Investment in India - Investing in India - Venturing into the Indian Market

Investment in Indian market

India, among the European investors, is believed to be a good investment despite
political uncertainty, bureaucratic hassles, shortages of power and infrastructural
deficiencies. India presents a vast potential for overseas investment and is actively
encouraging the entrance of foreign players into the market. No company, of any
size, aspiring to be a global player can, for long ignore this country which is expected
to become one of the top three emerging economies.

Success in India
Success in India will depend on the correct estimation of the country's potential,
underestimation of its complexity or overestimation of its possibilities can lead to
failure. While calculating, due consideration should be given to the factor of the
inherent difficulties and uncertainties of functioning in the Indian system.Entering
India's marketplace requires a well-designed plan backed by serious thought and
careful research. For those who take the time and look to India as an opportunity for
long-term growth, not short-term profit- the trip will be well worth the effort.

Market potential
India is the fifth largest economy in the world (ranking above France, Italy, the
United Kingdom, and Russia) and has the third largest GDP in the entire continent of
Asia. It is also the second largest among emerging nations. (These indicators are
based on purchasing power parity.) India is also one of the few markets in the world
which offers high prospects for growth and earning potential in practically all areas of
business.Yet, despite the practically unlimited possibilities in India for overseas
businesses, the world's most populous democracy has, until fairly recently, failed to
get the kind of enthusiastic attention generated by other emerging economies such
as China.

Lack of enthusiasm among investors

The reason being, after independence from Britain 50 years ago, India developed a
highly protected, semi-socialist autarkic economy. Structural and bureaucratic
impediments were vigorously fostered, along with a distrust of foreign business.
Even as today the climate in India has seen a seachange, smashing barriers and
actively seeking foreign investment, many companies still see it as a difficult market.
India is rightfully quoted to be an incomparable country and is both frustrating and
challenging at the same time. Foreign investors should be prepared to take India as
it is with all of its difficulties, contradictions and challenges.

Developing a basic understanding or potential of the Indian market,

envisaging and developing a Market Entry Strategy and implementing these
strategies when actually entering the market are three basic steps to make a
successful entry into India.
Developing a basic understanding or potential of the Indian market
The Indian middle class is large and growing; wages are low; many workers are well
educated and speak English; investors are optimistic and local stocks are up; despite
political turmoil, the country presses on with economic reforms.But there is still
cause for worries-

Infrastructural hassles.
The rapid economic growth of the last few years has put heavy stress on India's
infrastructural facilities. The projections of further expansion in key areas could snap
the already strained lines of transportation unless massive programs of expansion
and modernization are put in place. Problems include power demand shortfall, port
traffic capacity mismatch, poor road conditions (only half of the country's roads are
surfaced), low telephone penetration (1.4% of population).

Indian Bureaucracy.
Although the Indian government is well aware of the need for reform and is pushing
ahead in this area, business still has to deal with an inefficient and sometimes still
slow-moving bureaucracy.

Diverse Market .
The Indian market is widely diverse. The country has 17 official languages, 6 major
religions, and ethnic diversity as wide as all of Europe. Thus, tastes and preferences
differ greatly among sections of consumers.

Therefore, it is advisable to develop a good understanding of the Indian market and

overall economy before taking the plunge. Research firms in India can provide the
information to determine how, when and where to enter the market. There are also
companies which can guide the foreign firm through the entry process from
beginning to end --performing the requisite research, assisting with configuration of
the project, helping develop Indian partners and financing, finding the land or ready
premises, and pushing through the paperwork required.

Developing up-front takes:

Market Study
Is there a need for the products/services/technology? What is the probable market
for the product/service? Where is the market located? Which mix of products and
services will find the most acceptability and be the most likely to generate sales?
What distribution and sales channels are available? What costs will be involved? Who
is the competi

Check on Economic Policies

The general economic direction in India is toward liberalization and globalization. But
the process is slow. Before jumping into the market, it is necessary to discover
whether government policies exist relating to the particular area of business and if
there are political concerns which should be taken into account.

Investment in India - Foreign Direct Investment - Introduction

Foreign Direct Investment (FDI) is permited as under the following forms of

investments.

• Through financial collaborations.

• Through joint ventures and technical collaborations.
• Through capital markets via Euro issues.
• Through private placements or preferential allotments.
Forbidden Territories:
FDI is not permitted in the following industrial sectors:

• Arms and ammunition.

• Atomic Energy.
• Railway Transport.
• Coal and lignite.
• Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
zinc.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market
through the issue of Global Depository Receipt (GDRs). GDRs are designated in
dollars and are not subject to any ceilings on investment. An applicant company
seeking Government's approval in this regard should have consistent track record for
good performance (financial or otherwise) for a minimum period of 3 years. This
condition would be relaxed for infrastructure projects such as power generation,
telecommunication, petroleum exploration and refining, ports, airports and roads.

Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a company or a
group of companies in the financial year . A company engaged in the manufacture of
items covered under Annex-III of the New Industrial Policy whose direct foreign
investment after a proposed Euro issue is likely to exceed 51% or which is
implementing a project not contained in Annex-III, would need to obtain prior FIPB
clearance before seeking final approval from Ministry of Finance.

Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and
building and investment in software development, prepayment or scheduled
repayment of earlier external borrowings, and equity investment in JV/WOSs in
India.

Restrictions
However, investment in stock markets and real estate will not be permitted.
Companies may retain the proceeds abroad or may remit funds into India in
anticiption of the use of funds for approved end uses. Any investment from a foreign
firm into India requires the prior approval of the Government of India.

Investment in India - Foreign Direct Investment - Approval

Foreign direct investments in India are approved through two routes:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks
(provided certain parameters are met) to all proposals involving:

• foreign equity up to 50% in 3 categories relating to mining activities (List 2).

• foreign equity up to 51% in 48 specified industries (List 3).
• foreign equity up to 74% in 9 categories (List 4).
• where List 4 includes items also listed in List 3, 74% participation shall apply.
The lists are comprehensive and cover most industries of interest to foreign
companies. Investments in high-priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI.

Opening an office in India

Opening an office in India for the aforesaid incorporates assessing the commercial
opportunity for self, planning business, obtaining legal, financial, official,
environmental, and tax advice as needed, choosing legal and capital structure,
selecting a location, obtaining personnel, developing a product marketing strategy
and more.

The FIPB Route:

Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases
where the parameters of automatic approval are not met. Normal processing time is
4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and
rejections are few. It is not necessary for foreign investors to have a local partner,
even when the foreign investor wishes to hold less than the entire equity of the
company. The portion of the equity not proposed to be held by the foreign investor
can be offered to the public.

Total foreign investment and FDI

Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98,
compared to dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98
was an estimated dols 3.1 billion, up from dols 2.7 billion in1996-97. The
government is likely to double FDI inflows within two years. Foreign portfolio
investment by foreign institutional investors was significantly lower at dols 752
million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly
reflecting the effect of the recent crisis in Asia.

Foreign institutional investors

Foreign institutional investors (FIIs) were net sellers from November 1997 through
January 1998. The outflow, prompted by the economic and currency crisis in Asia
and some volatility in the Indian rupee, was modest compared to the roughly dols 9
billion which has been invested in India by FIIs since 1992.

FII investments
FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2
billion in 1996-97. The trend reversed itself in February and March 1998, reflecting
the renewed stability of the rupee and relatively attractive valuations on Indian stock
markets.

Large outflows of capital

Large outflows began again in May 1998, following India's nuclear tests and volatility
in the rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the
RBI announced in June that FIIs would be allowed to hedge their incremental
investments in Indian markets after June11, 1998.

Investment in India - Foreign Direct Investment - Introduction

Foreign Direct Investment (FDI) is permited as under the following forms of
investments.

1. Through financial collaborations.

2. Through joint ventures and technical collaborations.
3. Through capital markets via Euro issues.
4. Through private placements or preferential allotments.

Forbidden Territories:
FDI is not permitted in the following industrial sectors:

1. Arms and ammunition.

2. Atomic Energy.
3. Railway Transport.
4. Coal and lignite.
5. Mining of iron, manganese, chrome, gypsum, sulphur, gold, diamonds, copper,
zinc.

Foreign Investment through GDRs (Euro Issues)

Foreign Investment through GDRs is treated as Foreign Direct Investment
Indian companies are allowed to raise equity capital in the international market through the
issue of Global Depository Receipt (GDRs). GDRs are designated in dollars and are not
subject to any ceilings on investment. An applicant company seeking Government's
approval in this regard should have consistent track record for good performance (financial
or otherwise) for a minimum period of 3 years. This condition would be relaxed for
infrastructure projects such as power generation, telecommunication, petroleum exploration
and refining, ports, airports and roads.

Clearance from FIPB

There is no restriction on the number of Euro-issue to be floated by a company or a group
of companies in the financial year . A company engaged in the manufacture of items
covered under Annex-III of the New Industrial Policy whose direct foreign investment after a
proposed Euro issue is likely to exceed 51% or which is implementing a project not
contained in Annex-III, would need to obtain prior FIPB clearance before seeking final
approval from Ministry of Finance.

Use of GDRs
The proceeds of the GDRs can be used for financing capital goods imports, capital
expenditure including domestic purchase/installation of plant, equipment and building and
investment in software development, prepayment or scheduled repayment of earlier
external borrowings, and equity investment in JV/WOSs in India.

Restrictions
However, investment in stock markets and real estate will not be permitted. Companies
may retain the proceeds abroad or may remit funds into India in anticiption of the use of
funds for approved end uses. Any investment from a foreign firm into India requires the prior
approval of the Government of India.

Euro Issues by Indian Companies

Indian companies are permitted to raise foreign currency resources through issue of
Foreign Currency Convertible Bonds (FCCBs) and/or issue of ordinary equity shares
through Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) to
foreign investors i.e. institutional investors or individuals (including NRIs) residing
abroad. Applications for necessary permission should be made to the Government of
India, Ministry of Finance, Department of Economic Affairs, New Delhi.

After obtaining the necessary approval from the Government, the Indian company should
submit an application to the General Manager, Foreign Investment Division, Exchange
Control Department, Reserve Bank of India, Central Office, Mumbai - 400 001 enclosing
a copy of the application made to the Government and the in-principle/final approval
granted by the Government, for necessary permission for issue/acquisition of shares to/by
non-residents, remittance of issue expenses, opening of foreign currency accounts, etc.

The FCCBs/GDRs/ADRs issued by Indian companies to non-residents have free

convertibility outside India. As regards transfer of shares (on conversion of GDRs/ADRs
into shares) in favour of residents, the non-resident holder of GDRs/ADRs should
approach the Overseas Depository bank with a request to the Domestic Custodian bank to
get the corresponding underlying shares released in favour of the non-resident investor
for being sold by the non-resident or for being transferred in the books of the issuing
company in the name of the non-resident. Reserve Bank has granted general exemption
vide its Notification No.F.E.R.A.185/98-RB dated 19th August 1998, permitting transfer
of shares from non-residents to residents, provided

a. such shares were released by the Indian custodian of a GDR/ADR issue against
surrender of GDRs/ADRs by the non-resident concerned and

b. the sale is made on a stock exchange or the shares are offered for sale in terms of
an offer made under the Securities and Exchange Board of India (Substantial
Acquisition of Shares and Takeover) Regulations, 1997.

Authorized dealers may allow remittance of sale proceeds of such underlying shares on
verification of the following documents:-

a. Release Order in original from the Domestic Custodian bank of the GDR/ADR
issue.

b. Sale note from a SEBI registered broker/merchant banker showing the number of
shares transferred and the amount of sale proceeds.
c. An undertaking/Accountant's certificate regarding payment of Income-tax

Authorized dealers may also allow the non-resident transferor to keep the above
mentioned shares in their safe custody till the sale of the shares is effected and to open a
non-resident non-interest bearing account to collect the sale proceeds of the shares. A
statement giving details, such as the name of the company whose shares have been sold,
number of shares sold and the amount remitted should be submitted to the General
Manager, Foreign Investment Division, Exchange Control Department, Reserve Bank of
India, Central Office, Mumbai 400 001 within a period of 7 days from the date of
effecting the remittance.

The above general permission will be applicable for transfer of shares underlying
GDRs/ADRs through stock exchange or under an offer made under the Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations
1997. All other cases including transfer of shares, on conversion of FCCBs into shares in
favour of residents, will require approval of Reserve Bank.

The Reserve Bank has granted general exemption vide its Notification
No.F.E.R.A.193/99-RB dated 16th March 1999 permitting

a. the non-resident holders of ADRs/GDRs issued by a company registered in India

to acquire the underlying shares against surrender of ADRs/GDRs held by them
when such shares are released by the Indian Custodian of the ADR/GDR issue

b. the company/depository concerned to enter in its register or books an address

outside India of the non-resident holder in respect of the underlying shares issued
against surrender of ADRs/GDRs.

In terms of Government guidelines, issue proceeds are required to be kept in foreign

currency and can be utilized only for certain purposes such as for meeting the cost of
expansion/diversification /acquisition/import of new plants and machinery, repayment of
foreign currency loans, etc. as approved by the Government. Pending deployment of
funds for approved purposes, the Indian company is allowed to keep the foreign currency
funds abroad with foreign banks ( which are rated for short-term obligations as A1 + by
Standard & Poor or P1 by Moody's ) or with branches of Indian banks abroad as
deposits, or to invest them abroad in treasury bills and other monetary instruments with
maturity not exceeding one year. Funds raised through GDRs/ADRs, FCCBs and ECBs
will also be allowed to be invested in rated certificates of deposit abroad. The issue
proceeds can also be kept in foreign currency accounts with authorized dealers/public
financial institutions in India authorized to deal in foreign exchange. It will accordingly
be in order for authorized dealers/public financial institutions to accept foreign currency
deposits from Indian companies out of Euro Issue proceeds subject to the following
conditions :-

a. The foreign currency deposits would carry interest at a rate not exceeding LIBOR
for the respective period for which the deposit is accepted.

b. Authorized dealers/public financial institutions with whom the foreign currency

deposits are kept should not swap the foreign currency for rupees but use the
amounts for on-lending in foreign currency to eligible clients.
 c. Authorized dealers may also invest surplus foreign currency out of such Euro
Issue proceeds as per the aforesaid norms.

d. Authorized dealers/public financial institutions accepting the foreign currency

deposits would be eligible to charge interest at the rate not exceeding 2.5 per cent
over six months LIBOR for lending out of such funds.

e. Authorized dealers will have to comply with the requirements of CRR/SLR as

laid down by Reserve Bank from time to time.

f. The deposits can be converted into Indian rupees only as and when expenditure
for approved end uses (including upto a maximum of 15% of the proceeds
earmarked for general corporate restructuring) are incurred by the Indian
company.

g. Authorized dealers/public financial institutions accepting such deposits as also the

Indian company, as the case may be, should comply with the conditions stipulated
by Government of India in their approval letters for such issues.

Foreign Investment Policy:

The Ministry of Industry has expanded the list of industries eligible for automatic
approval of foreign investments and, in certain cases, raised the upper level of
foreign ownership from 51 percent to 74 percent and further in certain cases to 100
percent. In January 1998, the RBI announced simplified procedures for automatic
FDI approvals. The announcement further provided that Indian companies will no
longer require prior clearances from the RBI for inward remittances of foreign
exchange or for the issuance of shares to foreign investors.

Facilitating foreign investment

In the recent budget, the finance minister announced the government's commitment
to a 90-day period for approving all foreign investments. Government officers will be
assigned to larger foreign investment proposals and will facilitate Central and State
clearances in a time-bound manner. Unlisted companies with a good 3 year track
record, have been permitted to raise funds in international markets through the issue
of Global Depository Receipts (GDRs) and American Depository Receipts (ADRs).

A number of recent policy changes have reduced the discriminatory bias

against foreign firms.

• The government has amended exchange control regulations previously

applicable to companies with significant foreign participation.
• The ban against using foreign brand names/trademarks has been lifted.
• The FY 1994/95 budget reduced the corporate tax rate for foreign companies
from 65 percent to 55 percent. The tax rate for domestic companies was
lowered to 40 percent.
 • The long-term capital gains rate for foreign companies was lowered to 20
percent; a 30 percent rate applies to domestic companies.
• The Indian Income Tax Act exempts export earnings from corporate income
tax for both Indian and foreign firms.

Other policy changes have been introduced to encourage foreign direct and foreign
institutional investment.

For instance, the Securities and Exchange Board of India (SEBI) recently formulated
guidelines to facilitate the operations of foreign brokers in India on behalf of
registered Foreign Institutional Investors (FII's). These brokers can now open foreign
currency-denominated or rupee accounts for crediting inward remittances,
commissions and brokerage fees.

Relaxation
The condition of dividend balancing (offsetting the outflow of foreign exchange for
dividend payments against export earnings) has been eliminated for all but 22
consumer goods industries. A 5-year tax holiday is extended to enterprises engaged
in development of infrastructural facilities. Even without a registered office in India,
foreign companies are allowed to start multimodal transport services in India.

The Reserve Bank of India (RBI) now permits 100 percent foreign investment in the
construction of roads/bridges. The peak custom duty rate was reduced to 50 percent
from 65 percent in the March 1995 budget. Import regime changes included
enhancement of the scope of Special Import License (SIL) programs, and the
expansion of freely importable items on the Open General License (OGL) list to
include some consumer goods.

Dispute Settlement
Currently, there are no investment disputes over expropriation or nationalization.
Government demands for penalty payments for alleged overcharging by
pharmaceutical companies during the 1980's could lead to de-facto expropriation of
some foreign drug companies' assets in India.

In pharmaceutical sector
A committee has been named to study these longstanding disputes, but the failure of
successive governments to produce a swift and transparent resolution has led to a
virtual standstill in foreign investment in India's pharmaceutical sector. Indian courts
provide adequate safeguards for the enforcement of property and contractual rights.

Case backlogs
However, case backlogs frequently lead to long procedural delays. India is not a
member of the International Center for the Settlement of Investment Disputes, nor
of the New York Convention of 1958. Commercial arbitration or other alternative
dispute resolution (ADR) methods are not yet popular ways of commercial dispute
settlement in India. The recent introduction in Parliament of a new Arbitration Bill
signals the importance now accorded to this matter by the GOI.
Investment in India - Foreign Direct Investment - Approval
Foreign direct investments in India are approved through two routes:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two weeks (provided
certain parameters are met) to all proposals involving:

• foreign equity up to 50% in 3 categories relating to mining activities (List 2).

• foreign equity up to 51% in 48 specified industries (List 3).
• foreign equity up to 74% in 9 categories (List 4).
• where List 4 includes items also listed in List 3, 74% participation shall apply.

The lists are comprehensive and cover most industries of interest to foreign companies.
Investments in high-priority industries or for trading companies primarily engaged in exporting are
given almost automatic approval by the RBI.

Opening an office in India

Opening an office in India for the aforesaid incorporates assessing the commercial opportunity for
self, planning business, obtaining legal, financial, official, environmental, and tax advice as
needed, choosing legal and capital structure, selecting a location, obtaining personnel,
developing a product marketing strategy and more.

The FIPB Route:

Processing of non-automatic approval cases
FIPB stands for Foreign Investment Promotion Board which approves all other cases where the
parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its
approach is liberal for all sectors and all types of proposals, and rejections are few. It is not
necessary for foreign investors to have a local partner, even when the foreign investor wishes to
hold less than the entire equity of the company. The portion of the equity not proposed to be held
by the foreign investor can be offered to the public.

Total foreign investment and FDI

Total foreign investment in IFY 1997-98 was estimated at dols 4.8 billion in 1997-98, compared to
dols 6 billion in 1996-97. Foreign Direct Investment (FDI) in 1997-98 was an estimated dols 3.1
billion, up from dols 2.7 billion in1996-97. The government is likely to double FDI inflows within
two years. Foreign portfolio investment by foreign institutional investors was significantly lower at
dols 752 million for fiscal 1997-98, down compared to dols 1.9 billion in1996-97, partly reflecting
the effect of the recent crisis in Asia.

Foreign institutional investors

Foreign institutional investors (FIIs) were net sellers from November 1997 through January 1998.
The outflow, prompted by the economic and currency crisis in Asia and some volatility in the
Indian rupee, was modest compared to the roughly dols 9 billion which has been invested in India
by FIIs since 1992.

FII investments
FII net investment declined to dols 1.5 billion for IFY 1997-98, compared to dols 2.2 billion in
1996-97. The trend reversed itself in February and March 1998, reflecting the renewed stability of
the rupee and relatively attractive valuations on Indian stock markets.

Large outflows of capital

Large outflows began again in May 1998, following India's nuclear tests and volatility in the
rupee/dollar exchange rate. In an effort to avoid further heavy outflows, the RBI announced in
June that FIIs would be allowed to hedge their incremental investments in Indian markets after
June11, 1998.