2011 Investment Climate Statement - India

2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011

Overview of Foreign Investment Climate

India is widely recognized for its sizeable and growing domestic market, high economic growth rates, large English-speaking population, and stable democratic government, making it one of the top five destinations worldwide for foreign investment. However, entering the Indian market presents challenges. The World Bank ranks India 134 out of 183 countries for ease of doing business. With many policies and their implementation decentralized at state and local levels, investors should be prepared to face conditions that vary among India's 28 states and seven union territories due to differences in political leadership, quality of governance, regulations, taxation, labor relations, and education levels. Economic reforms and major infrastructure projects generally move slowly. India prides itself on its rule of law, but its courts have cases backlogged for years. Businesses identify governance issues and lack of transparency as persistent obstacles. India has a strong cultural and historical preference toward self reliance – and a corresponding tendency toward protection of domestic industry despite a trend of liberalization in some sectors. Indian conglomerates and high technology companies have gained sophistication and prominence on the world stage. Indian industrial sectors such as information technology, telecommunications, and biotechnology are widely recognized for their innovation and competitiveness in the global market. The country’s entertainment industry, renewable energy, travel and tourism, textile and clothing manufacturing, automobile components, pharmaceuticals, and gems and jewelry sectors are also gaining prominence for their quality, price, and innovation.

Foreign investors can invest in India via two routes: the “automatic route” and the “government route”. Under the “automatic route,” the foreign investor or Indian company does not require approval from the relevant sector (e.g., coal and lignite mining, power, industrial parks, petroleum and gas, and non-banking finance); it simply notifies the Reserve Bank of India (RBI) of its investment. Under the “government route,” prior approval is required (e.g., defense, broadcasting and media, and private banks). The rules regulating government approval for investment in selected sectors vary from industry to industry and frequently change. The approving entity also varies depending on the applicant and the product:

-- The Ministry of Commerce and Industry’s (MOCI) Department of Industrial Policy and Promotion (DIPP) oversees single-brand product retailing proposals, as well as proposals made by Non-Resident Indians (NRIs), and Overseas Corporate Bodies (OCBs). An OCB is a company, partnership firm, or other corporate entity that is at least 60 percent owned, directly or indirectly, by NRIs, including overseas trusts.

-- The MOCI’s Department of Commerce oversees proposals from export-oriented units (i.e., industrial companies that intend to export their entire production of goods and services from India abroad).

-- The Ministry of Finance’s Foreign Investment Protection Board (FIPB) oversees all other applications.

Recent changes in FDI policy tend toward greater liberalization. Industrial policy reforms continue to reduce industrial licensing requirements, remove restrictions on expansion, and facilitate easy access to foreign technology and FDI. While existing joint ventures face restrictions, new joint ventures are finding it easier to negotiate their own business terms. 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.

FDI policy is governed by the Foreign Exchange Management Act 1999, and RBI. Details on current caps and procedures are available in a comprehensive policy document released by DIPP in October 2010 and available here: http://dipp.nic.in/FDI_Circular/FDI_Circular_02of2010.pdf The government is expected to release a revised document incorporating policy changes from RBI on March 31, 2011.

In India, an NRI can invest in the capital of a resident entity in certain sectors, but is subject to investment limits and other rules. According to MOCI, if a company with foreign investment is majority-owned or controlled by resident Indians, the company is authorized “downstream” investment without the transaction counting towards FDI caps in the receiving entity or sector. In contrast, downstream investment by a foreign-owned and foreign-controlled entity counts pro-rata towards FDI caps. (For this purpose, NRIs are considered foreign.) This regulation results in the government counting foreign shareholding as domestic shareholding, so long as the investment is transacted via a shell company with only 49 percent foreign ownership. Importantly, the GOI no longer differentiates between portfolio and direct investment in calculating foreign ownership. As a result, several large firms, particularly banks that have low FDI but high foreign portfolio holding now find themselves in possible breach of foreign ownership limits. Under this definition, India’s two largest banks, ICICI Bank and HDFC Bank, may soon become foreign banks. Foreign investors hold 77 percent equity in ICICI and 64 percent in HDFC. MOCI maintains that ICICI and HDFC Bank have violated the norms governing FDI in the country; however, banking analysts say the rules are confusing.

Foreign investment is prohibited in many areas or subsectors such as: agriculture, real estate, multi-brand retailing, legal services, security services, atomic energy, railway transport, gambling, casinos, lotteries, cigars, cigarettes and tobacco substitutes, and trading in transferable development rights. In July, the GOI released discussion papers on FDI in the defense and multi-brand retail services sectors for public comment. The retail paper suggests lifting the ban on FDI in multi-brand retail, and the defense paper proposes increasing the cap on defense FDI from 26 to 74 percent. The timeline for such changes remains unclear.

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

Existing foreign as well as domestic companies can also use the automatic route for additional FDI, provided the sector falls under the automatic route. These companies need to notify the relevant authorities of their expansion plans and must use funds from abroad rather than funds leveraged from the domestic market. The Indian company’s Board of Directors must approve such investments.

Sector-Specific Guidelines for FDI in key industries

-- Advertising and Film: One hundred percent FDI via the automatic route is allowed in the advertising and film industries, which includes film production, exhibition, and distribution, and related services and products.

-- Agriculture: No FDI is permitted in farming except tea plantations. Foreigners are not authorized to own farmland. 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 limits under the automatic route. For tea plantations, 100 percent FDI is allowed via the government route. However, there is a compulsory divestment of 26 percent equity in favor of the Indian partner or potential Indian investors within five years from the date FDI enters the country. In other plantation sectors, no FDI is allowed.

-- Airport Infrastructure: One hundred 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 74 percent of the ground-handling businesses at airports with 49 percent through the automatic route and FDI in excess of 49 percent to 74 percent permitted via the government route. NRIs are allowed 100 percent FDI in ground-handling services. One hundred percent FDI is allowed through the automatic route for maintenance and repair operations, flight 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 (meaning FIPB is not involved) but requires formal 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 vice versa.

-- Alcoholic Distillation and Brewing: One hundred percent FDI is allowed through the automatic route but still requires a license via DIPP under the provisions of the Industries (Development and Regulation) Act, 1951.

-- Asset Reconstruction Companies: FDI is limited to 49 percent via the government route. 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, local content requirements, or export obligations apply. FDI in automobile manufacturing is allowed under the automatic approval route.

-- Banking: Aggregate foreign investment (from all sources) in all private banks is capped at 74 percent. For state-owned banks, the foreign ownership limit is percent. There are four distinct ways foreign investors can enter the Indian banking sector. The first is by a foreign bank establishing a branch in India. A second alternative is to establish a wholly owned subsidiary. Foreign banks are permitted to have either branches or subsidiaries but not both. A third and least likely method is for a foreign entity to acquire an ailing bank. However, the RBI has yet to authorize this type of transaction. Lastly, foreign institutional investors (FII) can invest in a bank up to 10% of the total paid up capital and 5% in case the FII is a foreign bank/bank group.

Voting rights in private banks and state owned banks are currently capped at 10 percent and 1 percent, respectively, and do not represent ownership. The Banking Regulation (Amendment) bill, which would align voting rights in private banks with shareholding, continues to be with a committee in Parliament and has yet to be introduced.

-- Broadcasting: Foreign investment (including, FDI, NRI persons of Indian origin and portfolio investment) is limited to 20 percent in frequency modulation 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 and the remainder coming via NRI and/or portfolio investment, again via the government route. In satellite broadcasting, foreign investment (FDI, NRI, persons of Indian origin and portfolio investment) is limited to 49 percent with prior government approval. TV channels, irrespective of ownership or management control, have to up-link from India provided they comply with the broadcast code issued by the Ministry of Information and Broadcasting. FDI is limited to 26 percent, including portfolio investment, in news and current affairs channels up-linking from India. One hundred percent FDI is permitted in entertainment and general interest channels. FDI up to 49 percent is permitted with prior approval of the government for establishing up-linking HUB/Teleports.

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

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

-- Coal/Lignite: FDI up to 100 percent is allowed through the automatic route in private Indian companies that have captive coal or lignite mines for either direct power generation or for captive consumption in their iron and steel or cement production plants. Similarly, 100 percent foreign investment in the equity of an Indian subsidiary of a foreign company or in the equity of an Indian company for setting up coal processing plants is allowed, subject to the conditions that such an equity recipient shall not do coal mining or sell washed (processed) coal from such plants in the open market.

-- Coffee and Rubber Processing and Warehousing: One hundred percent FDI is permitted under the automatic route with no conditions.

-- Commodity exchanges: Foreign ownership up to 49 percent, with portfolio investment limited to 23 percent and FDI limited to 26 percent is allowed via the government route. No single foreign investor/entity can hold more than five percent of the total paid-up capital.

-- Construction Development Projects: Construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, townships, housing, commercial buildings, resorts, educational institutions, infrastructure and townships is open to up to 100 percent FDI. Automatic approval is subject to certain minimum capitalization and minimum area-of-development requirements. As of 2010, the minimum capitalization requirement is USD 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners. In the case of serviced housing plots, a minimum of 10 hectares (25 acres) must be developed, while in the case of construction–development projects, the minimum built-up area must be 50,000 square meters. At least 50 percent of the project must be developed within five years from the date of obtaining all statutory clearances.

-- Credit Information Companies: Foreign investment is permitted up to 49 percent and is subject to FIPB and RBI approval. Portfolio investment is limited to 24 percent and no single investor/entity can hold more than 10 percent of the total paid-up capital. Furthermore, any acquisition in excess of one percent requires mandatory reporting to RBI.

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

-- Defense and strategic industries: FDI is limited to 26 percent and is subject to a license from DIPP in consultation with the Defense Ministry. Production of arms and ammunition is subject to additional FDI guidelines. There are no automatic approvals. Purchase and price preferences may be given to Public Sector Enterprises as per Department of Public Enterprises’ guidelines. The licensee must establish adequate safety and security procedures once the authorization is granted and production begins.

-- 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: One hundred percent FDI is allowed via the automatic route. However, a license under the provisions of the Industries (Development and Regulation) Act, 1951, is required from DIPP.

-- Food Processing: One hundred percent FDI is allowed with automatic approval for: fruit and vegetable processing, dairy products, meat and poultry products, fishing and fish processing, grains, confections, consumer and convenience foods, soft-drink bottling, food parks, cold chain, and warehousing. The exception is for alcoholic beverages and beer, where a license is required, and items reserved for small scale sector. FDI up to 100 percent is allowed via the automatic route for cold storage facilities.

-- Health and Education Services: One hundred 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 by foreigners. However, NRIs who can obtain “Overseas Citizenship of India” status are allowed to own property and invest in India as if they were citizens. NRIs may invest up to 100 percent FDI with prior government approval in the real estate sector and in integrated townships including housing, commercial premises, resorts, and hotels, as well as in projects such as the manufacture of building materials.

-- Industrial explosives: FDI at 100 percent via the automatic route is allowed, subject to licensing by the appropriate authorities.

-- Industrial Parks: FDI up to 100 percent under the automatic route is allowed, provided: the industrial park includes at least ten units with no single unit occupying more than 50 percent of the area, and at least 66 percent of the area is available for industrial activity.

-- Information Technology: FDI of 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, the Insurance Regulatory and Development Authority (IRDA) must first grant a license. The GOI is considering raising the FDI cap to 49 percent in the insurance sector. After the Finance Standing Committee finishes considering the Insurance Regulatory and Development Authority (Amendment) bill, it will go to the full Parliament for a vote.

-- Infrastructure companies in the securities market (stock exchanges, depositories, and clearing corporations): Foreign investment is capped at 49 percent via the government route. FDI is limited to 26 percent and FIIs are limited to 23 percent. Specific to stock exchanges, total foreign investment, including portfolio investment, is allowed via the government route (FIPB) up to 49 percent. The total FDI limit is 26 percent and the FII cap is 23 percent. Other Securities and Exchange Board of India requirements may apply.

---- Legal services: No FDI is allowed and recent court cases strive to limit the ability of foreign attorneys to provide any sort of legal services. Most foreign attorneys practice in India as legal consultants. In March of 2010, a writ of petition was filed by a Chennai-based attorney on behalf of the Association of Indian against 31 foreign law firms, the Bar Council of India, and the Ministry of External Affairs in the Madras High Court. A similar case was decided against foreign firms in December 2009 in the Bombay High Court. The Madras High Court has repeatedly delayed a decision in order to give the court more time to consult with foreign firms. The implications of these cases are unclear and the status of foreign law firms remains uncertain. The petitioner in the Madras case and other opponents to market liberalization insist U.S. attorneys should be barred from practicing law in India until there is reciprocity in the U.S. market.

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

-- Manufacturing: GOI approval is required for any foreign investment greater than 24 percent equity when the manufacturer is not a small or micro-sized enterprise (SME) and the entity will manufacture items reserved for the SME sector. Manufacturers in this category are subject to additional licensing and minimum export requirements. Since 1997, 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 today. The list can be found on the Ministry of Micro and Small and Medium Enterprises website: http://msme.nic.in/MSME_AR_ENG_2009_10.pdf.

-- Mining: One hundred percent FDI is allowed, with automatic approval for diamonds and precious stones, 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 (NBFC): FDI is allowed up to 100 percent via the automatic route. In India, NBFCs include merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating agencies, housing finance, leasing and finance, credit card businesses, foreign exchange brokerages, money changers, factoring and custodial services, investment advisory services, micro and rural credit. All investments are subject to the following minimum capitalization norms: USD 500,000 upfront for investments with up to 51 percent foreign ownership; USD 5 million upfront for investments with 51 percent to 74.9 percent ownership; USD 50 million total with 7.5 million required up-front and the remaining balance within 24 months for investments with more than 75 percent ownership. One hundred percent foreign-owned NBFCs, with a minimum capitalization of USD 50 million, are not restricted on the number of subsidiaries established for specific NBFC activities and are not required to bring in additional capital. Joint venture operating NBFCs, with up to 75 percent foreign investment, are allowed to set up subsidiaries for other NBFC activities and are also subject to the minimum capitalization norms.

-- Pensions: No FDI is allowed in the pension sector. The Pension Fund Regulatory and Development Authority bill, which would allow FDI in the sector has lapsed and needs to be re-introduced.

-- Petroleum: FDI limits --along with tax incentives, production sharing, and other terms and conditions–- with automatic approval vary by sub-sector as follows:

- Discovered small fields 100 percent
- Refining with domestic private company 100 percent
- Refining by public sector company* 49 percent
- Petroleum product/pipeline 100 percent
- 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 is 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 the 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: One hundred 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 single-brand retail, subject to government approval. FDI is not allowed in any other retail activities, including multi-brand retailing. However, several large multinational retailers are partnering with Indian companies to form joint-venture wholesale enterprises to avoid violating FDI rules.

-- 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 is 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): One hundred percent FDI is allowed automatically when establishing a SEZ and an individual unit within a SEZ. Establishing the unit is subject to Special Economic Zones Act, 2005, and the Department of Commerce.

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

-- Telecommunications: This sensitive sector has seen enormous changes in 2010. 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. DIPP sets the security conditions prospective investors must follow to participate in the telecom sector. When approving investment proposals, FIPB will note whether the investment is coming from countries of concern or unfriendly countries. FDI in telecom services such as basic, cellular, access services, national/international long distance, V-Sat, public mobile radio trunked services, global mobile, unified personal communication services, ISP gateways, radio-paging, and end-to-end services is limited to 74 percent and FDI proposals above 49 percent must go via the government route. One hundred percent FDI in equipment manufacturing is authorized via the automatic route. FDI in Internet service providers (ISP) without international gateways, voice-mail, and email is allowed up to 100 percent. Below 49 percent, FDI in this category is authorized via the automatic route. Above 49 percent FDI is authorized via the government route. In both cases, 26 percent divestment is required within the first five years of the investment.

-- Trading/Wholesale: FDI of 100 percent is allowed through the automatic route for activities like exporting, bulk imports with export warehouse sales, and cash-and-carry wholesale trading. A wholesaler/cash-and-carry trader cannot open a retail shop to sell directly to consumers. In the 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 the FDI limit is 51 percent.

Business Environment Indices:

-- Transparency International (TI) Corruption Index - 87 of 178 countries

-- Heritage Economic Freedom – 124 of 179 countries, mostly unfree

-- World Bank Doing Business – 134 of 183 countries

-- Millennium Challenge Corporation (MCC) Government Effectiveness – 98th percentile

-- MCC Rule of Law – 97th percentile

-- MCC Control of Corruption - 90th percentile

-- MCC Fiscal Policy – 8th percentile

-- MCC Trade Policy – 37th percentile

-- MCC Regulatory Quality – 87th percentile

-- MCC Business Start Up – 49th percentile

-- MCC Land Rights Access – 67th percentile

-- MCC Natural Resource Mgmt- 46th 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 and 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 are permitted to transfer up to USD 200,000 per year abroad for any purpose 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 2010, the exchange rate was Rupees 45.3 to USD 1, compared to Rupees 46.7 at the end of 2009. Investment banks think the rupee is likely to appreciate further in the coming months.

Other conversion restrictions include:

- 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 RBI approval but income tax payment clearance is required. There are generally no transfer delays beyond 60 days.

- RBI approval is needed 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 and 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 USD 1 million per year may be remitted for transfer of assets into India.

Foreign institutional investors (FII) 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 authorizes automatic approval to Indian industries for foreign collaboration agreements, royalty, and lump sum fees for transfer of technology and payments for the use of trademark and brand names with no limits. Royalties and lump sum payments are taxed at ten percent.

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 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

Since the 1970s, there have been few instances of direct expropriation.

India has had a poor track record of honoring and enforcing agreements with U.S. investors in the energy sector. In November 2008, the GOI 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.

There has been significant progress since 2007 toward resolving several payment disputes that American power sector investors have with the state of Tamil Nadu. The central government, which has limited jurisdiction over commercial disputes involving matters under state jurisdiction, has been helpful in convincing Tamil Nadu to settle these disputes.

The U.S. Government 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 commercial disagreements. Media reports that, as of 2010, India had a backlog of more than 44 million legal cases countrywide, further complicating the resolution of commercial disputes.

Dispute Settlement

Foreign investors frequently complain about a lack of “sanctity of contracts.” According to the World Bank, India is the sixth slowest country in the world in the number of days it takes to resolve a dispute. Indian courts are understaffed and lack the technology to address the backlog of unsettled cases. According to the World Bank’s “Doing Business 2011” report, it takes about seven years to liquidate a business in India. In an attempt to align its adjudication of commercial contract disputes 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. Foreign awards are enforceable under multilateral conventions such as the Geneva Convention. The government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote settlement of domestic and international disputes through alternate dispute resolution. The World Bank funded ICADR to conduct training for mediators in the settlement of commercial disputes. India is a member of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards. India has yet to become a member of the International Center for the Settlement of Investment Disputes. The Permanent Court of Arbitration (PCA, The Hague) and the Indian Law Ministry agreed in 2007 to establish a regional PCA office in New Delhi to provide 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.

In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution 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: Companies are free to select the location of their industrial projects. The earlier restriction prohibiting location of factories near urban settlements was lifted in July 2008. However, projects still require clearance from the state’s pollution board environment ministry.

Employment: There is no requirement to employ Indian nationals. Restrictions on employing foreign technicians and managers were eliminated, though companies complain that hiring and compensating expatriates is time-consuming and expensive. The RBI permits remittances at a per-diem rate up to USD 1,000 with an annual ceiling of USD 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. The Department of Telecommunications under the Ministry of Communications and Information Technology regulates the employment security concerns of the telecom sector, due to due to national security concerns. Majority Directors (but not necessarily stakeholders) serving on the boards of telecom companies including the Chairman, Managing Director, Chief Executive Officer, and Chief Financial Officer must be Indian citizens. The Chief-Officer in-charge of technical network operations and the Chief Security Officer should be resident Indian citizens. The positions of Chairman, Chief Executive Officer and Chief Financial Officer, if held by foreign nationals, require security clearance vetting by the Ministry of Home Affairs on a yearly basis.

In August 2009, the government tightened employment visa and business rules for foreigners. Foreign nationals executing projects/contracts in India now require “employment” visas. The government only issues “business” visas to individuals entering India to explore business opportunities, to set up a business, or to sell industrial products. Furthermore, in the wake of disclosures about the abuse of tourist visas by Pakistani-American terror suspect David Headley, the Home Ministry decided 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. The two-month gap restriction does not apply to Persons of Indian origin or Overseas Citizen of India card-holders, nor to foreigners holding business, employment, student, and other categories of visa. There continues to be widespread confusion and inconsistent application of these rules. In view of these concerns, in January 2010, the government eased tourist norms for nationals of Finland, Japan, Luxembourg, New Zealand, and Singapore via the “visa on arrival” process. In December 2010, Cambodia, Laos, Vietnam and the Philippines were added to this list. The new rules are available on the Ministry of Home Affairs website: http://mha.nic.in/uniquepage.asp?Id_Pk=334.

Taxes: The GOI provides a 10-year tax holiday for knowledge-based start-ups. Most state governments also offer fiscal concessions to almost all industries. Large fiscal deficits at the state and central government level, along with attempts to reform both the direct and indirect tax regimes throughout India, have increased uncertainty about investors’ tax liability. In a few high profile cases now pending appeal, Indian tax collectors have made significant tax assessments on mergers and acquisitions by large multinationals. Press reports have noted increasing investor concerns about the lack of transparency and predictability in India’s taxation of mergers and acquisitions. The central government is leaning towards rationalizing the tax structure and simplifying the tax code. The UPA government started a country-wide campaign in favor of lowering tax rates, reducing the number of exceptions, and creating greater transparency in tax administration over the summer of 2010. Unfortunately, recent events have stalled the government’s progress on introducing a Direct Tax Code in 2011, which would remove most tax exemptions.

The Central and State governments started to negotiate a Goods and Services Tax (GST) to rationalize the national tax system. The idea behind GST is to standardize taxes levied at all points in the supply chain concurrently by both the central and state governments. A GST would replace national and state Value-Added Taxes (VATs), central excise taxes, and a number of other state-level taxes. The central and state governments have yet to decide on several contentious issues including the GST rate and items subject to separate rates or GST exemption such as real estate transactions, alcohol, and fuel. India originally planned to implement the GST on April 2010, but due to a lack of consensus between the central and state governments, it has been postponed until 2012. Before implementation, the Cabinet, both houses of Parliament, and a majority of state governments would have to approve a Constitutional amendment, which could be completed within several months.

In setting India’s foreign trade policy, MOCI provides a broad framework for the import and export of goods and services, including the incentives exporters receive to boost their exports. In August 2009, MOCI released its foreign trade policy for fiscal years 2009-14, which highlighted various incentives for exporters with particular emphasis on employment generating sectors such as textiles, processed foods, leather, gems and jewelry, tea, and handloom-made items. Under this policy, the GOI added 26 new markets, including 16 Latin American countries and 10 in Asia-Oceania. The duty credit extended to exporters under this scheme is three percent of the free-on-board (FOB) export value. Furthermore, exporters can import machinery and capital goods at concessional duty rates, which currently stand at zero percent. Exporters are allowed to use the duty cash reimbursement scheme, which aims to neutralize duties paid on inputs by exporters until June 30, 2011.

Right to Private Ownership and Establishment

Subject to certain sector-specific restrictions, foreign and domestic private entities are allowed to 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. FIIs 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 FDI stipulations.

To establish a business, various government approvals and clearances are required including incorporation of the company and registration under State Sales Tax Act and Central and State Excise Acts. Businesses that intend to own land and build facilities are also required to register the land; seek land use permission when the industry is located outside an industrially zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters also need to obtain industry –specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, cement thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper (among others) must obtain clearance from the Ministry of Environment and Forests.

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

India has generally adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. India is a party to the Geneva Phonograms Convention and the Universal Copyright Convention, and is a member of both UNESCO and the World Intellectual Property Organization (WIPO), though the country has not yet ratified and incorporated into domestic law the WIPO Internet treaties. The government has set up one exclusive court for sorting out intellectual property (IP) issues in Karnataka state.

The legal system places a number of restrictions and imposes a stamp tax on the transfer of land. Titles are often unclear, making land 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 it.

India has yet to fully modernize legislation addressing copyright and intellectual property protections. The Parliament continues to evaluate a proposed amendment to the Copyright Act, 1957, which was introduced in the Upper House of the Indian Parliament in April 2010, and referred to the Standing Committee on Human Resources Development soon after. The Standing Committee submitted its recommendations to Parliament in November 2010. The recommendations are now being examined by the Ministry of Human Resource Development. The bill is expected to be presented to the Parliament in the upcoming budget session which commences in February 2011. The Copyright Amendment Bill, 2010, contains provisions to deal with technology issues by extending protection of copyrighted material in India over digital networks related to literary, dramatic, musical and artistic works, films and sound recordings. The bill also seeks to provide clauses for stringent punishment for copyright violations. In October 2010, the government, along with the Federation of Indian Chambers of Commerce and Industry, set up a web portal of Anti-Piracy Coordination Cell, which will function as a centralized agency to curb piracy, thus fulfilling India's commitment to ensure "zero tolerance."

In August 2010, the Trade Marks (Amendment) Bill, 2009, was passed in Parliament, which brings India into greater compliance with international standards for filing and granting trademarks. The law makes it easier for Indian and foreign nationals to secure simultaneous protection of trademarks in other countries. Now through a single application, a person or enterprise can register a trademark in any of the 84 member countries of the Madrid Protocol. Before this law, applicants had to approach different countries in different languages, each with a separate fee. This system of filing of trademark applications under the Madrid Protocol is expected to be implemented by the Indian Intellectual Property Office by 2012.

Pharmaceutical and agro-chemical patents products can be patented in India. Embedded software may also be patented. However, the interpretation and application of law especially with regard to 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 lacks clarity. India also provides protection for plant varieties through the Plant Varieties and Farmers’ Rights Act, 2001.

Indian law does not protect against unfair commercial use of test or other data submitted to the government during the application for market approval for their pharmaceutical or agro-chemical products. The Pesticides Management Bill, 2008, which would allow data protection of agricultural chemical provisions, was introduced in Parliament in October 2008, and thereafter referred to the Standing Committee of Agriculture, which submitted recommendations to the Parliament. These recommendations are currently being examined by the Ministry of Agriculture. Indian pharmaceutical companies, technology firms, and educational institutions all favor improved patent protection.

Indian law provides no statutory protection of trade secrets. The Designs Act, 2000, meets India’s obligations under the TRIPS (Trade-Related Aspects of Intellectual Property Rights) Agreement for industrial designs. The Design Rules 2008, which detail 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 inactive due to the lack of implementing regulations.

Regulatory System Transparency

Despite progress, the Indian economy is still constrained by excessive rules and a powerful bureaucracy with broad discretionary powers. India has a decentralized federal system of government in which states possess extensive regulatory powers. Regulatory decisions governing important issues such as zoning, land-use, and the environment vary between states. Opposition from labor unions and political constituencies slows the pace of reform in exit policy, bankruptcy, and labor rights.

The central government was successful in establishing independent and effective regulators in telecommunications, securities, insurance, and pensions. The Competition Commission of India (CCI), India's antitrust body, has started using its enforcement powers and is now taking cases against cartelization and abuse of dominance, as well as conducting capacity-building programs. However, the government has yet to enact rules on mergers and acquisitions. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance, and is well regarded by foreign institutional investors. The Satyam Computer Services’ (SCS) fraud case, where the SCS chairman admitted that 94 percent of the company’s USD 1 billion in cash was fictitious, led to several proposals for reform measures including rotation of audit partners, additional disclosure requirements, and giving more power to a company’s audit committee. Most of the proposed reforms are a part of the amendments to the Companies Bill, which has yet to be introduced in Parliament.

Efficiency of Capital Markets and Portfolio Investment

Indian capital markets are growing. The market capitalizations of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) both exceeded USD 3.4 trillion at the end of October 2010. Together, the NSE and BSE account for 96 percent of total stock market turnover. The NSE and BSE are the world’s fourth and fifth largest stock exchanges in terms of transaction volume. They are smaller in comparison to foreign exchanges in terms of market capitalization. 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, 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 the scope of business. It reflects 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, India’s Securities and Exchange Commission (SEC) equivalent. They are divided into two categories: regular FIIs, which invest in both equity and debt; and 100 percent debt-fund FIIs. The list of eligible FIIs includes pension funds, mutual funds, banks, foreign central bank, sovereign wealth funds, endowment and university funds, foundations, charitable trusts and societies, insurance companies, re-insurance companies, foreign government agencies, international or multilateral organizations, broad based funds, asset management companies, investment managers and hedge funds. FIIs must be registered and regulated by a recognized authority in their home country, meaning many US-based hedge funds cannot register as FIIs. FII registration can be made either as an investor or investor on behalf of its “sub-accounts.” Sub-account means any person residing outside India on whose behalf investments are made within India by an FII. There are a total of 1,713 FIIs registered in India and 5,426 sub-accounts.

FIIs now hold 15 percent of the Indian stock market. FII flows from January to November 2010 totaled USD 29.31 billion. After the global financial crisis, FIIs withdrew USD 12.18 billion when they sold their shares of Indian companies. 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 some restrictions based on investment type. The FII limit on debt instruments (corporate and securities bonds) is USD 30 billion. In the equities market, FII and sub-accounts can own up to 10 percent and 5 percent, respectively, of the paid-up equity capital of any Indian 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. Foreign firms and persons are prohibited from trading in commodities.

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) need to register with SEBI to invest in Indian firms. They can also set up a domestic asset management company to manage the fund. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations and FDI policy. FVCIs can invest in many sectors including software business, information technology, pharmaceutical and drugs, bio-technology, nano-technology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital market through the issuance of Indian Depository Receipts (IDRs). These transactions are subject to SEBI monitoring and per conditions found at: http://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5185&Mode=0. Companies are required to have pre-issue, paid-up capital and free reserves of least USD 100 million, as well as an average turnover of USD 500 million during the three financial years preceding the issuance. In addition, they must 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 and non-banking finance companies) 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, acquiring real estate or a domestic firm, or financial assets. Generally, any non-financial firm can borrow up to USD 500 million per year through ECBs via the automatic route. As of July 2010, the all-in-costs ceilings for ECBs with an average maturity period of three to five years was capped at 300 basis points over 6 month LIBOR and 500 points for loans maturing after five years.

The liquidity crunch brought on by the global financial crisis of 2008 motivated the GOI to relax external commercial borrowing for eligible borrowers, as well as end use, amount, maturity, and all-in cost caps. Now that capital is returning to India in significant amounts, regulators are tightening ECB rules. For instance, cost caps that were abolished in 2009, were reinstated January 1, 2010. Between January and October 2010, ECB approvals from different companies stood at USD 19.2 billion, versus USD 12.8 billion for the same period in 2009.

Takeover regulations require disclosure upon 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, per SEBI regulations. The public offer made by the acquiring entity (i.e., an individual, company, any other legal entity) must be for at least 20 percent of the company’s voting rights. Since October 2008, an owner holding between 55 percent and 75 percent of voting rights can acquire additional voting rights of up to five percent without making a public offer (i.e., creeping acquisition). However, the buyer can make a creeping acquisition only by open market purchases and not through bulk/block/negotiated deals or preferential allotment. Furthermore, subsequent to this acquisition, the buyer’s total shares should not cross the 75 percent threshold. RBI and FIPB clearances are required to assume a controlling stake in an Indian company. Cross shareholding and stable shareholding are not prevalent in the Indian market. SEBI regulates hostile takeovers.

Competition from State Owned Enterprises

India’s public sector enterprises (PSEs), both at the central and state levels, play an important role in the country’s industrialization. There are currently 250 Central Public Sector Enterprises (CPSEs). The manufacturing sector constitutes the largest component of investment in CPSEs (45 percent) followed by services (35 percent), electricity (12 percent), and mining (8 percent). Foreigners, including Americans, are allowed to invest in these sectors.

The Ministry of Heavy Industries and Public Enterprises’ Department of Public Enterprises oversees CPSEs. CPSEs have a Board of Directors, wherein at least one-third of the directors should be externally appointed without being promoters or relatives of promoters. The chairman, managing director, and directors are appointed independently. Companies can appoint private consultants, senior retired officers, and politically affiliated individuals to their boards. Detailed guidelines for CPSEs on corporate governance are listed on this website: http://dpe.nic.in/newsite/gcgcpse2010.pdf.

In December 2009, the government established the “Maharatna” status for four CPSEs, allowing them greater financial and operational freedom to expand their operations and emerge as global giants. Maharatna CPSEs are allowed to invest up to USD 1.1 billion without government approval. The four CPSEs with Maharatna status include Indian Oil Corporation, NTPC Limited, Oil and Natural Gas Corporation, and Steel Authority of India. To have qualified for Maharatna status these CPSEs established a track record of excellent financial performance for the past three years, with a turnover of at least USD 5.5 billion, a net worth of USD 3.3 billion, and profitability of USD 1.1 billion. Nineteen other CPSEs achieved “Navratna” status that affords them the autonomy to make investment decisions up to USD 240 million without government approval. Navratna-rated CPSEs are expected to maintain a net profit of Rs 300 million or more over three years or at least in one of the three years. The government plans to pursue disinvestment in CPSEs, but would retain at least 51 percent ownership. Americans are allowed to buy equity stakes in these Maharatna and Navratna companies via IPOs.

Although there do not appear to be systemic advantages, CPSEs in some sectors enjoy pricing and bidding advantages over their private sector and foreign competitors. The government has increased its pace for reducing its equity ownership in CPSEs, although there are no plans to sell majority shares of CPSEs to the private sector or to list more than 50 percent of the shares on any of the Indian stock exchanges. India will pose challenges for these CPSEs as the leveling of the playing-field decreases their opportunities to benefit from special privileges and concessions.

Corporate Social Responsibility

Awareness of corporate social responsibility (CSR) in India is growing, especially as the private sector continues to experience positive results from influencing the areas of Indian society directly linked to their business. Effective programs tend to combine good business with development work in areas such as education, micro-finance, and contract farming. CSR efforts by Tata Group, WIPRO, and Reliance are setting examples for the rest of the Indian private sector. U.S. companies are also doing their part, with two Indian-based American companies becoming finalists in the Secretary of State’s 2010 Award for Corporate Excellence. As a regular practice, CSR is not as widely found among SMEs in India.

Forbes Asia’s 2010 list of “48 Heroes of Philanthropy” includes four Indian companies. In 2009, India was listed among the top ten Asian countries that are placing increasing importance on CSR practices. In April 2010, the Department of Public Enterprises issued CSR guidelines for CPSEs that require them to spend 0.5 percent to 5 percent of their net profits on CSR activities. In December 2010, Corporate Affairs Minister Salman Khurshid watered down these guidelines, saying companies need only adopt a policy showing how they would spend two percent of their profits on CSR. If they do spend the money, however, they are required to disclose how they did so. Khurshid was quoted as saying, “You can say it is not entirely voluntary, might say it is not mandatory. It is somewhere in between.” CSR guidelines are posted on the Ministry of Corporate Affairs website: http://www.mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf

Political Violence

There were no politically motivated attacks on U.S. companies operating in India in 2010. There were protests in Andhra Pradesh, which led to strikes and violence over the carving out a new state of Telengana from Andhra Pradesh. There continue to be outbursts of violence related to separatist movements in Jammu and Kashmir and similar events in some northeastern states. Maoist/Naxalite insurgent groups remain active in some eastern and central Indian states, including the rural areas of Bihar, Jharkhand, Chhattisgarh, West Bengal, and Orissa. Travelers to India are invited to visit the Department of State travel advisory website at: http://travel.state.gov/travel/cis_pa_tw/cis/cis_1139.html for the latest information and travel resources.


Media coverage of corruption cases in India appears to be increasing as popular tolerance seems to be waning. India’s ranking with Transparency International’s Corruption Perception Index slipped three points to 87th out of 178 countries surveyed for 2010. In the December 2010 Global Corruption Barometer survey, also by Transparency International, 54 percent of respondents in India said they had paid a bribe in the past 12 months. That puts India ninth after Liberia (89 percent), Uganda (86 percent), Cambodia (84 percent), Sierra Leone (71 percent), Nigeria (63 percent), Afghanistan (61 percent), Iraq and Senegal (both at 56 percent). Media coverage of corruption cases is intense and the topic is expected to continue to dominate the press for the coming months. Recent high profile cases include questionable kickbacks on Commonwealth Games construction contracts, land development schemes in Maharashtra and Karnataka, and the dubious allocation of telecom licenses.

The legal framework for fighting corruption is addressed by the following laws: the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Companies Act, 1956; the Indian Contract Act, 1872; and the Prevention of Money Laundering Act, 2002. Anti-corruption laws amended since 2004 granted additional powers to vigilance departments in government ministries and public sector enterprises at the central and state levels and made the Central Vigilance Commission (CVC) a statutory body. In November 2010, the Indian government signed the G-20 Anti-Corruption Action Plan in South Korea. Within this context, there is talk of India ratifying and implementing the UN Convention Against Corruption and passing legislation to protect whistleblowers. In 2009, the GOI took additional steps to increase transparency and integrity in defense procurements by strengthening the role and number of independent monitors in the oversight of signed “integrity pacts”. These pacts bind the bidders and government contractually to reduce the possibility of corruption during and after the tendering process of defense projects. More information on integrity pacts can be found here: http://buylawsindia.com/Integrity%20and%20Anti-Corruption.htm.

The national Right to Information Act, 2005, and equivalent state acts function similarly to the U.S. Freedom of Information Act, requiring government officials to furnish information requested by citizens or face punitive action. The increased computerization of services, coupled with central and state government efforts to establish vigilance commissions, is opening up avenues to seek redress for grievances. In November 2010, then-Corporate Affairs Minister Salman Khurshid said the government may review the act’s scope to ensure greater transparency in corporate lobbying. This would require parliamentary approval and hence may take some time.

U.S. firms continue to identify corruption as a major obstacle to American foreign direct investment, citing 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

As of December 2010, India concluded 76 bilateral investment agreements, including with the United Kingdom, France, Germany, Switzerland, Malaysia, and Mauritius. The complete list is here: http://www.commerce.nic.in/trade/international_ta.asp?id=2&trade. In 2009, India concluded a Comprehensive Economic Cooperation Agreement (CEPA) with ASEAN and a free trade agreement (FTA) in goods, services, and investment with South Korea. In November 2010, India and Japan’s CEPA negotiations concluded, but the agreement has yet to be signed. FTA negotiations with the EU and Canada are still under way. India is also negotiating CEPAs with Malaysia and Thailand and has proposed a CEPA with Indonesia. India is also keen to engage the United States in a Bilateral Investment Treaty (BIT) or Comprehensive Economic Partnership Agreement (CEPA).

India and the United States began formal BIT negotiations in August 2009, and India has expressed interest in re-engaging in negotiations once a U.S. model BIT text is finalized. India’s interest in starting negotiations with the United States on a totalization agreement is increasing. It already has totalization agreements with Belgium, France, Germany, Switzerland, the Netherlands, Hungary, the Czech Republic, Denmark, and Luxembourg. The U.S. Department of Commerce’s International Trade Administration’s “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 both countries.

India and the United States already have a double taxation avoidance treaty. Several tax disputes are pending that are being 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 operating in India in the areas of renewable energy and power, telecommunications, manufacturing, housing, services, and education and plans to invest more than USD 280 million in clean energy and energy efficiency projects. India is a member of the World Bank’s 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 formal economy, primarily in state-owned entities, 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 are estimated to have dropped 82 percent between 2009 and 2010. While it a commonly held view that the government underreports labor unrest, this dramatic improvement may be the result of an improving economy and successful government programs.

Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. In 2010, for example, foreign companies such as Hyundai and Bosch in the manufacturing sector experienced labor problems in Karnataka and Tamil Nadu, while others in the same sector report excellent labor relations. Some labor problems are the result of workplace disagreements, including pay, working conditions, and union representation, but other unrest may be related to local political conditions beyond the companies’ control. The states of Gujarat, Kerala, Andhra Pradesh, Karnataka, and Rajasthan experience the most strikes and lockouts, according to government statistics. Sectors with the most labor unrest include banks (excluding insurance and pension) and the automobile industry. In November 2009, trade unions representing miners urged the government to ratify an International Labor Organization (ILO) convention promoting worker rights in terms of health and safety in mining operations. It is a commonly held belief throughout India that accidents are under-reported.

India’s labor regulations are among the world’s most stringent and complex, and are considered limiting to the growth of the formal manufacturing sector. The payment of wages is governed by the Payment of Wages Act 1936, and the Minimum Wages Act, 1948. Industrial wages vary by state, ranging from about USD 3.50 per day for unskilled workers to over USD 150 per month for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act, 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people. Permission is not easily obtained, resulting in a high use of contract workers in the manufacturing sector to circumvent the law. Private firms successfully downsize through voluntary retirement schemes. Foreign banks also require RBI approval to close branches.

In August 2010, Parliament passed the Industrial Disputes (Amendment) Bill, 2010, which contains several provisions that: increase the wage ceiling prescribed for supervisors; bring disputes between contractors and contracted labor under the purview of the Ministry of Labor in consultation with relevant state or central government offices; provide direct access for workers to labor courts or tribunals in case of disputes; seek more qualified officers to preside over labor courts or tribunals; establish a grievance process; and empower industrial tribunal-cum-labor courts to enforce decrees.

Foreign Trade Zones/Free Trade Zones

The GOI 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). These schemes are governed by separate rules and granted different benefits, details of which can be found at: www.sezindia.nic.in; www.stpi.in; and www.eouindia.gov.in/handbook_procedures.htm .

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. Export Oriented Units (EOUs) are industrial companies established anywhere in India that export their entire production. They are granted: duty-free import of intermediate goods; income tax holidays; 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 (USD million)










27, 331

25, 888

12, 397

Of which









3, 073

3, 454

2, 379

1, 282



1, 089

1, 802

1, 943



1, 878

1, 176
















GDP is taken at factor cost

Note: Indian Fiscal Year (IFY) is from April to March. * FDI inflows for April 2010-October 2010 only. Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI.

Table B: Inflow of FDI by top 5 countries (Rs billion)













Of which Mauritius




































GDP is taken at factor cost

Note: Indian Fiscal Year (IFY) is from April to March. * FDI inflows for April 2010-October 2010 only. Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI.

Table C: FDI Inflows by Sector - Top 5


FDI (USD millions)


April 2000-October 2010

April 2010-October 2010

All Services (fin and non-fin)









Construction Activities (roads/hwys)



Housing and Real Estate



Note: * data is for April - October 2010 only. Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI.

Table D: FDI Inflows by Sector - Top 5


FDI (Rs billion)


April 2000-October 2010

April 2010-October 2010

All Services (fin and non-fin)









Construction Activities (roads/hwys)



Housing and Real Estate



Note: * data is for April – October 2010 only. Source: Secretariat for Industrial Assistance,

Ministry of Commerce and Industry, GOI.