (FIIs) registered with SEBI and Non-Resident Indians are eligible to purchase shares and convertible debentures under the Portfolio Investment scheme. The FII should apply to the designated AD for opening a foreign currency account and/or a Non Resident Rupee Account. Investment by FIIs is regulated under SEBI (FII) Regulations, 1995 and Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000. SEBI acts as the nodal point in the entire process of FII registration. FIIs are required to apply to SEBI in a common application form in duplicate. RBI approval is also required under FEMA to enable an FII to buy/sell securities on Stock Exchanges and open foreign currency and Indian Rupee accounts with a designated bank branch. Foreign Institutional Investors (FII): FIIs include Asset Management Companies, Pension Funds, Mutual Funds, Investment Trusts as Nominee Companies, Incorporated/Institutional Portfolio Managers or their Power of Attorney holders, University Funds, Endowment Foundations, Charitable Trusts and Charitable Societies. Policy On FII Investments Main features of the policy on investment by FII are:

a. FIIs are required to allocate their investment between equity and debt instruments in the ratio of 70:30. However, it is also possible for an FII to declare itself a 100% debt FII in which case it can make its entire investment in debt instruments. b. FIIs can buy/sell securities on Stock Exchanges. They can also invest in listed and unlisted securities outside Stock Exchanges where the price has been approved by RBI. c. No individual FII/sub-account can acquire more than 10% of the paid up capital of an Indian company. d. All FIIs and their sub-accounts taken together cannot acquire more than 24% of the paid up capital of an Indian Company. e. Indian Companies can raise the above mentioned 24% ceiling to the Sectoral Cap / Statutory Ceiling as applicable by passing a resolution by its Board of Directors followed by passing a Special Resolution to that effect by its General Body in terms of Press Release dated Sept.20, 2001 and FEMA Notification No.45 dated Sept. 20, 2001. No permission from RBI is needed so long as the FIIs purchase and sell on recognized stock exchange. All non-stock exchange sales/purchases require RBI permission. Portfolio Investments by NRIs NRIs/PIOs are permitted to purchase/sell shares/convertible debentures of Indian companies on Stock Exchanges under Portfolio Investment Scheme. For this purpose, the NRI/PIO has to apply to a designated branch of a Bank which deals in Portfolio Investment. All the sale/purchase transaction is routed through the designated branch. An NRI can purchase shares up to 5% of the paid up capital of an Indian company. All NRIs taken together cannot purchase more than 10% of the paid up value of the company. This limit can be increased by the Indian company to 24% by passing a General Body resolution. Investment can be made both on repatriation basis or non-repatriation basis the sale of shares will be subject to payment of applicable taxes. Details regarding portfolio investment scheme available at the websites of RBI (www.rbi.org.in) and SEBI (www.sebi.gov.in).

INCORPORATION OF COMPANY Company’s Act 1956: Incorporation of a company in India is governed by the Companies Act, 1956. Part II of the Act deal with the incorporation of a company and matters related to. Private Company: Private company means a company which has a minimum paid-up capital of Rs,1,00,000/- or such higher paid-up capital as may be prescribed, and by its articles, (a) restricts the rights to transfer its shares, if any; (b) Limits the number of its members to fifty, not including i) Persons who are in the employment of the company; and ii) persons who, having been formerly in the employment of the company, were members of the company while in that employment have continued to be members after the employment ceased; and (c) prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company; (d) Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. Public Company: A public company is a company which is not a private company and has a minimum paid-up capital of Rs,5,00,000/-or such higher paid-up capital, as may be prescribed. Formation of a Private Limited Company: A private Company can be formed either by

i. incorporation of a new company for doing a new business , or ii. Conversion of existing business of a sole proprietary concern or partnership firm into a company. Name of Company: The name of a corporation is the symbol of its personal existence. Any suitable name may be selected for registration subject to the following guidelines: a. The promoters should select three to four alternative names, quite distinct from each other. b. The names should include, as far as possible, activity as per the main objects of the proposed company. c. The names should not too closely resemble with the name of any other registered company. d. The official guidelines issued by the Central Government should be followed while selecting the names. Besides, the names so selected should not violate the provisions of the Emblems and Names (Prevention of Improper Use) Act, 1950. e. Apply in form 1-A to the Registrar of Companies having jurisdiction along with a filing fee of Rs. 500. Memorandum of Association: An important step in the formation of a company is to prepare a document called Memorandum of Association. It is the charter of the company and it contains the basic conditions on which the company is incorporated. The Memorandum contains the name, the State in which the registered office is to be situated, main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects, liability of the members and the authorized capital of the company. The main purpose of the memorandum is to state the scope of activities and powers of the company. Articles of Association: Articles of Association of the company contain rules, regulation and bye-laws for the general management of the company. It is compulsory to get the Articles of Associations registered along with the Memorandum of Association in case of a private company. The Articles are subordinate to the Memorandum of Association. Therefore, the Articles should not contain any regulation, which is contrary to provisions of the Memorandum or the Companies Act. The Articles are binding on the members in relation to the company as well as on the company in its relation to members. Registration of Company and Issue of Capital: After completion of the preliminaries, as enumerated above, the application with necessary documents are required to be filed with the Registrar of Companies of the State in which the

company is proposed to be incorporated. These include: a. Memorandum of Association (duly stamped) and a duplicate thereof. b. Articles of Association (duly stamped) and a duplicate thereof c. The agreement, if any, which the company proposes to enter into with any individual for appointments as its managing or whole time director or manager. d. A copy of the letter of the Registrar of Companies intimating the availability of the proper name e. Documents evidencing payment of prescribed registration and filing fee, i.e. a bank draft or a treasury challan. f. Documents evidencing the directorship and situation of Registered Office in Form 32 and Form 18 respectively and declaration of compliance with requirements of the Companies Act in Form No.1 and Form 29 for giving consent to act as a Director in case of public company are also given. The amount of registration fee payable is regulated with reference to the amount of authorized capital of the proposed company. Certificate of Incorporation Upon compliance with all requirements, the Registrar will register the company and issue a Certificate of Incorporation of company. It brings the company into existence as a legal entity. Issue of Share Capital: After obtaining registration, the company proceeds with its business for which it requires funds. In case of a private company, the capital is to be raised by way of private arrangements whereas a Public Ltd. company can raise funds from the public. First of all, the company will issue shares to the subscribers to its memorandum and other members of the company. The issued capital must not exceed the authorized capital of the company. It is necessary for a public limited company to obtain the Certificate of Commencement of Business before commencing the business. SPECIAL ECONOMIC ZONES (SEZs) AND EXPORT ORIENTED UNITS (EOUs) Policy for Setting up Special Economic Zone (SEZ): SEZ is a specifically delineated duty free enclave and is deemed to be foreign territory for the purposes to trade operations and duties and tariffs. Goods and services going into the SEZ area form DTA are treated as exports and goods coming from the SEZ area into DTA are to be treated as if these are being imported. A SEZ may be set up in the Public, Private or Joint Sector or by State government(s). Proposals as per criteria under appendix 14 II O available at DGFT website (http://dgft.delhi.nic.in) is considered by Board of Approvals and Department of Commerce

issues the letter of permission. Procedure: The applicant should follow the following procedure: a. Submission of 10 copies of application along with project report to Chief Secretary of the concerned State. b. Forwarding of application along with comments by the State government to Board of Approvals in the Department of Commerce. c. Issue of letter of permission by Department of Commerce. Policy for FDI/NRI Investment for setting up SEZ/FTWZ: 100% FDI is permitted under automatic route for setting up Special Economic Zones and Free Trade Warehousing Zones subject to Special Economic Zones Act, 2005 and the Foreign Trade Policy. FDI in setting up of SEZs & units in SEZ are exempt from Press Note No. 2 (2005), governing FDI in Construction Development projects. Policy for setting up EOUs/Units in SEZ under Automatic Route: Development Commissioners (DCs) of Special Economic Zones (SEZs) accord automatic approval to projects where (a) Activity proposed does not attract compulsory licensing or falls in the services sector except R&D; Software & IT enabled services; (b) Location is in conformity with the prescribed parameters; (c) Units undertake to achieve positive net foreign exchange earning; An EOU unit may be shifted to SEZ with the approval of DCs provided the EOU unit has achieved pro-rata obligation under the EOU scheme. If the Unit is amenable to bonding by customs authorities; conversion of existing Domestic Tariff Area (DTA) units into EOU is also permitted under automatic route, if the DTA unit satisfies the parameters in Para 8.1. In case there is an outstanding export commitment under the EPCG scheme, it will be subsumed in the export performance of the unit. If the unit is having outstanding export commitment under the Advance Licensing Scheme, it will apply to ALC for reducing its export commitment in proportion of the quantum of duty free material actually utilized for production and permitted to carry forward the unutilized material imported against the Advance License.

Policy for Setting up EOUs/ Units in SEZ under Government Route: Proposals not covered by the automatic route are forwarded by the Development Commissioner to the Board of Approval (BoA), Department of Commerce for consideration.

On consideration of the proposal by the Board, the decision would normally be conveyed within 45 days. Procedure for Approval: Applications in the prescribed form for EOUs and units in SEZ should be submitted to the concerned DCs of the SEZs. The application should be submitted along with a crossed demand draft of Rs.5000/- drawn in favour of the “the Pay & Accounts Officer, Department of Commerce, Ministry of Commerce and Industry”, payable at New Delhi. Application form and detailed procedure may be obtained from the website of Department of commerce at http://commerce.nic.in . The form is also available at all outlets dealing in Government publications. Policy for FDI/ NRI Investment for EOUs/ Units in SEZ: Details about the type of activities permitted are given in the Foreign Trade Policy issued by Department of Commerce (web site - http://commerce.nic.in). Proposals not covered under the automatic route are considered by the FIPB. SETTING UP OF INDUSTRIAL PARKS, INDUSTRIAL MODEL TOWNS AND GROWTH CENTRES Policy under Automatic Route: The Government notified Industrial Park scheme on 1.4.2002 (available at www.dipp.gov.in) for setting up Industrial Parks/ Industrial Model Towns. SIA in DIPP accord approval to set up the Industrial Parks/ Industrial Model Towns, which meet the criteria laid down for approval under the automatic route within fifteen days.

Approval by Empowered Committee: Proposals not meeting any or all of the parameters for automatic route require approval of Empowered Committee set up in the DIPP, Ministry of Commerce & Industry. The decision of the Committee is usually conveyed within six weeks. Procedure for Approval and availing 100% Tax Exemption: Application in the Form-IPS-1, available on this Department’s web site (http://dipp.gov.in), for obtaining approval for setting up an Industrial Park and for availing 100% tax exemption available under section 80 IA of the Income Tax Act, should be made to the PR&C Section of the DIPP. Application for automatic route has to be submitted in duplicate and for nonautomatic approval, in six sets. The application must be accompanied by a fee of Rupees 6,000/- by a demand draft drawn in favor of the Pay and Accounts Officer, DIPP payable at New Delhi. Policy for FDI/NRI Investment:

100% FDI is permitted under automatic route for setting up of Industrial Parks/ Industrial Model Towns. The procedure mentioned in para 1.5 will be applicable for seeking requisite approval. Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) Schemes: In order to provide impetus to the electronics industry, to enhance its export potential and to develop an efficient electronic component industry, EHTP and STP schemes offer a package of incentives and facilities like duty free imports on the lines of the EOU Scheme, deemed exports benefits and tax holidays. Automatic Route: The Directors of STPs in respect of STP proposals; and the Designated Officers in respect of EHTP proposals accord automatic approval within 2 weeks if: (a) Items do not attract compulsory licensing; (b) Location is in conformity with the prescribed parameters; (c) Units undertake to achieve positive net foreign exchange earning; Government Approval: All proposals for setting up of these projects, which do not meet any or all of the parameters for automatic approval, need to be considered and approved by the Ministry of Information Technology through the Inter-Ministerial Standing Committee. The decision of the Committee is usually conveyed within six weeks. Procedure: Application, in the prescribed form, should be submitted to the concerned Directors of STPs or the Designated Officers of EHTPs and to the Ministry of Information Technology for Government approval. The application should be submitted along with a crossed demand draft for Rs. 5000/- drawn in favor of the “the Pay & Accounts Offer, Department of Commerce, Ministry of Commerce & Industry”, payable at New Delhi. The form is available in any outlet dealing with Government Publications. Procedure for FDI/NRI Investment: All proposals for FDI/NRI investment in EHTP/STP Units are eligible for approval under automatic route subject to parameters listed in Para 1.3. For proposals not covered under automatic route, the applicant should seek separate approval of the FIPB, as per the procedure outlined in Para 1.6.

TAXATION IN INDIA

Taxation System in India: India has a well developed tax structure Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax are the main taxes levied by the Central Government. Value Added Tax, (Sales Tax where VAT is yet not in force), Stamp Duty, State Excise, Land Revenue, and Tax on Professions are the principal taxes levied by the State Governments. Local Bodies are empowered to levy tax on properties, Octroi and for utilities like water supply, drainage, etc. Personal Income Tax: The rates of personal income tax are: Income range (Rupee) 0 -1, 00,000 1, 00,000 -1, 50,000 1, 50,000 - 2, 50,000 2, 50,000 and above Tax rate(%) NIL 10 20 30

A surcharge of 10% is levied on income exceeding Rs.10, 00,000. Senior citizens with income up to Rs.1, 85,000 are exempt from Income Tax.

Rates of Withholding Tax: Current rates for withholding tax for payment to non-residents are: (i) Interest (ii)Dividends (iii)Royalties (iv) Technical Services (v) Any Other Services 20% Dividends paid by domestic companies: Nil 20% 10%

Individuals: 30% of the income Companies: 40% of the net income The above rates are general and in respect of countries with which India does not have a Double Taxation Avoidance Agreement (DTAA). Corporate Tax: Current rates of corporate tax are: • 30 % in the case of domestic companies and surcharge @ 10% of the tax. Companies incorporated in India under the applicable law are treated as domestic company for the purpose of taxation. • 40% in the case of foreign companies and surcharge @ 2.5% of the tax. • Education cess is levied @ 2% on the amount of tax and surcharge in all cases. Special Economic Zones (SEZs) TAX CONCESSIONS: India offers attractive tax incentives to encourage investments in Special Economic Zones, priority industries and to promote industrialization of industrially dis-advantageous areas. Special Economic Zones (SEZs): ‘THE SPECIAL ECONOMIC ZONES ACT, 2005’, notified by the Government of India in June 2005, provides following concessions for the establishment, development and management of the Special Economic Zones for the promotion of exports. The tax concessions available to developers of Special Economic Zones and units located in such zones are as follows: Units which begin to manufacture or produce articles or things or provide any services, on or after 01-04-2005 are eligible for 15 year tax benefit in relation to export profits, in the following manner :-

(i) 100 % deduction for 5 years, 50 % deduction for next 5 years, 50 % deduction of the profits ploughed back into business for the next 5 years. (ii) 100 % deduction of profits derived by an undertaking / enterprise from the business of developing an SEZ, notified on or after 1st April, 2005. The deduction is available for 10 out of 15 years beginning from the year in which SEZ has been notified. (iii) Exemption of capital gains arising on transfer of capital assets in case of shifting of industrial undertaking from urban area to any Special Economic Zone. (iv) Minimum Alternate Tax (chargeable @ 7.5 % of the book profit) is not applicable to the income arising on or after 1st April, 2005 to SEZ units or developers of SEZs. (v) Exemption of developers of SEZ from dividend distribution tax on dividends to be distributed by them on or after 1st April, 2005. (vi) Exemption of interest income received by a non-resident or not ordinarily resident on deposits made on or after 01-04-2005 with Offshore Banking Units. (vii) No tax to be deducted by Offshore Banking Units from the interest paid on deposit made by, or borrowing from, a non-resident or a person not ordinarily resident in India, on or after 01-042005. Capital Gains On Infrastructure Funds: Income by way of dividend, interest, or long-term capital gain of an infrastructure capital company or an infrastructure capital fund is 100% tax-exempt. However infrastructure capital companies are liable to pay minimum alternative tax. Income of Venture Capital Company or venture capital fund set up to raise funds for investment in a venture capital undertaking is also tax-exempt. Tax Exemptions: Following tax exemptions are available for priority sectors and incentives to industries located in special area/regions: Deduction of 100% of the profit from business of a. Development or operation and maintenance of ports, airports , roads, highways, bridges, rail systems, inland waterways, inland ports, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, solid waste management systems.. b. Generation, distribution and transmission of power c. Development, operation and maintenance of an Industrial Park or SEZ

d. By undertakings set up in certain notified areas or in certain thrust sector industries in the North-eastern states and Sikkim. e. By undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal & Himachal Pradesh f. By undertakings set up in Jammu & Kashmir g. Derived from export of articles or software by undertakings in FTZ / EHTP / STP h. Derived from export of articles or software by undertakings in SEZ i. Derived from export of articles or software by 100% EOU j. An offshore banking unit situated in a SEZ from business activities with units located in the SEZ. k. Derived by undertakings engaged in the business of developing and building housing projects. l. By undertakings from the business of operating and maintaining Hospital. m. Derived by an undertaking engaged in the integrated business of handling, storage and transportation of food grains... n. Derived by an undertaking engaged in the commercial production or refining of mineral oil o. Derived by an undertaking from export of woodbased handicraft. Double Taxation Relief: India has entered into DTAA with 69 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. In case of countries with which India has double taxation avoidance agreements. The Comprehensive DTAA’s, country wise, may please be seen thru website of Income Tax India at http://incometaxindia.gov.in AUTHORITY FOR ADVANCE RULING: With a view to avoid a dispute in respect of assessment of income-tax liability in the case of a non-resident ( and also specified categories of residents), a Scheme of Advance Ruling was incorporated in the Income Tax Act. The Authority for Advance ruling (AAR) pronounces rulings on the applications of the non-resident/residents submitted and such rulings are binding both on the applicant and the Income-Tax Department. Thus, the applicant can avoid expensive and time consuming litigation which would have arisen from normal income tax assessment proceedings. The application in such cases should be addressed to: The Commissioner of Income-Tax Authority of Advance Rulings,

5th Floor, N.D.M.C. Building, Yashwant Place, Satya Marg, Chankyapuri, New Delhi -110021.

INVESTMENT GUIDANCE AND FACILITATION: INVESTMENT GUIDANCE: Secretariat for Industrial Assistance (SIA) Secretariat for Industrial Assistance (SIA) has been set up in the Department of Industrial Policy & Promotion (DIPP) in the Ministry of Commerce and Industry to provide a single window for entrepreneurial assistance, investor facilitation, conveying Government decisions on applications filed, assisting entrepreneurs and investors in setting up projects, (including liaison with other organisations and State Governments) and in monitoring implementation of projects. It also notifies all Government policy relating to investment and technology. Assistance to Entrepreneurs PR&C Section of the SIA provides assistance to entrepreneurs on various subjects concerning investment decisions. It receives all papers/ applications related to industrial approvals i.e. IEMs, Industrial Licenses, Foreign Investment, Foreign Technology Agreements, EHTP, STP Schemes, etc. and immediately issues a computerized acknowledgement, which also has an identity/reference number. All correspondence with the SIA should quote this number. It also provides information regarding the current status of applications filed for various industrial approvals. Web Site (http://dipp.gov.in) DIPP’s website www.dipp.gov.in ensures easy availability of information to the investors about investment policies and procedures, investment climate, state industrial policies, publications, notifications and press notes/releases. The web site contains the following: ? Manual on Foreign Direct Investment in India - Policy and Procedures (also available in English/French/German/Spanish/Korean/Japanese/Chinese and Italian language) ? SIA Newsletter-monthly issues

? SIA Statistics- monthly issues ? FDI Statistics ? Press Notes, Notifications and Press Releases ? List of SSI reserved items & NIC Codes ? Industrial Policy Statements ? Latest Annual Report ? Information about Intellectual Property Rights ? Status of SIA applications ? Important Legislations ? Information about Attached and Subordinate Offices ? Profile of selected industrial sectors ? Link to websites of other Ministries/Departments ? Link to websites of all States/Union Territories ? All relevant application forms National Industrial Classification (NIC) Code: In all the forms required for various approvals including FDI, description of activities are required to be given as per the National Industrial Classification of All Economic Activities (NIC), 1987, Online Chat And Bulletin Board Services: DIPP website provides a link this list for the benefit of the users. The web site has the facility of on line chat between 11AM to 12 Noon & 4.00 to 5.00 P.M. (Indian Standard Time, GMT+5 ½) on all working days where investors can seek clarification on any issue relating to FDI Policies and related issues. The web site also has provision of bulletin board service. If the investor cannot avail the on line chat facility, he/she can post the question on bulletin board at any time. All efforts are made to send a reply within 24 hours. Information about Various Other Clearances and Approvals:

In addition to the approval for bringing FDI in India, other clearances and approvals, such as registration of company, environment and forest clearance, land acquisition, power and water connection, etc., may be required for starting a business in India. Details of concerned Departments/Agencies along with their web site addresses are given in Annex-IV. Publications: Following publications are brought out by DIPP and updated regularly for the guidance of investors: a. Foreign Direct Investment in India – Policy & Procedure. b. Investing in India –Flyer c. Entry Strategies for foreign Investors –Flyer d. Taxation in India –Flyer e. Investment Opportunities in infrastructure sectors . Single Window System in States & Union Territories g. Compendium of Press notes on FDI policy. These publications are available through the PR&C of the SIA or Investment Promotion Cell, DIPP; as also from Indian Missions abroad. These can also be down loaded from the web site www.dipp.gov.in SIA News Letter: This is a monthly publication on Foreign Direct Investment / NRI Investment / sectoral breaksups / country-wise break-ups, all actual FDI inflows and policy notifications issued during the month. The monthly publication is uploaded on Department’s website at www.dipp.gov.in. Annual issues of SIA Newsletter are also published and available on payment from Controller of Publications, 1, Civil Lines, Delhi - 110 054 or from any outlet dealing in Government publications. SIA Statistics: This is also a monthly publication on data relating to Industrial Licences, Foreign Technical Collaboration, etc., monthly data on industrial production of 209 select industry groups, as well as policy announcements by Government during the month. Annual issues of SIA Statistics are available on payment from Controller of Publications, 1 Civil lines, Delhi - 110 054 or from any outlet dealing in Government publications.

INVESTMENT FACILITATION: Foreign Investment Implementation Authority (FIIA) FIIA has been established to facilitate quick implementation of FDI approvals and assist foreign investors in getting necessary approvals. Fast Track Committees have been set up in 30 Ministries/Departments for regular review of FDI mega projects (with proposed investment of Rs. 1 billion and above), and resolution of any difficulties. Details of the fast track committees set up in various ministries is available at http://dipp.gov.in. Investors can approach FIIA through website http://dipp.gov.in. Foreign Investment Promotion Board (FIPB) The Government has set up the FIPB to consider FDI proposals requiring prior Government approval. The reconstituted FIPB comprises of: (i) Secretary, Department of Economic Affairs - Chairman (ii) Secretary, Department of Industrial Policy & Promotion - Member (iii) Secretary, Department of Commerce - Member (iv) Secretary (Economic Relations), Ministry of External Affairs - Member (v) Secretary, Ministry of Overseas Indian Affairs, - Member. Business Ombudsperson: To facilitate expeditious redressal of grievances and attend to complaints relating to delays in grant and implementation of industrial approvals and facilitate their disposal, the Government has appointed a BUSINESS OMBUDSPERSON in the Ministry of Commerce & Industry. Additional Secretary & Financial Adviser, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi-110011 has been nominated to act as Business Ombudsperson(e mail: [email protected]). Grievances Officer-Cum-Joint Secretary: Grievances and complaints are also received by the Grievances Officer-cum-Joint Secretary, DIPP, Ministry of Commerce and Industry, Udyog Bhavan, New Delhi-110011, either through post or through the mail box in the PR&C of the SIA, or at Reception of the Ministry of

Commerce and Industry at Gate No.12, Udyog Bhavan, New Delhi-110011. Such communications are handled expeditiously and steps are taken to redress the grievance. Sector Specific Guidelines For Foreign Direct Investment:
S.N Sector/Activity FDI Cap Equity / Entry Route Other conditions Releva nt Press Note issued by D/o IPP www.di pp.gov. in

1. a.

AirportsGreenfield projects Existing projects 100% Automatic Subject to sectoral regulations notified by Ministry of Civil Aviation www.civilaviation.nic. in Subject to sectoral regulations notified by Ministry of Civil Aviation www.civilaviation.nic. in Subject to no direct or indirect participation by foreign airlines. Government of India Gazette Notification dated 2.11.2004 issued by Ministry of Civil Aviation www.civilaviation.nic. in Subject to license appropriate authority FIPB by PN 4 / 2006 PN 4 / 2006 .

b.

100%

FIPB beyond 74%. Automatic

2.

Air Transport Services

49%- FDI; 100%for NRI investment

3. 4.

Alcohol 100% -Distillation & Brewing Asset Reconstruction Companies

Automatic 49% (only FDI)

PN 4 / 2006 Where any individu al investm ent exceed s 10% of the equity,

5. Banking - 74% Private (FDI+FII) sector

Automatic

Subject to PN 2 / 2004 guidelines for setting up branches/ subsidiaries of foreign banks issued by RBI. www.rbi.org.in Subject Guidelines notified Ministry Information Broadcasting www.mib.nic.in FIPB to PN 6 / 2005 by of & Subject to Cable Television Network Rules (1994) Notified by Ministry of Information & Broadcasting www.mib.nic.in Subject to guidelines issued by Ministry of Information & Broadcasting www.mib.nic.in

6. Broadcasting a. FM Radio FDI +FII FIPB investment up to 20%

b.

Cable network

49% (FDI+FII)

c.

Direct-To-Home

49% FIPB (FDI+FII). Within this limit, FDI component not to exceed 20% FIPB

d. Setting up 49% hardware (FDI+FII) facilities such as up-linking, HUB, etc

Subject to Up- PN 1 / 2006 linking Policy notified by Ministry of Information & Broadcasting www.mib.nic.in

e. Up-linking 26% a News & FDI+FII Current Affairs TV Channel f. Up-linking a Non100%

FIPB

FIPB

news & Current Affairs TV Channel

Subject to PN 1/ 2006 guidelines issued by Ministry of Information & Broadcasting www.mib.nic.in Subject to PN 1 / 2006 guidelines issued by Ministry of Information & Broadcasting www.mib.nic.in

7 cigars &cigarettes 100 manufacture. %

FIPB

Coal & Lignite 100 mining for captive % consumption by power projects, and iron & steel, cement production and other eligible activities permitted under the Coal Mines (Nationalisation) Act, 1973.

Subject to industrial PN 4 / 2006 license under the Industries (Development & Regulation) Act, 1951 Automatic Subject to provisions PN 4 / 2006 of Coal Mines (Nationalization) Act, 1973 www.coal.nic.in

Coffee & Rubber 100% processing & warehousing

Automatic

PN 4 / 2006

Construction Development 100 projects, including housing, % commercial premises, resorts, educational institutions, recreational facilities, city and regional level infrastructure, townships.

Automatic Subject to conditions notified vide Press Note 2 (2005 Series) including: 1 A. minimum capitalization of US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint venture. The funds would have to be brought within six months of commencement of business of the Company. 2 b. Minimum area to be developed under each project- in 10 hectares in case of development of serviced housing plots and built up area of 50,000 sq mts. in case of construction development project and any of the above in case of a combination project.

PN 2 / 2005 & PN 2 / 2006

8.

Courier services for 100 carrying packages, parcels % and other items which do not come within the ambit of the Indian Post Office Act, 1898.

FIPB

Subject to PN 4 / existing laws 2001 and exclusion of activity relating to distribution of letters, which is exclusively reserved for the State. www.indiapost.g ov.in

9.

Defence production

26% FIPB

10 Floriculture, Horticulture, 100 . Development of Seeds, % Animal Husbandry, Pisciculture, aquaculture, cultivation of vegetables,, mushrooms, under controlled conditions under services related to agro and allied sectors.

Automa tic

Subject to licensing under Industries (Development & Regulation) Act, 1951 and guidelines on FDI in production of arms & ammunition. PN 4 / 2006

PN 4 / 2001 & PN 2 / 2002

11. Hazardous 100 chemicals, viz., % hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanates and di-isocyantes of hydrocarbon. 12. Industrial explosivesManufacture 100 %

Automatic Subject to industrial PN 4 / license under the 2006 Industries (Development & Regulation) Act, 1951 and other sectoral regulations.

Automatic Subject to industrial PN 4 / license under Industries 2006 (Development & Regulation) Act, 1951 and regulations under Explosives Act, 1898 Automatic Subject to licensing by PN the Insurance Regulatory 10 / & Development Authority 2000 www.irda.nic.in.

13. Insurance

26%

14. Investing 49% companies in infrastructure / services sector (except telecom sector)

FIPB

Foreign investment in an investing company will not be counted towards sectoral cap in infrastructure /services sector provided the investment is up to 49% and the management of the company is in Indian hands.

PN 2 / 2000 & PN 5 / 2005

15. Mining covering 100 exploration and % mining of diamonds & precious stones; gold, silver and minerals.

Automatic Subject to Mines & Minerals (Development & Regulation) Act, 1957 www.mines.nic.in Press Note 18 (1998) and Press Note 1 (2005) are not 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.

PN 2 / 2000, PN 3 / 2005,& PN 4 / 2006

16. Petroleum & Natural Gas sector a. Other than 100% Refining and including market study and formulation; investment/ financing; setting up infrastructure for marketing in Petroleum & Natural Gas sector. Automatic Subject to sectoral regulations issued by Ministry of Petroleum & Natural Gas; and in the case of actual trading and marketing of petroleum products, divestment of 26% equity in favour of Indian partner/public within 5 years. www.petroleum.nic.in PN 1 / 2004 & PN 4 / 2006

b.

Refining

26% in case of PSUs 100% in case of Private companies

FIPB Subject to Sectoral PN 2 (in case of policy / PSUs) www.petroleum.nic.in 2000 Automatic (in case of private companies.

17 a.

Print MediaPublishing of 26% newspaper and periodicals dealing with news and current affairs FIPB

b.

Publishing of 100% scientific magazines/ specialty journals/ periodicals Power including 100% generation (except Atomic energy); transmission, distribution and Power Trading.

FIPB

18

Subject to guidelines issued by Ministry of Information & Broadcasting. www.mib.nic.in Automatic Subject provisions of the Electricity Act, 2003 www.powermin.nic.i n

PN 1 / 2004

PN 2 / 1998, PN / 7 2000, & PN 4 /

2006

19. Tea including plantation

Sector, 100% tea

FIPB

Subject to PN divestment of 26% 6 / equity in favour of 2002 Indian partner/Indian public within 5 years and prior approval of State Government for change in land use. Subject to PN guidelines notified 5 / in the PN 5 / 2005 2005 Series

20. Telecommunication a. Basic and cellular, Unified Access Services, National/International Long Distance, VSat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services 74% (Including FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters/ investing company) Automatic up to 49%. FIPB beyond 49%

FDI Permitted in Various Sectors/ Activities 1 2I. FDI prohibitedi. Retail trading(except Single Brand Product retailing) ii. Atomic energy iii. Lottery business

iv. Gambling and betting sector 3 4II. FDI up to 26 % allowed5 6i.Broadcasting (a) FM Radio – FDI + FII investment up to 20% with prior Government approval subject to guidelines by Ministry of Information & Broadcasting. (b) Uplinking news and current affairs TV Channel – up to 26% (FDI + FII) with prior FIPB approval. i. Print media: Publishing newspaper and periodicals dealing with news and current affairs - FDI up to 26% with prior Government approval iii. Defence industries - FDI up to 26% with prior Government approval iv. Insurance - Foreign equity (FDI+FII) up to 26% under the automatic route v. Petroleum and Natural Gas Sector – Refining in case of PSUs: up to 26% with prior FIPB approval. III. FDI up to 49 % allowedi. Broadcastinga. Setting up hardware facilities such as up-linking, HUB, etc.- FDI+FII equity up to 49% with prior Government approval subject to up-linking Policy notified by Ministry of Information & Broadcasting. b. Cable network- Foreign equity (FDI+FII) up to 49% with prior Government approval subject to Cable Television Network Rules (1994) notified by Ministry of Information & Broadcasting. c. DTH - Foreign equity (FDI+FII) up to 49% with prior Government approval. FDI can not exceed 20% subject to guidelines by Ministry of Information & Broadcasting. ii. Domestic airlines and Air Transport Services - FDI up to 49% under the automatic route with no direct or indirect participation of foreign airlines iii. Telecommunication services: basic and cellular - FDI up to 49% is under automatic route. Beyond 49% and upto 74% requires FIPB approval. Foreign equity includes FDI, FII, NRI, FCCBs, ADRs, GDRs, convertible preference shares, and proportionate foreign equity in Indian promoters/ Investing Company)

iv. Investing companies in infrastructure/service sector (except Telecom Sector) – FDI up to 49% with prior Government approval. v. Asset reconstruction companies – up to 49% (only FDI) with prior FIPB approval. IV. FDI up to 74% allowedi. Development of existing Airports- up to 74% under the automatic route; prior Government approval beyond 74% subject to sectoral regulations notified by Ministry of Civil Aviation. ii. ISP with gateways, radio-paging, end-to-end bandwidth – FDI up to 74% with FDI beyond 49% requiring prior Government approval iii. Establishment and operation of satellites - FDI up to 74% with prior Government approval iv. Atomic minerals - FDI up to 74% with prior Government approval v. Private sector banks - Foreign equity (FDI + FII) up to 74% under the automatic route vi. Single brand retailing – up to 51% with prior Government approval. V. FDI up to 100 % allowed subject to conditionsi. Development of Greenfield Airports - FDI under automatic route subject to sectoral regulations notified by Ministry of Civil Aviation ii. Exploration and mining of coal and lignite for captive consumption – FDI up to 100% under automatic route Subject to provisions of Coal Mines (Nationalization) Act, 1973 iii. Petroleum sector: market study and formulation, investment /financing Minimum 26% Indian equity within 5 years for actual trading and marketing. iv. Trading: wholesale cash and carry; and trading for exports under the automatic route subject to guidelines issued by DIPP. v. Trading: Trading of items sourced from small scale sector under Govt approval route vi. Trading: Test marketing of such items for which a company has approval for manufacture under Govt approval route. vii. Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.- prior Government approval Subject to existing laws and subject to existing laws and exclusion of activity relating to distribution of letters, which is exclusively reserved for the State.

viii. Tea Sector, including tea plantation – prior Government approval subject to divestment of 26% equity within five years. ix. Non Banking Finance Companies – FDI up to 100% under the automatic route subject to minimum capitalization norms. x. ISP without gateway, infrastructure provider providing dark fibre, electronic mail and voice mail – FDI up to 49% under automatic route. Beyond 49% and up to 100% subject to FIPB approval subject to divestment of 26% equity in 5 years if the investing companies are listed in other parts of the world. xi. Domestic airlines/Air transport services – NRI investment up to 100% permitted under the automatic route with no direct or indirect participation of foreign airlines. xii. Power trading –upto 100% subject to compliance with Regulations under the Electricity Act, 2003; xiii. Cigars & Cigarettes – up to 100% with prior FIPB approval and Subject to industrial license under the Industries (Development & Regulation) Act, 1951. xiv. Alcohol distillation and brewing - 100% FDI under automatic route subject to licence by appropriate authority.

FACT SHEET ON FOREIGN DIRECT INVESTMENT (FDI) From AUGUST 1991 to September 2007

I. FDI EQUITY INFLOWS: A. CUMULATIVE FDI EQUITY INFLOWS (equity capital components only): 1. Cumulative amount of FDI inflows (from August 1991 to March 2007) 2. Amount of FDI inflows during 20062007 (during April-September 2007) Rs. US$ 2,32,041 54.628 crore million Rs. 29,737 US$ 7,250 crore million

3. Cumulative amount of FDI inflows (updated up to September 2007)

Rs. US$ 2,61,778 61,878 crore million

Note : FDI inflows include amount received on account of advances pending for issue of shares for the years 1999 to 2004. B. FDI EQUITY INFLOWS (WITH COMPANY-WISE) AVAILABLE 2000-2007: 1. Cumulative amount of FDI inflows (from April 2000 to September 2007) Rs. 2,01,173 crore US$ 45,179 million

C. FDI EQUITY INFLOWS DURING FINANCIAL YEAR 2007-2008: Amount of FDI inflows (In Rs. crore) 6,928 8,642 5,048 2,849 3,394 2,876 29,737 20,155 (+) 48 % (In US$ mn) 1,643 2,120 1,238 705 831 713 7,250 4,382 (+) 65 %

1. 2. 3. 4. 5. 6.

April 2007 May 2007 June 2007 July 2007 August 2007 September 2007

2007-2008 (up to Sept. 2007) 2006-2007 (up to Sept. 2006) %age growth over last year

D. FDI EQUITY INFLOWS DURING CALENDAR YEAR 2007: Amount of FDI inflows (In Rs. Crore) 8,515 3,081 16,896 6,928 8,642 5,048 2,849 3,394 2,876 58,229 28,374 (+) 128 % (In US$ mn) 1,921 698 3,838 1,643 2,120 1,238 705 831 713 13,707 6,232 (+) 118 %

1. 2. 3. 4. 5. 6. 7. 8. 9.

January 2007 February 2007 March 2007 * April 2007 May 2007 June 2007 July 2007 August 2007 September 2007

Year 2007 (upto Sept. 2007) Year 2006 (upto Sept. 2006) %age growth over last year

E. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS (Financial yearwise): Amount Rupees in crore (US$ in Rank s million) Country 200405 (AprilMarch ) 200506 (AprilMarch) 200607 (AprilMarch) 200708 (AprilSept. 2007) Cumulativ e Inflows (from April. 2000 to %age with total Inflows (in terms

Sept. 2007)

of rupees )

28,759 13,502 79,392 44.82 (17,840) (6,363) (3,301) 2. U.S.A. 3,861 1,695 17,276 9.75 (3,856) (856) (412) 3. U.K. 8,389 711 15,085 8.52 (3,361) (1,878) (175) 4. Netherlands 2,905 689 9,831 5.55 (644) (167) (2,177) 5. Japan 382 2,070 8,069 4.55 (85) (496) (1,807) 6. Singapore 2,662 2,059 7,865 4.44 (578) (506) (1,790) 7. Germany 540 1,088 5,752 3.25 (120) (266) (1,296) 8. France 528 181 2,82 1.68 (117) (44) (660) 9. Switzerland 257 815 2,746 1.55 (56) (199) (622) 10. Cyprus 266 1,561 2,243 1.27 (58) (374) (525) TOTAL FDI 70,630 29,736 201,173 INFLOWS * (15,726 (7,250) (45,179) ) Note: (i) *Includes inflows under NRI Schemes of RBI, stock swapped and advances pending for issue of shares. (ii) Cumulative country-wise FDI inflows (from April 2000 to September 2007) – Annex-‘A’. F. SECTORS ATTRACTING HIGHEST FDI EQUITY INFLOWS: Rank s Sector 200405 (AprilMarch ) 200506 (AprilMarch ) 200607 (AprilMarch ) 200708 (AprilSept. 2007) Cumulativ e Inflows (April 2000 to Sept. 2007) % age with total Inflows (In terms of rupees)

1.

Mauritius

5,141 11,441 (1,129) (2,570) 3,055 2,210 (669) (502) 458 1,164 (101) (266) 1,217 340 (267) (76) 575 925 (126) (208) 822 1,218 (184) (275) 663 1,345 (145) (303) 537 82 (117) (18) 353 426 (77) (96) 12 310 (3) (70) 17,138 24,613 (3,754) (5,546)

1.

2. 3.

Services Sector (financial & nonfinancial) Computer Software & Hardware Telecommunications (radio paging, cellular mobile, basic telephone services) Construction activities (including roads & highways) Automobile Industry Power Chemicals (other than fertilizers) Housing $ Real Estate Drugs & Pharmaceuticals Electrical Equipments

2,106 (469) 2,441 (539) 588 (129)

2,565 (581)

21,434 (4,749)

8,175 (1,990) 1,550 (378) 3,567 (875)

37,282 (8,432) 28,094 (6,246) 15,212 (3,455)

21.05

6,172 11,786 (1,375) (2,614) 3,023 2,354 (680) (521)

15.86 8.59

4.

696 (152)

667 (151)

4,424 (985)

2,780 (682)

9,176 (2,102)

5.18

5. 6. 7. 8.. 9. 10.

559 (122) 241 (53) 909 (198) 0 (0) 1,343 (292) 449 (98)

630 (143) 386 (87) 1,979 (447) 171 (38) 760 (172) 156 (35)

1,254 (276) 713 (157) 930 (206) 2,121 (467) 970 (215) 353 (77)

606 (148) 197 (48) 449 (123) 2,915 (710) 191 (47) 2,177 (520)

7,765 (1,710) 5,949 (1,285) 5,722 (1,279) 5,327 (1,242) 4,472 (989) 4,286 (989)

4.38 3.36 3.23 3.01 2.52 2.42

Amount Rupees in crore (US$ in million) Note: (i) Cumulative Sector- wise FDI inflows (from April 2000 to September 2007) Annex-‘B’. STATEMENT ON RBI’S REGION-WISE (WITH STATE COVERED) FDI EQUITY INFLOWS1 (from April 2000 to September 2007): Amount of FDI Inflows %age with FDI inflow s (in rupee

terms) Rupees in crore 1. MUMBAI MAHARASHTRA, DADRA & NAGAR HAVELI, DAMAN & DIU DELHI, PART OF UP AND HARYANA KARNATAKA TAMIL NADU, PONDICHERRY ANDHRA PRADESH GUJARAT CHANDIGARH, PUNJAB, HARYANA, HIMACHAL PRADESH WEST BENGAL, SIKKIM, ANDAMAN & NICOBAR ISLANDS GOA 43,783.97 US$ in million 9,870.33 24.72

2. 3. 4. 5. 6. 7.

NEW DELHI BANGALORE CHENNAI HYDERABAD AHMEDABAD CHANDIGARH`

40,978.21 12,810.59 12,665.4 6,789.3 5,134.67 1,754.7

9,236.59 2,900.75 2,834.92 1,523.89 1,138.75 384.22

23.13 7.23 7.15 3.83 2.90 0.99

8.

KOLKATA

1,633.12

361.46

0.92

9. 10. 11. 12. 13. 14.

PANAJI BHOPAL

826.34 442.86 424.53 395.52 293.69 57.7

179.29 101.67 90.49 88.68 65.11 12.83

0.47 0.25 0.23 0.22 0.17 0.03

MADHYA PRADESH, CHATTISGARH KOCHI KERALA, LAKSHADWEEP BHUBANESHWAR ORISSA JAIPUR KANPUR RAJASTHAN UTTAR PRADESH, UTTRANCHAL

15.

GUWAHATI

16. 17.

PATNA NOT INDICATED3

ASSAM, ARUNACHAL PRADESH, MANIPUR, MEGHALAYA, MIZORAM, NAGALAND, TRIPURA BIHAR, JHARKHAND

52.34

11.68

0.03

1.79 49,107.30 177,152.2 4 14,525.44

0.39 10,993.2 8 39,798.6 8 3,295.8 1,962.8 121.3 45,178.5 8

0.00 27.74 100.00 -

SUB TOTAL 18. 19. 20. RBI’s-NRI Schemes Stock Swapped Advance of Inflows (from 2000 to 2004)

8,962.22 533.06 201,172.9 6

-

GRAND TOTAL (From April 2000 to September 2007) III. FOREIGN TECHNOLOGY TRANSFER: (From August 1991 to September 2007) A. NUMBER OF CUMULATIVE FTC APPROVALS: No. Of Cumulative FTC Approvals (from august 1991 to September 2007) No. Of FTC Approvals During 2006-07 (from April 2006 to march 2007) No. Of FTC Approvals During 2007-08 (from April 2007 to September 2007)

7,886 81 40

B. COUNTRY-WISE TECHNOLOGY TRANSFER APPROVALS: Ranks 1 2 3 Country U. S. A Germany Japan No. of technical collaborations approved 1,750 1,103 861 % with Total Tech. Approvals. 22.19 13.99 10.92

4 5 6

U. K Italy Other Countries TOTAL OF ALL COUNTRIES.

856 484 2,832 7,886

10.85 6.14 35.91 100.00

C. SECTORS-WISE TECHNOLOGY TRANSFER APPROVALS: Ranks Sector 1 Electrical Equipments(including software & electronics) Chemicals other than fertilizer. Industrial Machinery Transportation Industry Misc. mech engineering industry Other Sectors Total Of All Sectors No. of Technical Collaborations Approved 1,253 883 889 730 441 3,710 7,886 % With Total Tech Approvals 15.89 11.20 11.02 9.26 5.59 47.04 100.00

2 3 4 5 6

D. STATE-WISE TECHNOLOGY TRANSFER APPROVALS: Ranks 1 2 3 4 5 6 State Maharastra Tamilnadu Gujarat Haryana Delhi Other States. Total Of All States No Of Technical Collaborations Approved 1,364 650 602 354 313 4,603 7,886 % With Total Tech Approvals 17.30 8.24 7.64 4.49 3.96 58.37 100.00

STATEMENT ON COUNTRY-WISE FOR FDI INFLOWS FROM APRIL 2000 TO SEPTEMBER 2007 S. NO Country Amount Of FDI Inflows In Rupees 793,921,57 72,756.70 150,849.61 98,307.57 80,692.50 78,652.78 57,516.28 29,821.21 27,458.33 22,431.01 22,351.87 20,457.36 18,409.85 13,717.23 9,936.62 9,880.16 7,695.04 7,652.80 7,555.07 7,533.90 6,101.19 4,647.33 In US$ 17,839,75 3856.15 3,361.35 2,177.26 1.806.51 1,789.71 1,295.98 659.69 621.89 524.98 502.72 455.65 416.43 306.64 221.79 227.06 170.04 %age with total inflows 44.82 9.75 8.52 5.55 4.55 4.44 3.25 1.68 1.55 1.27 1.26 1.15 1.04 0.77 0.56 0.43 0.43 0.43 0.43 0.34 0.26 0.17

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22

Mauritius U.S.A U.K Netherlands Japan Singapore Germany France Switzerland Cyprus U.A.E Bermuda Sweden Korea(south) Italy British Virginia Cayman Islands Belgium Australia Hong Kong Spain Denmark

23 24 25 26 27 28 29 30

Malaysia Canada South Africa Luxembourg Russia Finland West Indies Thailand

4,630.41 4,575.66 3,089.57 2,949.44 2,670.96 2,095.71 1,788.62 1,762.37 INTERPRETATIONS

0.17 0.15 0.12 0.10 0.10 0.08 0.07 0.07

The FDI scenario in India has changed drastically in the last decade. For the first time in 15 years, the government has simplified and rationalized FDI procedures while liberalizing the existing sectors such as retail, television, diamond and coal mining, airports, wholesale and export trading, and opening new ones such as power trading, processing and warehousing of coffee and rubber to foreign investment. Aggregate FDI inflows into India were somewhat lower during 2003-04 as compared to that during 2002-03, FDI inflows into India, improved from US$ 2634 million to US$ 3755 million from the year 2003-04 to 2004-05. Notwithstanding the upturn, India’s capital account in recent years has gained far more strength from short-term portfolio flows that from long- term FDI flows. This probably necessitates revisiting the FDI policy and identifying constraints impeding higher FDI inflows. Procedural simplifications are likely to encourage much greater FDI flows. Foreign direct investments (FDI) inflows into India during the fiscal year 2005-06 were Rs. 24613 crore, this was higher by 43% to its corresponding previous year. Net FDI into India picked up on the back of sustained growth in economic activity and positive investment climate, with inflows going into the manufacturing as well as services sectors. FDI inflows into India during December 2006 registered an unprecedented increase of 480% over the inflows in December of the previous year 2005, the month of December 2006 received equity inflow of Rs. 9108 Crores in December 2006 compared to Rs. 1587 crore in December 2005. This is the highest inflow ever into the country in a single month. With this, the total inflows from April 2006 to December 2006 are now about Rs. 42138 crores, as compared to Rs. 16394 crores received during this period last year. The inflows in the year 2005-06 were Rs. 24613 crores. The sectors attracting highest FDI were Equipments (including computer software & electronics), services sector (financial and non- financial) and Telecommunications (radio

paging, cellular mobile, basic telephone services) While Mauritius is the top most investing country followed by USA, UK, Netherlands, Japan, Singapore, and Germany. In case of no. of technological transfers USA is at first position with share of 21.98% followed by Germany, Japan, and UK. Summary and Conclusion The most important determinants for attracting FDI are the Cost Factors, Market Size, Real Exchange Rates, Macro Economic Stability, Rate of Inflation, Overall Economic Stability, National FDI Policy, Investment Incentive, and Removal of Restrictions like Access to few industries, foreign ownership restrictions, ease of entry performance requirements. The policy on Foreign Direct Investment has been reviewed on a continuing basis and several measures announced from time to time for rationalization/ liberalization of the policy and simplification of procedures. As a result, a number if rationalization measures have been undertaken which, inter alia include, dispensing with the need to multiple approvals from Government and/or regulatory agencies that exist in certain sectors, extending the automatic route to more sectors and allowing FDI in new sectors. The Government should take a series of steps to further liberalize and streamline the procedures and mechanism for approval of both domestic and foreign direct investment. In fulfillment of its commitment to provide greater transparency in decision making. It announces a set of guidelines for the consideration of foreign direct investment proposals by the Foreign Investment Promotion Board. In a bid to stimulate the sector further, the government is working on a series of ambitious economic reforms. 1The centre has divested some of tis own powers of approving foreign investments that it exercised through the Foreign Investment Promotion Board and has handed them over to the general permission route under the RBI. 2The FDI cap for telecommunications has been increased to 74%, up from prevailing ceiling of 49 percent. 3It has set up an Investment Commission that will garner investments in the infrastructure sectors among other sectors, and plans to increase the limit for investment in the infrastructure sector. 4The Government approved sweeping reforms in FDI with a first step towards partially opening retail markets to foreign investors. It will now allow 51% FDI in single brand products in the retail sector. Besides retail, other sectors are being opened. 5100% is allowed in new sectors such as power trading, processing and warehousing of coffee and rubber. 6FDI limit raised to 100% under automatic route in mining of diamonds and precious stones,

development of new airports, cash and carry wholesale trading and export trading, laying of natural gas pipelines, petroleum infrastructure, captive mining of coal and lignite. 7Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of potable alcohol, industrial explosives and hazardous chemicals. 8Indian investor is allowed to transfer shares in an existing company to foreign investors. 9The Government is looking at reviewing regulation involving foreign investments into the country. Aimed at simplifying the investment from foreign institutional investors (FII) and FDI in the same light.

BIBLIOGRAPHY: PRASSANA CHANDRA: FINANCIAL MANAGEMENT THEORY AND PRACTICE, TATA MC GRAW HILL 1997 JOHN J HAMPTON: FINANCIAL DECISION MAKING PRENTICE HALL INDIA, 1992 INDIA YEAR BOOK-PUBLICATIONS DIVISION, GOVERNMENT OF INDIA 2007 PRATIYOGITA DARPAN ECONOMY EDITION WEBSITES: www.dipp.nic.in www.commerce.nic.in

www.finmin.nic.in www.india.gov.in www.rbi.org.in www.wikipedia.org Directory of government websites.



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