General
Most sectors are now open to 100 percent foreign ownership.
In other sectors, FDI caps are gradually being reduced. Very few sectors now
completely disallow foreign ownership. Those sectors that are completely closed
are contained in a negative list published by the Indian government; for
example, sectors prohibited for FDI are retail trading (except single brand
product retailing where specific approval is required), atomic energy, lottery,
gambling and betting.
Foreign institutional
investors
Companies and other entities and non-residents, may also
invest in India under the Portfolio Investment Scheme as foreign institutional
investors (Fiis). Fiis may also register as sub-accounts on behalf of third
parties who wish to invest in Indian securities. Fiis and their sub-accounts
are required to register with the Securities and Exchange Board of India
(SEBi), the principal capital markets regulator in India under the SEBi
(Foreign institutional investors) Regulations 1995. Registered Fiis can buy and
sell securities on the Indian stock exchanges. They can also invest in listed
and unlisted securities in off-market transactions subject to pricing
restrictions.
A single Fii or an approved sub-account of an Fii cannot
hold more than 10 percent of the paid-up capital of an Indian company, or 10
percent of the paid-up value of each series of convertible debentures issued
by an Indian company.
Fiis and their sub-accounts together cannot hold more than
an aggregate of 24 percent of an Indian company’s issued and paid-up share
capital. However, the limit of 24 percent may be increased up to the sectoral
cap for the relevant industry, on the passing of a resolution by the board of
directors of the Indian company followed by the passing of a special
shareholders’ resolution to approve the increase. The ceiling includes shares
and convertible debentures acquired through the primary market or the secondary
market. However, the ceiling does not include investment made by the Fii
through offshore funds, global depository receipts and euro convertible bonds.
Small-scale industry reservation policy Since 1964, the Indian
government has reserved many areas of production for the small-scale industry,
such as garments, sporting goods, shoes and toys. This policy is aimed at
protecting labor intensive industries from competition by larger corporations.
Although the number of reserved industries has reduced, the
reservation policy is still a barrier to entry for foreign investors who may
not invest more than 24 percent in these sectors.
Other restrictions
Foreign investors who had an existing venture, investment,
technical collaboration or trade mark agreement with an Indian company prior to
January 12, 2005 are required to obtain the prior approval of the FIPB for
investments or collaborations in the same field. This restriction does not
apply to investment proposals in the information technology or mining sector or
to investments by international financial institutions.
Prior approval of FIPB is also not required for investments
by venture capital funds registered in India, or for investments in financially
weak or defunct companies, or where the prior investment in the existing Indian
partner is less than 3 percent.
Government
initiatives and incentives
Tax incentives
The government offers a range of tax incentives to investors
to promote industrial growth and foreign investment. These incentives include:
- deduction of scientific research and development costs
- deduction of preliminary expenses in five annual
instalments
- full or partial deduction of foreign exchange earnings by
hotels and construction companies
- a ten-year deduction of 90 per cent of the profits and
gains derived by any undertaking that is located in a free-trade zone or a
export processing zone
- a ten-year deduction of such profits and gains as are
derived by a 100 per cent export-oriented undertaking from the export of
articles or things or computer software. This deduction is available only until
31 March 2011
- a ten-year tax
holiday on profits and gains of a new industrial undertaking, set up anywhere
in India, for power-generating projects
- a ten-year tax holiday to any enterprise that builds,
maintains, and operates any infrastructure facility, such as roads, highways or
expressways, new bridges, airports, ports, or rapid rail transport systems on a
BOT (build, operate, transfer), BOOT (build, own, operate, transfer), or
similar basis.
Special economic
zones
The government has offered incentives for establishing
special economic zones with the following benefits:
- 100 percent foreign ownerships
- accelerated approval processes
- exemption from value added tax/central sales tax, excise
duty, custom duty and service tax on domestic procurements and imports
- 100 percent income tax exemption for first five years; 50
per cent income tax exemption for next five years; income tax exemption for
next five years to the extent of profits reinvested (maximum 50 per cent)
- 100 percent deduction for a block of ten years out of 15
years in respect of profit and gain of a special economic zone developer and
co-developer for the purpose of income tax
- exemption from dividend distribution tax
- no minimum alternate tax
- single point clearance to the SEZ unit under various state
acts and rules
- external commercial borrowings by units up to uS$500
million a year allowed without any maturity restrictions
- freedom to bring in export proceeds without any time limit
- flexibility to keep 100 percent of export proceeds in EEFC
account
- SEZ units allowed to write-off unrealized export bills
- SEZ units allowed to sub-contract part of process abroad
- inter-unit sales permitted provided payment in foreign
currency.
Other incentives
State governments also encourage investment and seek to
attract capital by offering various incentives. These commonly take the form of
investment incentives, power tariff incentives and other physical benefits.