REGULATORY CLIMATE
Regulatory authorities
Foreign investment projects (other than those qualifying for automatic approval) are approved by the Foreign Investment Promotion Board (FIPB), a high-powered committee of civil servants chaired by the Secretary-industry. Investment proposals up to Rs 6 billion recommended for approval by the FIBP are given final clearance by the Industry Minister. Proposals for investment exceeding this amount are considered by the Cabinet Committee endorses the recommendations of the FIPB, and accordingly the FIPB is the main decision-making body in the Foreign investment approval process. The Secretariat for Industrial Approvals (SIA) in the Ministry of Industry, in addition to being the Secretariat for the FIPB, is the approving authority for technical-collaboration agreements that do not fall under the norms for automatic approval and involve only technical and not financial collaborations.
Applications for setting up units in designated export-processing zones for free-trade zones (EPZs/FTZs) or Software or Electronic Hardware Technology Parks (STPs/EHTPs) or for setting up individual units as 100 percent export-processing units (EOUs), STPs or EHTPs are now required to be made either to the development commissioners of the relevant zone.
The Reserve Bank of India (RBI, the Indiana central bank) is the exchange control authority and is also empowered to grant automatic approval for foreign investment of up to 51 percent in specified high-priority industries (see Chapter 4) and also approve technical-collaboration agreements within specified parameters in all industries. The RBI is also the approving authority for the establishing of a branch, liaison office or project office or the posting of a representative in India by a foreign corporation.
Regulatory legislation
India has no separate foreign investment legislation. The Foreign Exchange Regulation Act 1973 (FETA) also regulates the activities of foreign enterprises in India. Authorized dealers in foreign exchange (i.e., commercial banks) are guided by the Exchange Control Manual (two volumes) issued by the Reserve Bank For all foreign exchange transactions.
Exchange controls
The Indian rupee has been made fully convertible for trade-and current-account transactions. Capital-account convertibility for the rupee is expected in the next few years. While trade-account transactions have been fully deregulated, the Reserve Bank still monitors and often regulates current-account transactions to ensure that remittances relate to current rather than capital transactions.
Inward investment
Under the Exchange Control laws, permission of the Reserve Bank is required for securities to be registered in Indian in the name of a nonresident or to be sent out of India. In addition, foreign corporations (i.e., companies not incorporated in India) require approval to set up a place of business in India or undertake a business activity in India.
The government's attitude toward foreign investment is discussed in general terms in Chapter 3, and the percentage restrictions on foreign equity ownership are explained below under "Restrictions on foreign ownership."
Registration of foreign capital and technology
The foreign investment approval is valid for the specified period of time within which the collaboration agreement must be filled with the RBI/authorized foreign exchange dealer (i.e, a commercial bank through which the remittances under the collaboration would be made). Copies of the agreement must also be filed with specified authorities, which include the relevant administrative ministry for the sector, the SIA, and the Department of Scientific and Industrial Research.
Automatic approval received from the RBI is a single clearance that combines the approval for the foreign collaboration with permission to issue equity shares of the Indian company to the nonresident foreign collaborator. However, in the case of a discretionary approval (i.e., an FIPB approval), formal authorization or permission to issue shares is provided by the Reserve Bank after the collaboration proposal is approved, the principle, by the government.
Foreign technical-collaboration agreements must be registered with the Reserve Bank after the approval. Foreign loans also require a discretionary approval from the Ministry of Finance, after which the loan agreement must be registered with the Reserve Bank.
There are no mandatory reporting requirements for foreign capital and technology. However, the Ministry of Industry requests investors to submit bioannual progress reports during project implementation.
Currency Accounts
A foreign-invested Indian company is treated on a par with other locally incorporated companies. Accordingly, the general rules for foreign currency accounts for residents (detailed bellow) apply to foreign-invested companies as well.
· Foreign currency accounts of residents
Resident Indians (including individuals and corporations) are normally not allowed to open and operate foreign currency accounts in India or abroad without prior RBI approval.
Indian firms and companies can seek permission from the RBI to open foreign currency accounts abroad for certain specific purposes, such as retention of foreign equity subscriptions or proceeds of foreign currency loans raised abroad. Such accounts, however, are permitted to be maintained only for a limited period.
Indian exporters and other foreign exchange earners are permitted by the RBI to open and maintain in India a foreign-currency-denominated account called the Exchange Earners Foreign Currency (EEFC) Account and retain upto 25 percent (up to 50 percent in a few specified cases, and even higher proportions with special RBI approval) of their foreign currency earnings. EEFC accounts holders are allowed to remit money aboard for a range of bona fide payments specified by the RBI, which may otherwise require prior approval.
Exporters falling in specific categories (such as Export/Trading/Star Trading House) and others meeting certain specified limits on net foreign exchange earnings can seek permission from the RBI to open foreign currency accounts in India or abroad to credit proceeds of export shipments.
In addition, the RBI also permits the opening of foreign currency accounts in India by airline and shipping companies, overseas companies executing projects in India and overseas buyers, subject to condition laid down by it in the approval.
Persons of Indian origin who have been resident outside India for a continuous period of not less than one year are permitted to open and maintain foreign-currency-denominated accounts in India.
· Rupee accounts of nonresidents
Branches or offices in India of foreign firms, companies or associations and foreign nationals resident but not permanently resident in India are permitted to maintain the operate rupee bank accounts in India only with authorized dealers. The Reserve Bank subjects such accounts to monitoring and strict reporting requirements. Repatriation facilities for such accounts are governed by the conditions specified by the Reserve Bank While permitting the account holders to operate the account in India.
The RBI has granted general permission to authorized foreign exchange dealers to open Ordinary Nonresident Rupee (NRO) Accounts in the names of nonresident individuals or entities for all bona fide transactions permitted under the exchange control regulations. Balances in NRO accounts are not normally eligible for remittances abroad and require specific approval from the Reserve Bank if repatriation is sought.
Nonresident Indians (NRIs) and Overseas Corporate Bodies (OCBs - organizations with NRI holdings of at least 60 percent) are permitted to open and maintain rupee accounts on a repatriable basis, provided the funds are either remitted in foreign currency into India or are legitimately due to them in India on a repatriable basis. NRIs and OCBs are also permitted to maintain nonrepatriable rupee deposits in India for periods ranging from six months to three years.
Blocked Accounts
The Reserve Bank has the powers to "block" accounts in India of any person or entity resident outside India and to direct that payment of any sums due to that person be made to those blocked accounts. Remittances can be effected through authorized foreign exchange dealers after payment of the applicable withholding taxes. In consumer-goods industries, foreign exchange outflows on account of dividend payments must be balanced by export earnings for the first seven years from commencement of production. Since exports need not be the exporter's own manufactured products, most investors do not find this commitment to be onerous.
For approved technical-collaboration agreements, royalties and technical fees can be remitted through normal banking channels after payment of applicable withholding taxes. A 5 percent research and development cess (tax) is payable by all Indian parties on technology-related fees remitted abroad as well as associated expenses.
Repatriation of capital upon disinvestment requires specific approval from the Reserve Bank, which is not normally withheld if the sales price is considered to be fair and reasonable. The sales price less the capital gains tax can be remitted through normal banking channels.
For approved loan arrangements, repatriation of interest and principal amounts can be effected through normal banking channels.
For all approved branches, branch profits are allowed to be repatriated in full after payment of the applicable withholding taxes, although specific RBI approval is mandatory.
Repatriation of amounts abroad for other purposes requires specific approval by the RBI unless the remittances are covered by general permission granted by the RBI. Such instances of general permission for remittances include those for import of goods, short-term engagement of foreign nationals, overseas travel, land sundry remittances within a specified limit
The RBI does not permit netting of payments for remittances and requires that all inward receipts be first brought into the country.
Applications to authorized dealers for making any remittances are to be supported by the required documents, including the auditor's certificate on calculation of the amounts (royalties, branch profits, etc.) to be repatriated as well as on various other matters such as adequacy of tax provision, compliance with the Companies Act and a no-objection certificate from the Tax authorities.
Banks that are authorized dealers in foreign exchange may allow all non-Indian nationals temporarily resident but no domiciled in India to make remittances to their own countries, provided the dealer making the remittance is satisfied that this amount does not exceed 75 percent of the remitters net income after taxes. If an application is made for remittance of an amount in excess of this limits, it must be refereed to the Reserve Bank. The Reserve Bank is prepared to consider individual cases on their merits and to allow larger remittances when it is satisfied that the applicant has retained sufficient funds out of monthly income to meet local expenses.
Upon departure from India, foreign nationals who had been temporarily resident in the country are allowed to remit in full current assets, such as savings out of salaries, commissions, dividends, provident funds, and proceeds from sales of personal effects. In addition, they may be permitted to repatriate the sales proceeds of their investments,. Subject to a limit of Rs. 1,000,000 at the time of departure. The balance, if any, may be remitted in annual installments not exceeding Rs. 500,000 per annum.
Guarantees against in convertibility
Neither the Indian government nor the Reserve Bank provides any guarantee against in convertibility or makes any advance commitment for the conversion of Indian currency into other currencies, except for facilities for forward contracts, which may be entered into by authorized dealers for purchase and sale of foreign currencies in furtherance of genuine foreign exchange transactions permitted under the current regulations.
The Indian government has been a signatory to the Multilateral Investment Guarantee Agency (MIGA) convention since April 13,1992.
The Indian government has signed bilateral investment protection treaties with various countries. These treaties state that investment from the partner country will be given national treatment (treated on a par with Indian companies), and investors are given most-favored-nation status. The treaties also provide for dispute settlement and guarantees against nationalization, and they allow repatriation of returns on investments without undue delay. India has a ratified treaty with the United Kingdom and has signed treaties with Denmark, Germany, Israel, Italy, the Republic of Korea, Malaysia, the Netherlands and Russia.