2009 Investment Climate Statement - India

2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2010

Overview of Foreign Investment Climate

India's projected high growth rates and its relatively strong financial position vis-a-vis other developing and developed countries after the global financial crisis has made it a preferred destination for foreign investment, as evidenced by a 2009 World Bank Report listing India as one of the top five most attractive locations for foreign direct investment (FDI) alongside China, the United States, Brazil, and Russia. However, India continues to control foreign investment with limits on equity contributions and voting rights, mandatory government approvals, and capital controls.

Although India has slowly implemented a program of economic reform and relaxed many of these constraints, FDI is still prohibited in some sectors or sub-sectors. Local investment conditions may vary from state to state and, in some cases, within a state, due to various levels of corruption, labor relations, and quality of government operations.

The GOI grants automatic FDI approvals in many sectors and has gradually expanded the list over time. Foreign investors do not need government licenses or approvals for these sectors and simply notify the Reserve Bank of India (RBI) of their investments. Some sectors still require government approval by the Foreign Investment Promotion Board (FIPB) or the cabinet committee on Foreign Investment (hereinafter, the Government approval route). Under the Government approval route, the ministry of Finance's Department of Economic Affairs receives applications for FDI proposals other than by Non-Resident Indians (NRIs), Export-Oriented units (EOUS which are industrial com anies that export their entire production of goods and services), and proposals for FDI in single Brand product retailing. The Ministry of Commerce and Industry (MOCI) Department of Industrial Policy (DIPP) receives FDI proposals for single brand product retailing and by NRIS. EOUS send their FDI proposals to the MOCI's Department of Commerce. The rules vary from industry to industry and are frequently changed.

Recent changes in FDI policy have tended toward greater liberalization. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion, and facilitated easy access to foreign technology and FDI. There are still restrictions on the majority of existing joint ventures, but new joint ventures can negotiate their own terms on a commercial basis. A local firm's ability to restrict its foreign partner's business strategy has been reduced, but exit strategies and dissolution procedures for existing joint ventures remain uncertain.

Foreign investment policy is covered in several ways including the Foreign Exchange Management Act (FEMA), the RBI guidelines, and Press Notes issued by the MOCI and Ministry of Finance, making it at times confusing and cumbersome for investors. In December 2009, the GOI unveiled a draft unified FDI policy consolidating 177 Press Notes in one place for easy reference. The unified FDI policy is scheduled to be operational by March 31. It will be reviewed every six months, incorporating the changes in the regulations during the intervening period of six months.

According to the MOCI Press Notes released in February 2009, if a company with foreign investment is majority owned or controlled by resident Indians, the company could conduct "downstream" investment (investment in another company) without counting towards FDI caps in the receiving entity or sector. In contrast, downstream investment by a foreign-owned and a foreign-controlled entity counts pro-rata towards FDI caps. (For this purpose, NRIs are considered foreign.) This allows foreign shareholding to count as domestic shareholding as long as it comes through a shell company with only 49 percent foreign ownership. Importantly, the GOI no longer differentiates between portfolio and direct investment in calculating foreign ownership. Several large firms, especially banks, with low FDI but high foreign portfolio holdings may find themselves breaching foreign ownership limits when the DIPP "notifies" the Press Notes, expected in May 2010, putting them in force.

Foreign investment is prohibited in many areas or subsectors of agriculture, real estate, multi-brand retailing, legal services, security services, atomic energy, and railways, gambling, betting, casinos, and lotteries. Some forms of realty development, such as integrated townships, are permitted FDI. NRIs, however, are allowed to invest in housing and real estate development. They are also allowed to hold up to 100 per cent equity in civil aviation companies, where foreign equity is otherwise limited to 49 percent. NRIs are able to claim "Overseas Citizenship of India," which allows them to own property and invest in India as citizens.

In 2008, India's National Security Council suggested umbrella legislation, called the National Security Exception Act, which would authorize the government to suspend or prohibit any foreign acquisition, merger, or takeover of Indian companies that could be considered damaging to national interests. However, the Ministry of Finance, which would have the lead on drafting such legislation, has been silent on such legislation and such legislation has not yet been introduced in Parliament.

Overseas Corporate Bodies (OCBs) are subject to the same FDI regulations as NRIs. An OCB is a company, partnership firm, or other corporate body that is at least 60 percent owned directly or indirectly by NRIs including an overseas trust in which not less than sixty percent beneficial interest is held by a NRI directly or indirectly.

The GOI's privatization and disinvestment policy permits foreign investors to bid for the sale of state-owned enterprises. Foreign investors are given national treatment at the time of initial investment or after the investments are made. Obligations and local content requirements are imposed on foreign investors in certain consumer goods industries.

Existing companies can also use the automatic approval route for additional FDI provided the sector falls under the automatic route. Requirements are (i) the equity increase must accompany an expansion of the company's equity base (i.e., the NRI/foreign investors cannot simply acquire existing shares); (ii) the investment must involve a foreign currency remittance; and (iii) the Indian company's Board of Directors must give its approval.

Sector-Specific Guidelines for FDI in key industries (alphabetical order):

-- Advertising and Films: 100 percent FDI with automatic approval is allowed, but certain conditions apply in the film industry.

-- Agriculture: No FDI is permitted in farming, nor may foreigners own farmland. However, FDI in agriculture-related activities like the seed industry, floriculture, horticulture, animal husbandry, aquaculture, fish farming, and cultivation of vegetables and mushrooms is permitted without any limits under the automatic route. 100 percent FDI in tea plantations require prior government approval. There is compulsory divestment of 26 percent equity of the company in favor of an Indian partner or the Indian public within five years.

-- Airport infrastructure: 100 percent FDI is allowed in greenfield projects through the automatic route. FDI up to 74 percent is allowed in existing projects through the automatic route; greater than 74 percent requires FIPB approval. Foreign companies can own up to a 74 percent of third party ground handling businesses at airports. Rule changes that may come into effect beginning in 2011 will disallow any self-ground handling operations. NRIs are allowed 100 percent FDI in ground handling services. 100 percent FDI is allowed through the automatic route for maintenance and repair operations, flying training institutes and technical training institutes.

-- Airport Transport Services: FDI is limited to 49 percent under the automatic route for air transport services including domestic scheduled passenger airlines. For non-scheduled/chartered/cargo airlines, the FDI limit is 74 percent. For helicopter and seaplane services, 100 percent FDI is allowed on automatic approval by the Directorate General of Civil Aviation. NRIs may own 100 percent of a domestic airline. Although frequently debated, India has yet to open its state-run international airlines to outside investment. The U.S.-India "open skies" agreement, signed in April 2005, allows unrestricted access by U.S. carriers to the Indian market, and by Indian carriers to the U.S. market.

-- Alcoholic Distillation and Brewing: 100 percent FDI is allowed through the automatic approval rote but a license from the GOI is required.

-- Asset Reconstruction Companies: FDI is limited to 49 percent. Prior government approval is required. No portfolio investments are allowed. Where any individual investment exceeds 10 percent of the equity, the approval is subject to the "Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002."

-- Automobiles: No FDI caps or local content requirements or export obligations are applicable. FDI in automobile manufacturing is allowed under the automatic approval route.

-- Banking: Aggregate foreign ownership (from all sources) is capped at 49 percent in each private bank, and a higher limit of 74 percent subject to certain conditions. Automatic approvals are granted; however, no individual foreign bank may own more than 5 percent in an Indian bank, and no non-bank, foreign or otherwise, may own more than 10 percent without prior RBI approval. For state-owned banks, the foreign ownership limit, including portfolio investment, remains at 20 percent. Aggregate foreign voting rights in a local bank are capped at 10 percent, even if foreign equity ownership exceeds 10 percent. Legislation to remove this voting rights cap is stalled in Parliament. Foreign banks (those chartered abroad) may establish either branches or subsidiaries, and all foreign banks have chosen to take the branch route. The RBI has imposed a divestment requirement for listed subsidiaries to match the 74 percent cap on private banks, but it remains unclear whether an unlisted subsidiary could exist wholly-owned by the foreign bank.

-- Broadcasting: FDI (including portfolio investments) is limited to 20 percent in FM terrestrial broadcasting, with prior government approval, subject to guidelines issued by the Ministry of Information and Broadcasting. For direct-to-home broadcasting, foreign investment from all sources is limited to 49 percent (with a maximum FDI component of 20 percent), again with prior government approval. In satellite broadcasting, FDI is limited to 49 percent with prior government approvals. TV channels, irrespective of the ownership or management control, have to up-link from India provided they comply with the broadcast code. FDI is limited to 26 percent (including portfolio investment) in news and current affairs channels up-linking from India. 100 percent FDI is permitted in entertainment and general interest channels. FDI up to 49 percent is permitted with prior approval of the Government for setting up up-linking HUB/Teleports.

-- Business services: 100 percent FDI is allowed under the automatic route in data processing, software development, and computer consultancy services. 100 percent FDI is allowed for call centers and business processing outsourcing organizations subject to certain conditions.

-- Cable Network: FDI is limited to 49 percent (inclusive of both FDI and portfolio investment). Prior approval is required and the approval is subject to Cable Television Networks Rules, 1994.

-- Cigars/Cigarettes of tobacco: There is no FDI limit but prior government approval and an industrial license is required. A health ministry proposal to ban FDI completely in the tobacco industry won support from an inter-ministerial committee in late 2009, but it has not yet been adopted.

-- Coal/Lignite: FDI is allowed up to 100 percent in coal processing plant/power projects, but limited to 74 percent for exploration and mining for captive consumption. Proposals in private sector companies are approved automatically. FDI is limited to 49 percent in state-owned enterprises.

-- Coffee and Rubber Processing and Warehousing: 100 percent FDI is permitted under the automatic route without any condition.

-- Commodity Exchanges: Overall foreign ownership of up to 49 percent (including FDI and portfolio investment) is allowed with prior government approval; however, the FDI limit is 26 percent. No foreign individual may hold more than five percent.

-- Construction Development Projects: Construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, housing, commercial premises, resorts, educational institutions, infrastructure and township is allowed up to 100 percent FDI, with automatic approval subject to certain minimum capitalization and minimum area of development conditions.

-- Credit Information Companies: Foreign investment is permitted up to 49 percent, subject to FIPB and RBI approval, with portfolio investment limited to 24 percent.

-- Courier services other than distribution of letters: 100 per cent FDI is permitted; however, FIPB approval is required.

-- Defense and strategic industries: FDI is limited to 26 percent, subject to a license from the Defense Ministry and guidelines on FDI in production of arms and ammunition. There are no automatic approvals. Purchase and price preferences may be given to public sector enterprises as per guidelines of the Department of Public Enterprises.

-- Drugs/Pharmaceuticals: FDI is allowed up to 100 percent for drug manufacturing on an automatic approval route.

-- E-commerce: FDI up to 100 percent is allowed in business-to-business e-commerce under the government approval route. No FDI is allowed in retail e-commerce.

-- Hazardous chemicals: 100 percent FDI is allowed through the automatic approval route. However, a license is needed.

-- Food Processing: 100 percent FDI is allowed with automatic approval for most products with the exception of malted foods, alcoholic beverages including beer, and in a protected category reserved for "small scale industries" where foreign equity ownership up to 24 percent is allowed. FDI up to 74 percent is allowed with automatic approval for cold storage facilities.

-- Health and Education services: 100 percent FDI is allowed under the automatic approval route.

-- Hotels, Tourism and Restaurants: FDI at 100 percent is allowed with automatic approval.

-- Housing/Real Estate: No FDI is permitted in the retail housing sector. NRIS, however, may invest up to 100 percent. FDI up to 100 percent with prior government approval is permitted for projects such as the manufacture of building materials and the development of integrated townships, including housing, commercial premises, resorts, and hotels.

-- Industrial explosives: FDI at 100 percent on automatic route is allowed subject to obtaining license from appropriate authorities.

---Industrial Parks: FDI up to 100 percent under the automatic route is allowed, subject to restrictions in the allocable area.

-- Information Technology: FDI at 100 percent is allowed with automatic approval in software and electronics except in the aerospace and defense sectors.

-- Insurance: FDI is limited to 26 percent in insurance and insurance brokering. While FDI approval is automatic, a license must first be obtained from the Insurance Regulatory and Development Authority (IRDA). The GOI has introduced an amendment to the IRDA Act in the Upper House of the Parliament, which would increase the FDI cap to 49 percent.

-- Investing in companies in infrastructure sector other than telecommunications sector: FDI at 100 percent is allowed with prior government approval. Foreign investment in these companies will not count towards the sectoral caps in the infrastructure or services sector if the companies are managed and controlled by Indians.

-- Legal services: No FDI is allowed and foreign lawyers are not allowed to practice in India without an Indian law degree, which a December 2009 Mumbai court ruling confirmed, closing a potential loophole for foreign law firms to provide advisory services. The status of foreign law firms remains unclear as they are expected to appeal the Mumbai court ruling. The GOI has engaged in consultations with local law associations about opening up the sector to foreign lawyers but there appears to be strong opposition from the domestic industry.

-- Lottery, Gambling, Betting: No FDI of any form is allowed.

-- Manufacturing: Any manufacturer that is not a small or medium-sized enterprise (SME) that is manufacturing items reserved for the SME sector requires Government approval for foreign investment greater than 24 percent. Such manufacturers would be subject to additional licensing and minimum exporting requirements. The government has been steadily decreasing the number of industry sectors reserved under the small scale industry (SSI) policy - from a peak of 800 industries in the late 1990s - to just 21 specific goods/services currently.

-- Mining: 100 percent FDI is allowed, with automatic approval, for diamond and precious stone, gold/silver, and other mineral mining and exploration. FDI up to 100 percent is also allowed for mining and mineral separation of titanium-bearing minerals and ores but such activity requires prior government approval.

-- Non-Banking Financial Companies (NBFCS - Merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating, housing finance, leasing & finance, credit card business, foreign exchange brokerage, money changers, factoring and custodial services, investment advisory services, micro and rural credit): FDI is allowed up to 100 percent with automatic approval. Joint venture operating NBFCS, that have up to 75 percent foreign investment, are allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries complying with the applicable minimum capitalization norms. Capital norms are as follows: if FDI is less than 51 percent, $500,000 needs to be provided up front; if FDI is between 51 percent and 75 percent, $5 million must be invested up front; and if FDI exceeds 75 percent, $50 million is needed, out of which $7.5 million must be initially invested and the balance invested in two years. Downstream investments require further approval.

-- Pension: Currently no FDI is allowed in the pension sector. The passing of the proposed Pension Fund Regulatory and Development Authority bill in Parliament would allow 26 percent FDI in the sector, the same as the insurance sector.

-- Petroleum: FDI limits (along with tax incentives, production sharing and other terms and conditions) with automatic approval vary according to the sub-sector as follows:
  • Discovered small fields 100 percent
  • Unincorporated joint venture 60 percent
  • Incorporated joint venture 51 percent
  • Refining with domestic private company 100 percent
  • Refining by public sector company* 49 percent
  • Petroleum product/pipeline 100 percent
  • Infrastructure related petrol/diesel retail outlets 100 percent
  • LNG Pipeline 100 percent
  • Exploration 100 percent
  • Investment Financing 100 percent
  • Market study and formulation 100 percent

Needs FIPB approval and disinvestment prohibited.

-- Pollution control: FDI up to 100 percent is allowed with automatic approval for equipment manufacture and for consulting and management services.

--Ports and harbors: FDI up to 100 percent with automatic approval is allowed in construction and manufacturing of ports and harbors.

-- Power: FDI up to 100 percent is permitted with automatic approval in projects relating to electricity generation, transmission, distribution, power trading, and renewable energy other than nuclear reactor power plants.

-- Print Media: Foreign investment in newspapers and news periodicals is restricted to 26 percent under the government approval route. FDI is permitted up to 100 percent in printing science and technology magazines/journals, subject to prior government approval and guidelines issued by Ministry of Information and Broadcasting.

-- Professional services: FDI is limited to 51 percent in most consulting and professional services, with automatic approval. Legal services, however, are not open to foreign investment.

-- Research and Development services: 100 percent FDI is allowed under the automatic route.

-- Railways: FDI is not allowed in train operations, although 100 percent FDI is permitted in auxiliary areas such as rail track construction, ownership of rolling stock, provision of container services, and container depots.

-- Retailing: The government allows 51 percent FDI for retail trade in single brand products, subject to Government approval. FDI is still not allowed in any other retail activities, including in retailing of goods of multiple brands where the same manufacturer produces such branded products. However, large multinational retailers have engaged in franchise-like joint venture deals with Indian partners that do not violate the FDI bar.

--Roads, Highways, and Mass Rapid Transport Systems: FDI up to 100 percent is allowed with automatic approval for construction and maintenance.

-- Satellites: FDI is limited to 74 percent for the establishment and operation of satellites with prior government approval.

--Security Agencies: Foreign shareholding restricted to a maximum of 49 percent under the government approval route.

-- Shipping: FDI is limited to 74 percent with automatic approval for water transport services.

-- Special Economic zones (SEZ): For setting up SEZs and individual units in an SEZ, 100 percent FDI is allowed through the automatic route, subject to special Economic Zones Act, 2005, and India's Foreign Trade Policy.

-- Stock Exchanges: Total foreign investment, including portfolio investment, up to 49 percent is allowed in stock exchanges through FIPB approval. FDI limit is 26 percent and FII ceiling is 23 percent. No single foreign investor can hold more than a five percent stake. Other Securities and Exchange Board of India requirements may apply.

-- Storage and Warehouse Services: FDI up to 100 percent is allowed under the automatic route including warehousing of agricultural products with cold storage.

-- Telecommunications: FDI limits are listed below. FDI in the telecom services sector can be made directly or indirectly in the operating company or through a holding company subject to licensing and security requirements. FDI up to 74 per cent is allowed in telecom services (basic, cellular, unified access services, national/international long distance, V-Sat, public mobile radio trunked services, global mobile and personal communication services). Of the 74 percent, 49 percent may be invested under the automatic route. Above 49 percent requires government approval. All FDI limits are inclusive of portfolio investments. 100 percent owned foreign companies will be allowed to bid on the pending 3G auction but companies with winning bids will be required to comply with the FDI limits for telecom services before 3G operations begin.

The DIPP sets out the security conditions that have to be adhered to by prospective investors in the telecom sector. While approving the investment proposals, FIPB shall note that the investment is not coming from countries of concern and or unfriendly countries.

-ISPs with gateways, radio-paging and end-to-end services
74 percent (FDI proposals above 49 percent require GOI approval)

- Equipment manufacturing
100 percent (automatic approval)

- ISP without international gateways, voice-mail and e-mail
100 percent (FDI proposals above 49 percent require GOI approval, 26 percent divestment within 5 years)

-- Trading/wholesale: FDI at 100 percent is allowed through automatic route, for activities like exports, bulk imports with export warehouse sales, as well as cash and carry wholesale trading.
However, in case of test marketing or if the items are sourced from the small scale sector, then FIPB approval is required. Single brand retailing is allowed subject to the FIPB approval and FDI limited to 51 percent.

Business Environment Indices:
-- Transparency International (TI) Corruption Index 84 of 180 countries
-- Heritage Economic Freedom - 123 of 179 countries, mostly unfree
-- World Bank Doing Business - 133 of 183 countries
-- Millennium Challenge corporation (MCC)
Government Effectiveness 100th percentile
MCC Rule of Law - 100th percentile
MCC control of corruption - 89th percentile
MCC Fiscal Policy - 10th percentile
MCC Trade Policy - 50th percentile
MCC Regulatory Quality - 90th percentile
MCC Business start up - 47th percentile
MCC Land Rights Access - 35th percentile
MCC Natural Resource Mgmt- 49th percentile

­Conversion and Transfer Policies

The Indian rupee is fully convertible for current account transactions, which are regulated under the Foreign Exchange Management Rules, 2000. Prior RBI approval is required for acquiring foreign currency above certain limits for specific purposes (foreign travel, consulting services, and foreign studies).

Capital account transactions are open for foreign investors, subject to various clearances. In recent years, with growing foreign exchange reserves, the Indian government has taken additional steps to relax foreign exchange and capital account controls for Indian companies and individuals. For example, since 2007 individuals have been permitted to transfer abroad for any purpose up to $200,000 a year without approval. The GOI now allows all NRI proposals for conversion of non-repatriable equity into repatriable equity under the automatic approval route. At the end of 2009, the exchange rate was Rupees 46.7 to $1, compared to Rupees 48.64 at the end of 2008.

Investments in the development of integrated townships and NRI investment in real estate may be subject to a "lock-in" period. There are no restrictions on remittances for debt service or payments for imported inputs. Profits and dividend remittances (as current account transactions) are permitted without approval from the RBI. Income tax payment clearance is required, but there are generally no delays beyond 60 days. RBI approval is required to remit funds from asset liquidation. Foreign partners may sell their shares to resident Indian investors without RBI approval, provided shares were held on a repatriation basis. Global Depository Receipts/American Depository Receipts proceeds from abroad may be retained without restrictions except for an end-use ban on investment in real estate and stock markets. FIPB approval is required for converting non-repatriable shares to repatriable ones. Up to $1 million may be remitted for transfer of assets into India. Individual professionals including journalists and lawyers are allowed to keep 100 percent of their earnings from consultancy services rendered abroad in foreign currency accounts.

Foreign Institutional Investors (FIIs, restricted portfolio investment) may transfer funds from rupee to foreign currency accounts and vice versa at the market exchange rate. They may also repatriate capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, without RBI approval.

The RBI accords automatic approval to Indian industries for foreign collaboration agreements up to 400 per cent of the net worth of the Indian company. For technology-transfer agreements with foreign companies and for the use of brand name or trademark, Indian firms may remit royalties up to five percent of domestic sales and eight percent of exports without DIPP approval. Recurring royalty payments, such as patent licensing, are normally limited to eight percent of the selling price over a ten-year period. Royalties and lump sum payments are taxed at 20 to 30 percent. Where technology transfer is not involved, royalty payments for the use of trademarks and brand names are limited to two percent of exports and one percent of domestic sales. In case of technology transfer, payment of royalty includes the payment of royalty for use of trademark and brand name of the foreign collaborator.

Foreign banks may remit profits and surpluses to their headquarters, subject to the banks' compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-rupee swaps without any limits to enable customers to hedge their foreign currency liabilities. They may also offer forward cover to non-resident entities on FDI deployed after 1993.

­Expropriation and compensation

There have been few instances of direct expropriation since the 1970s.

India has had a poor track record in honoring and enforcing agreements with U.S. investors in the energy sector, but there has been some progress in recent years. In November 2008, the GOI finally issued a settlement payment to a U.S. company for work performed for an Indian parastatal in the 1980s, following a 2006 Supreme Court of India decision in favor of the U.S. firm. The settlement payment was significantly less than the amount awarded under the court's order.

After years of negotiation, the GOI in 2005 persuaded state-owned financial institutions and the state of Maharashtra to reach a settlement with U.S. investors, the Overseas Private Investment Corporation, and other foreign lenders on the investment dispute surrounding the Dabhol power project. A comprehensive commercial settlement was subsequently achieved in 2006. There has been significant progress since 2007 in resolving several payment disputes that American power sector investors have with the state of Tamil Nadu. The GOI, which has limited jurisdiction over commercial disputes involving matters under state jurisdiction, has been helpful in convincing Tamil Nadu to settle these commercial disputes.

The United States continues to urge the GOI to create an attractive and reliable investment climate. India and its political subdivisions need to provide a secure legal and regulatory framework for the private sector, as well as institutionalized dispute resolution mechanisms to expedite resolution of commercial issues.

Dispute Settlement

Foreign investors frequently complain about a lack of "sanctity of contracts." According to the World Bank, India is the 6th slowest country in the world in the number of days it takes to resolve a dispute. Although Indian courts are independent, they are backlogged with unsettled dispute cases. According to the World Bank's “Doing Business 2010" report, it takes about seven years to liquidate a business in India. In an attempt to unify its adjudication of disputes over commercial contracts with the rest of the world, India enacted the Arbitration and Conciliation Act of 1996, based on the UNCITRAL (United Nations Commission on International Trade Law) Model Law. Foreign awards are enforceable under multilateral conventions like the Geneva Convention. The International Center for Alternative Dispute Resolution (ICADR) has been established as an autonomous organization under the Ministry of Law and Justice and Company Affairs to promote settlement of domestic and international disputes through different modes of alternate dispute resolution. The World Bank has agreed to provide funds to the ICADR for preparing a business plan and training mediators for settlement of commercial disputes. India is not a member of the International Center for the Settlement of Investment Disputes, but is a member of the New York Convention of 1958. The Permanent Court of Arbitration (PCA, Hague) and the Indian Law ministry agreed in 2007 to establish a regional office of the PCA in New Delhi to make available an arbitration forum to match the facilities offered at The Hague at a far lower cost. However, no further progress has been made in establishing such an office. Administrative details such as office space in establishing an ICADR court remain outstanding.

In November, the Central Board of Direct Taxes established eight dispute resolutions panels (DRPs) across the country to settle transfer pricing tax disputes of domestic and foreign companies in a faster and more cost effective manner.

Performance Requirements and Incentives

Local sourcing is generally not required, but has been mandated for certain sectors in the past. In some consumer goods industries, the GOI requires the foreign party to ensure that the inflow of foreign exchange and foreign equity covers the foreign exchange requirement for imported goods.

Plant Location: Industrial undertakings are free to select the location of a project. The earlier restriction prohibiting location of factories near urban settlements was lifted in July 2008. However, projects will still need clearance by the concerned state pollution board and the Environment Ministry.

Employment: There is no requirement to employ Indian nationals. Restrictions on employing foreign technicians and managers have been eliminated, though companies complain that hiring and compensating expatriates is time-consuming and expensive. The RBI permits remittance of a per-diem rate up to $1,000, with an annual ceiling of $200,000, for services provided by foreign workers payable to a foreign firm. Employment of foreigners in excess of 12 months requires approval from the Ministry of Home Affairs. In addition, there are certain employment restrictions in the telecommunications industry. Majority directors on the boards of telecom companies including the Chairman, Managing Director and Chief Executive officer, should be resident Indians. The Chief Technical Officer and the Chief Finance Officer should also be resident Indian citizens. The chief officer in charge of the technical network operations and the chief security officer for all telecom companies have to be resident Indian citizens.

In August, the government tightened employment visa rules for foreigners. Foreign nationals executing projects/contracts in India now require "employment" visas. "Business" visas will be issued only to those entering India to explore business opportunities, to set up a business, or to sell industrial products in India. In addition, in the wake of disclosures about the abuse of tourist visas by Pakistani-American terror suspect David Headley, the Home Ministry issued a directive that foreign nationals having a multi-entry Indian tourist visa must wait a minimum of two months between visits to India. Additional visits within the two-month period may be allowed if the visa holder can provide an itinerary for a regional trip. Implementation of these regulations is inconsistent and the rules are continuing to evolve as the government has since softened its stance and eased some of the restrictions.

Taxes: The GOI provides a 10-year tax holiday for knowledge-based start-ups. Most state governments also offer fiscal concessions. Large state and central government fiscal deficits, along with attempts to reform both the direct and indirect tax regimes throughout India, have increased uncertainty over tax liability for investors. Tax collectors have made surprising and aggressive moves targeted at mergers and acquisitions by large multinationals of other companies, which had an indirect interest in assets located in India, in the past few years, perhaps because their size can yield large collections. The general trend in tax structure, however, has been toward simplification of the tax code, a reduction in tax rates and exceptions, and greater transparency in tax administration. The government plans to introduce a Direct Tax Code in 2010, which could remove most tax exemptions.

The central and state governments have been negotiating a Goods and Services Tax (GST) to be levied at all points in the supply chain concurrently by both the center and the states. A GST would replace center and state Value-Added Taxes (VATS), central excise taxes, and a number of other state-level taxes. This could represent a tremendous harmonization of tax levels across states and simplification of compliance and collection. Several contentious issues including the GST rate and items subject to separate rates or exemption from GST such as real estate transactions, alcohol, and fuel must still be agreed upon between the Central Government and the State Governments. The current estimated date of implementation is April 1, 2011. Before implementation, the Cabinet, both houses of Parliament, and the State Governments would have to approve an amendment to the constitution, which could be completed within several months.

The Foreign Trade Policy for fiscal years 2009-14 announced various incentives for exporters, with particular emphasis on promoting exports in employment generating sectors like textiles, processed foods, leather, gems and jewelry, tea, and handloom-made items. Emphasizing diversification away from India's traditional exports, the GOI added 26 new markets under the Focus Market scheme, including 16 Latin America countries and 10 in Asia-Oceania. The duty credit under this scheme has been raised to three percent from 2.5 percent of the free-on-board (FOB) export value. Under the Focus Product scheme, a large number of products have been included and the duty credit has been increased to two percent from the present 1.25 percent of the FOB export value. The duty rate for the Export Promotion Capital Goods scheme (EPCG) has been reduced to zero percent from three percent. The EPCG is an export incentive scheme that allows exporters to import machinery and capital goods at a concessional duty rate. The scheme is available for engineering and electronic products, apparel and textiles, chemicals and pharmaceuticals, plastics, handicrafts, and leather and leather products. The GOI also decided to extend the Duty Entitlement Passbook Scheme (DEPB) until December 31 2010. The DEPB is a cash reimbursement scheme aimed at neutralizing duties paid on inputs by exporters. The Indian customs authorities maintain a list of entitlements based on notional duties and "reimburse" exporters accordingly.

Right to Private Ownership and Establishment

Subject to certain sector-specific restrictions, foreign and domestic private entities may establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices and liaison offices. The GOI does not permit investment in real estate by foreign investors, except for company property used to do business and for the development of most types of new commercial and residential properties. NRIS are permitted 100 percent equity investment in real estate. FITS can now invest in Initial Public Offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to the FDI stipulations.

To establish a business, various approvals and clearances are required such as: incorporation of the company; registration and allotment of land; permission for land use in case of industry located outside an industrial area; environmental site approval; sanction of power and finance; approval for construction activity and building plan; registration under state sales Tax Act and Central and State Excise Acts; and consent under Water and Air Pollution Control Acts. Industries such as petrochemicals complexes, petroleum refineries, cement thermal power plants, bulk drugs; fertilizers, dyes, and paper (among others) need to obtain environment clearance from the Ministry of Environment and Forest.

The GOI passed the Securitization Act in 2002 to introduce bankruptcy laws. The requirement to obtain government permission before shutting down some businesses, however, makes it difficult to dispose of company assets.

­Protection of Property Rights

The legal system puts a number of restrictions and imposes a stamp tax on the transfer of land, making title unclear, often making buying and selling transactions difficult. There is no reliable system for recording secured interests in property, making it difficult to use property as collateral or to foreclose against such property.

India has generally adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. India is a party to the Geneva Convention for the Protection of Rights of Producers of Phonograms and the universal copyright convention, and a member of the World Intellectual Property Organization (WIPO) and UNESCO. India has not yet ratified and incorporated into domestic law the WIPO Internet treaties. The government has set up two exclusive courts for sorting out intellectual property (IP) issues, one in New Delhi and one in Karnataka.

In December 2009, the Indian Cabinet cleared a Copyright Amendment Bill to amend the Copyright Act, 1957, which now must be introduced to Parliament for its passage. Besides introducing provisions to implement WIPO Internet treaties, the Bill proposes other amendments including making a Producer and a Principal Director of a cinematograph film co-authors, extending the copyright of a cinematograph film from 60 to 70 years, providing a fair dealing exception for the production of copyrighted material in special formats that can be used by physica ly challenged people, extending the term of copyright protection for photographs from 60 years to life of the author plus 60 years and providing independent rights to authors of literary and musical works in a cinematograph film. The Bill also includes provisions for the enforcement of copyright. while India has not yet signed these treaties, it is necessary to amend domestic legislation to extend the copyright protection in the digital environment.

Trademark protection is good and meets international standards. The Trade Marks Act (1999) and implementing regulations accord national treatment for trademark owners and statutory protection of service marks. Although U.S. firms report few trademark related problems, India's weak judicial system can make it difficult to exercise rights established by the law. India is currently working on amending its Trademark Laws to make them compliant with the Madrid Protocol. In December 2009, the Lower House of India's Parliament cleared the Trade Marks (Amendment) Bill, 2009. Should the Bill be cleared by Parliament's Upper House and the President, it will be notified, implementing the provisions of the Madrid Protocol and allowing international registration of a trademark.

In 2005, India expanded product patent coverage to include pharmaceuticals and agro-chemicals, sectors of significant interest to U.S. firms. Embedded software may also now be patented. However, the law lacks specificity in several important areas such as compulsory license triggers, pre-grant opposition provisions, and defining the scope of patentable inventions (e.g., whether patents are limited to new chemical entities, rather than incremental innovation). India also provides protection for plant varieties through the Plant Varieties and Farmers' Rights Act.

Indian law does not provide for protection against unfair commercial use of test or other data that companies submit to the government in order to obtain marketing approval for their pharmaceutical or agricultural chemical products. The Pesticides Management Bill 2008, which will implement provisions for data protection of agricultural chemicals, has been introduced in the Parliament while the Ministry of Health and Family Welfare (MOHFW) is holding stakeholder consultations to decide about the way forward for the adoption of data protection for pharmaceuticals. A small but growing domestic constituency of Indian pharmaceutical companies, technology firms, and educational institutions favors improved patent protection.

Indian law provides no protection of trade secrets. The Designs Act 2000 meets India's obligations under the TRIPS Agreement for industrial designs. The Design Rules 2008, detailing classification of design, conform to the international system and are intended to take care of the proliferation of design related activities in various fields. India's semiconductor Integrated Circuits Layout Designs Act 2000 is based on standards developed by WIPO. However, this law remains inoperative due to the lack of implementing regulations.

Transparency of the Regulatory System

Even though India has made much progress on economic reform since 1991, the economy is still constrained by excessive rules and a powerful bureaucracy with broad discretionary powers. Moreover, India has a decentralized federal system of government in which the state governments possess broad regulatory powers. Regulatory decisions governing important issues such as zoning, land-use and environment can vary from one state to another. Opposition from labor unions and political constituencies has slowed reform in such areas as exit policy, bankruptcy, and labor law reform.

Despite these shortcomings, central government efforts to establish independent and effective regulators in some sectors, such as telecommunications, securities, insurance, and pensions have shown positive results. The GOI established a Competition Commission, which began operations in 2009, and has indicated its intention to strengthen the commodities futures markets. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance, which is considered better than in many other emerging markets by foreign institutional investors. Financial disclosures are strict though there is scope for improvement. The Satyam Computer services' (SCS) fraud case, where the SCS chairman admitted that 94 percent of the company's $1 billion in cash was fictitious, has led to several proposed reform measures including rotation of audit partners, additional disclosure requirements, and giving more power to a company's audit committee. None of the proposed reforms has yet to be implemented, however.

Efficiency of Capital Markets and Portfolio Investment

Indian capital markets have grown rapidly in recent years, with market capitalizations of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) both exceeding $1.2 trillion at the end of December. Together, the NSE and BSE account for 96 percent of total turnover in the stock markets. The NSE and BSE are the world's fourth and fifth largest stock exchanges in terms of volume of transactions, although they are smaller in terms of market capitalization compared to the world's largest markets. Spot prices for index stocks are usually market-driven and settlement mechanisms are in line with international standards. India's debt and currency markets lag behind its equity markets. Although private placements of corporate debt have been increasing, the daily trading volume remains low.

Foreign portfolio investment and activities in India's capital markets are regulated by a complex and onerous "foreign institutional investor" (FII) regime, analogous to China's Qualified Foreign Institutional Investor regime. The FII regime sets caps on investment and scope of business, and is a reflection of India's relatively closed capital account, the lack of market access for foreign firms and the strict regulation of the financial sector.

FIIs investing in India's capital markets must register with SEBI. They are divided into two categories: (a) Regular FIIs - those which invest both in equity and debt; and (b) 100 percent debt-fund FIIs -- those which are permitted to invest only in debt instruments. The list of eligible FIIS has been expanded to include endowment and university funds, foundations, charitable trusts, and hedge funds. Sovereign wealth funds can also register as FIIs. Foreign individuals may not make portfolio investments in India. FIIs must be registered and regulated by a recognized authority in their home country. This means many U.S.-based hedge funds cannot register as FIIs. FII registration this year is up eight percent bringing the total number of FIIs in India to 1,705. Even the FII sub-accounts have gone up over 10 per cent to 5,347.

FIIs now hold 15 percent of the Indian stock market. FII flows in calendar year 2009 totaled $17.5 billion. This robust flow of money in 2009 came after FIIs withdrew $12.18 billion in 2008 by selling Indian shares in the aftermath of the global financial crisis. While FIIs are allowed to invest in all securities traded on India's primary and secondary markets, in unlisted domestic debt securities, and in commercial paper issued by Indian companies, the GOI imposes several restrictions that vary by type of investment. The FII limit in corporate bonds is $15 billion. In the equities market, FII and sub-accounts can hold only up to 10 percent and 15 percent respectively of the paid-up equity capital of any company. Aggregate investment in any Indian company by all FIIs and sub-accounts is also capped at 24 percent unless specifically authorized by that company's board of directors. 'Naked short selling" is not permitted. FIIs are not permitted to participate in the new currency futures markets and their positions in the total interest rate futures market is capped at $4.7 billion. Foreign firms and persons are prohibited from trading commodities. The GOI constituted a working group in November 2009 to rationalize the portfolio investment regime, including inconsistencies in treatment of foreign investments.

SEBI allows foreign brokers to work on behalf of registered FIIs. FIIs can also bypass brokers and deal directly with companies in open offers. FII bank deposits are fully convertible and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, may be repatriated without prior approval.

NRIs are subject to separate investment limitations. They can repatriate dividends, rents, and interest earned in India and their specially designated bank deposits are fully convertible.

Foreign Venture Capital Investors (FVCIs) can also register with SEBI to invest in Indian firms, including FDI, subject to two-thirds of their investment being made in unlisted firms, originally allowed to invest through the automatic route, then prohibited from real estate investment, now new FVCIs are only approved by SEBI to invest in a list of ten sectors. Hence, older FVCIs have fewer restrictions than new ones. Favorable tax treatment has made this a popular vehicle.

Companies incorporated outside India can raise resources in India's capital market through the issuance of Indian Depository Receipts (IDRs), subject to certain conditions established and monitored by SEBI. Companies are required to have pre-issue paid-up capital and free reserves of least $100 million, as well as an average turnover of $500 million during the three financial years preceding the issuance. In addition, they should have been profitable for at least five years preceding the issue, declaring dividends of not less than 10 percent each year, and maintaining a pre-issue debt-equity ratio of not more than 2:1.

External commercial borrowing (ECB or direct lending to Indian entities by foreign institutions) is allowed if the funds will be used for outward FDI or domestically for investment in industry, infrastructure, hotels, hospitals or software. ECBs may not be used for on-lending, working capital, or acquiring real estate, a domestic firm, or financial assets. All-in interest costs are capped at LIBOR plus 300 basis points for three to five year loans or LIBOR plus 500 basis points for loans maturing after five years. Generally, any non-financial firm can borrow up to $500 million per year without prior approval from the RBI, subject to minimum maturity requirements of three years for amounts up to $20 million and five years for $20-500 million. This is referred to as the "automatic route". The "approval route", so-called because the RBI must pre-approve the loan, allows for exceptions to these rules. For instance, the RBI authorizes an additional $250 million in ECBs with an average maturity of at least 10 years, under the approval route. Non-banking finance companies (NBFCS) which lend exclusively to infrastructure projects will now be able to borrow from international banks with RBI approval. In addition, ECBs are also allowed for investors in integrated townships until 2010.

The complex set of ECB rules represents a serious relaxation of past rules by all parameters: eligible borrowers, end use, amount, maturity, and all-in cost caps. Most of the relaxation occurred when India experienced a significant outflow of capital in the wake of the global financial crisis. Now that capital is returning to India in significant amounts, a slight tightening of the ECB rules can be seen. For instance, the cost caps were abolished in 2009, but reinstated January 1, 2010. The approval route allows for a great deal of RBI discretion, which causes much consternation among applicants, including USG entities like Export-Import Bank (EXIM) and Overseas Private Investment Corporation (OPIC), because procedural transparency is uncommon at the RBI. Approvals for ECBs were $15.2 billion from January through November 2009 versus $21.0 billion for the same period in 2008.

Takeover regulations require disclosure on acquisition of shares exceeding five percent of total capitalization. Acquisition of 15 percent or more of the voting rights in a listed company triggers a public offer for an additional 20 percent stake as per SEBI’s Substantial Acquisition of Shares & Takeovers Regulations. Companies may buy back their shares in the market to make inter-corporate investments. From October 2008 consolidation through creeping acquisition up to five percent has been allowed to persons holding 55 percent and above but below 75 percent, subject to the condition that such acquisition can only be via open market purchases in the normal segment, and no consolidation via bulk/ lock/ negotiated deal or through preferential allotment would be permitted. RBI and FIPB-clearances are required to acquire a controlling stake in Indian companies. Cross shareholding and stable shareholding are not prevalent in the Indian market. The Hostile Takeover Code and the SEBI Takeover Committee regulate hostile takeovers. The committee makes ad hoc decisions on takeovers, and tends to protect the target firm when takeover bids come from foreign entities.

­Competition from State Owned Enterprises

India's public sector enterprises (PSEs), both at the central and at the state levels play an important role in India's industrialization. There are currently 242 Central Public Sector Enterprises (CPSEs). The service sector constitutes the largest component of investment in CPSES (40 percent) followed by electricity (28 percent), manufacturing (22 percent) and mining (9 percent). Nine of the most prestigious PSEs have been designated 'Navratnas," or nine prestigious jewels, giving them greater autonomy.

The Ministry of Heavy Industries and Public Enterprise's Department of Public Enterprises is the nodal department of CPSEs. PSEs have a Board of Directors, wherein at least one-third of the Directors should be non-official Directors. The Chairman, Managing Director, and Directors are appointed independently. Private consultants, senior retired officers and politically-affiliated individuals are appointed as board members of the PSEs.

In December 2009, the government cleared a policy for the creation of a "Maharatna" or great jewel category of state-owned PSEs. Under the new policy, the identified PSEs would be allowed greater financial and operational freedom to expand their operations and emerge as global giants. This status empowers the boards of PSEs to consider investment opportunities up to $1.2 billion without the approval of the government. To become a Maharatna, PSEs must meet certain levels of sales, net worth, and profitability over an extended period of time as well as have a significant global presence or international operations. Eighteen PSEs are eligible for Maharatna designation.

Although there do not appear to be systemic advantages, PSEs in some sectors have enjoyed pricing and bidding advantages over their private sector competitors. The government has increased its pace for reducing its equity ownership in PSEs although there are no plans to sell a majority share in PSEs to the private sector or to list more than 50 percent of the shares in PSEs on any of the Indian stock exchanges. A driving factor in disinvestment is the government's goal to reduce its fiscal deficit. Growing competition from the private sector within India and outside will pose challenges, as existence of a level-playing-field will decrease the public sector's opportunities for special privileges and concessions that some PSEs enjoy.

­Corporate Social Responsibility

As Indian corporations have grown in wealth and global reach, awareness of corporate social responsibility (CSR) has risen, as has the idea that the private sector can influence change in many areas of Indian society that are neglected or imperfectly served by the government. While a number of large Indian companies have practiced philanthropy and community development for decades, CSR as a key part of companies' business plans has developed only recently. Exceptions include the outstanding efforts of companies like the Tata Group that has had CSR as one of its core precepts since the late 1800s. Examples of effective corporate measures include combining good business with development work, such as in the fields of education, micro-finance or contract farming. Less effective are those companies that practice vanity philanthropy or have established boutique NGOs to disburse funds to charities. Most Indian companies, however, do nothing at all. Therefore, while awareness of CSR is growing, it exists mainly in large Indian companies. CSR is conducted at a very low level, or not all, in small and medium sized enterprises.

As awareness has increased, more large Indian companies have begun to follow generally accepted CSR principles, as do most multinational foreign enterprises though perhaps not necessarily to the same extent they would in OECD countries. These companies' CSR efforts are appreciated by those that are directly affected by them and by the educated and the growing middle class who themselves are becoming more aware of CSR.

­Political Violence

In general, there have been few incidents of politically motivated attacks on foreign projects or installations in recent years. There were no politically motivated attacks on U.S. companies operating in India in 2009. There have been recent protests which spilled over into some strikes and violence in Andhra Pradesh and in its capital Hyderabad over the possibility of creating a new state of Telengana. There is violence related to insurgent movements in Kashmir and some northeastern states, as well as Maoists/Naxalites (left wing) insurgent groups in some eastern and central Indian states. In addition, India has been the target of terrorist attacks, including bombings in 2008 in Jaipur, New Delhi, Bangalore, Hyderabad, Guwahati, and Ahmedabad, as well as the November 2008 sea-borne terrorist attacks on Mumbai, which killed 166 including 28 foreigners. Prior to Mumbai, major terrorist attacks had not specifically targeted hotels and facilities frequented by American travelers.


Corruption is a major concern. TI ranked India 84 out of 180 countries in terms of public sector corruption in its most recent ranking. In the past, the government procurement system, especially for telecommunications, power and defense, has been particularly subjected to allegations of corruption. Several government employees and public figures have been indicted or convicted under anti-corruption laws over the last eight years. Most of the corruption cases include that of economic offenses, bank security and fraud, and special crime cases. In November, the police arrested former Jharkhand Chief Minister Madhu Koda for alleged involvement in the largest corruption scheme reported to date - an estimated $870 million.

The legal framework for fighting corruption is provided in the following laws: the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Companies Act, 1956; and the Indian Contract Act, 1872. Amended anti-corruption laws since 2004 have given additional powers to vigilance departments in government bodies and made the Central Vigilance Commission (CVC) a statutory body. In Defense Procurement Procedure 2009, the Indian Government took additional steps to increase transparency and integrity in defense procurement by strengthening the role and numbers of independent monitors in their oversight of Integrity Pacts, which prohibit corruption in defense procurement.

The Right to Information Act (2005) and equivalent acts in the Indian states that require government officials to furnish information requested by citizens or face punitive action, computerization of services and various central and state government acts that established vigilance commissions have considerably reduced corruption or at least have opened up avenues to redress grievances.

U.S. firms have identified corruption as one obstacle to foreign direct investment. Indian businessmen agree that red tape and wide-ranging administrative discretion serve as a pretext to extort money. According to some foreign business representatives in India, corruption stems from the lack of transparency in the rules of governance, extremely cumbersome official procedures, and excessive and unregulated discretionary power in the hands of politicians and bureaucrats.

­Bilateral Investment Agreements

The GOI states that it has concluded 75 bilateral investment promotion agreements, including ones with the United Kingdom, France, Germany, Switzerland, Malaysia, and Mauritius. In 2009, India concluded a Comprehensive Economic Cooperation Agreement with ASEAN and a free trade agreement (FTA) in goods, services, and investment with South Korea. FTAs with Japan and the EU are being negotiated.

India and the United States launched formal Bilateral Investment Treaty negotiations in August 2009 and both sides have committed to active continuation of negotiations. In addition, the U.S. Department of Commerce's International Trade Administration "Invest in America" program and "Invest India," a Joint Venture between DIPP and the Federation of Indian Chambers of Commerce and Industry, signed a Memorandum of Intent in November 2009 to facilitate FDI in their respective countries by investors of the other country.

India and the United States already have a double taxation avoidance treaty. Several tax disputes are pending which are addressed during regular meetings between the two countries' Competent Authorities.

OPIC and other Investment Insurance Programs

The United States and India signed an Investment Incentive Agreement in 1987 that covers OPIC programs. OPIC is currently open in India for all its programs, specifically supporting three regional private equity funds and five global funds. OPIC projects in India are in the following sectors: energy and power, telecommunications, manufacturing, housing, services, and education. India is a member of the World Bank Multilateral Investment Guarantee Agency (MIGA).


Although there are more than seven million unionized workers, unions represent less than one-seventh of the workers in the organized sector (primarily in state-owned concerns), and less than two percent of the total work force. Most unions are linked to political parties. According to the Ministry of Labor, man-days lost to strikes and lockouts decreased 90 percent in 2008 as compared to the prior year, although underreporting of labor unrest is common.

Labor unrest occurred throughout India although sectors affected and reasons for the unrest are extremely varied. For example, some companies in the manufacturing sector, including some electronics and automotive manufacturers, in Tamil Nadu experienced labor problems, while others in the same sector report excellent labor relations. Some of the labor problems experienced are the result of workplace disagreements, including pay, working conditions, and union representation, but other labor unrest may be related to local political conditions beyond the control of the affected companies. Official statistics show the states of Tamil Nadu, Kerala, Andhra Pradesh, and Karnataka experiencing the most strikes and lockouts. Sectors with the most labor unrest include financial intermediation (excluding insurance and pension), textiles, air transport, coal mining, and food products, although there were several high-profile cases in 2009 affecting the automobile industry. In November, trade unions representing miners urged the government to ratify an International Labor Organization (ILO) convention that seeks to promote worker rights in terms of health and safety in mining operations. Accidents are often under-reported.

The payment of wages is governed by the Payment of Wages Act 1936, and the minimum wages Act, 1948. Industrial wages range from about $3.50 per day for unskilled workers, to over $150 per month for skilled production workers. Retrenchment, closure and layoffs are governed by the Industrial Disputes Act, which requires prior government permission to lay off workers or close businesses employing 100 or more workers. Permission is not easily obtained, resulting in a high use of contract workers in the manufacturing sector. Private firms have successfully downsized using voluntary retirement schemes. Foreign banks are also required to get the RBI's approval for closing branches.

Comprehensive legislation on labor reforms that is generally considered favorable for industry was introduced several years ago but expired in May 2009 with the formation of a new government after the May elections. The bills must now be reintroduced in Parliament. The proposed law contains stringent provisions for strikes and lockouts. The comprehensive legislation was meant to integrate both the Trade Unions Act and the Industrial Disputes Act in a single piece of legislation. In addition, a key amendment to the Industrial Disputes Act would increase the threshold limit to 300 employees for seeking government approval before laying off workers. The bill also advocates the establishment of tribunals and special labor courts for adjudicating disputes. Further, all disputes pertaining to public sector enterprises where the government has more than 51 percent equity must be referred to a Central Authority to adjudicate.

­Foreign Trade Zones/Free Trade Zones

The GOI has established several foreign trade zone schemes to encourage export-oriented production. These include special Economic zones (SEZ), Export Processing Zones (EPZ), Software Technology Parks (STP), and Export Oriented Units (EOU). All of these schemes are governed by separate rules and granted different benefits. In May 2005, the GOI passed new legislation called the "Special Economic Zones Bill 2005" endorsing its commitment to a long-term and stable policy for the SEZ structure which had previously been only an administrative construct.

SEZs are treated as foreign territory, allowing businesses operating in SEZs to operate outside the domain of the custom authorities, avoid FDI equity caps, be exempted from industrial licensing requirements, and enjoy tax holidays and other tax breaks. Land acquisition concerns have led to restrictions in developing SEZs. EPZs are industrial parks with incentives for foreign investors in export-oriented business. STPs are special zones with similar incentives for software exports. Both receive breaks on customs duties. EOUs are industrial companies established anywhere in India that export their entire production. They are granted: duty-free import of intermediate goods; income tax holiday up to March 2011; exemption from excise tax on capital goods, components, and raw materials; and waiver of sales taxes.

­Foreign Direct Investment Statistics

Table A: Inflow of FDI by top 5 countries ($ million) (IFY)







of which





































Note: Indian Fiscal Year (IFY) is from April to March. * FDI inflows for April 2009-September 2009 only.

Source: Secretariat for Industrial Assistance Newsletters, Ministry of Commerce and Industry, GOI

Table B: Top New FDI proposals approved in IFY 2009-10 (April-September)

Table B: Top New FDI proposals approved in IFY 2009-10 (April-September)

CompanyProject Equity ($ million)
Arcelor MitalSteel


Sistema Shyam TeleservicesTelecom650
Indus Renewable EnergyPower106


Dish TV, India LtdInformation160
And Broadcasting Teesta urja LimitedHydro-Power116
Mitsui and Company, LimitedGeneral Trading70

Note: The Indo-Mauritius investment agreement provides tax advantages that have attracted U.S. and businesses of other countries to make FDI into India from Mauritius, rather than the headquarter country.

Table C: FDI Inflows by Sector - Top 5 IFY

 April 2000-Sept 20092009-10*
All services (fin and non-fin) 8,38621,876 74,0752,627
Construction Activities(roads/hwys)6,182991
Housing and Real Estate74,0751,894

Note: * data is for April - September 2009 only
Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI