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Foreign Investment Policy
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.