PROJECT REPORT ON

A N A LY S I S O F B U S I N E S S E N V I R O N M E N T

IN INDIA

N.L.Dalmia Institute of Management Studies &Research

Mumbai

2002 – 04

1
INDEX Page #
INDIA

• A brief History 4

• Some important Fact 4

Government Structure and Economic Climate
Structure of Government of India 7
- Financial System 9
-Reforms 13
Type of Economy 15
General Economic Trends 16
The Market 25
Currency 27
Leading Industries 27
Energy Chemicals and Utilities 28
Technology, Communications and Entertainment 30
Financial Services 36
Retail 37
Health Sciences 38
Infrastructure 41
Investment Climate and Foreign Trade 42
-Foreign Investment Framework 42
-Foreign Investment Policy 43
-Economic Policies and Incentives for Foreign Investment 43
-Foreign Direct Investment 44
-Country Wise Share in Approvals 44
- Foreign Portfolio Investment 45

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-Investment in Export Trading Companies 45
- Foreign Investment Promotion Board 46
Foreign-Exchange Controls 46
- Foreign Exchange Policy 46
- External Commercial Borrowings 47
Economic Laws and Regulations 47
-Indian Contract Act, 1872 47
-Intellectual Property Rights Protection 48
-Labor Laws 49
-Anti Trust Regulations 52
Special Investment Considerations 55
-SEZs 55
- Incentives for SEZ Units 55
- Other Incentives 57
Major Trading Partners and Leading Imports and Exports 57
Companies 60
-Private Co.s 61
-Public Co.s 61
-Foreign Co.s 61
Structures used by Foreign Corporations 62
Taxes on Corporate Income 63
-Corporate Income Tax 64
-Rates of Income Tax 65
- Dividend Income 65
-Minimum Alternate Tax 65
-Tax Incentives 66
-Foreign Tax Relief 66

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Other Significant Taxes 66
-Excise/Cenvat 66
-Customs 67
-Service Tax 67
-Sales Tax 68
-Octroi 68
-Value Added Tax 69
Financial Reporting & Auditing 70
Funding of Indian Business 71
SWOT of India 74
Bibliography 76

Brief History
The Indus Valley civilization, one of the oldest in the world, goes back at
least 5,000 years. Aryan tribes from the northwest invaded about 1500 B.C.;
their merger with the earlier inhabitants created the classical Indian culture.
Arab incursions starting in the 8th century and Turkish in 12th were followed
by European traders, beginning in the late 15th century. By the 19th century,
Britain had assumed political control of virtually all Indian lands. Nonviolent
resistance to British colonialism under Mohandas GANDHI and Jawaharlal
NEHRU led to independence in 1947. The subcontinent was divided into the

4
 secular state of India and the smaller Muslim state of Pakistan. A third war
between the two countries in 1971 resulted in East Pakistan becoming the
separate nation of Bangladesh. Fundamental concerns in India include the
ongoing dispute with Pakistan over Kashmir, massive overpopulation,
environmental degradation, extensive poverty, and ethnic and religious
strife, all this despite impressive gains in economic investment and output

Some Facts

Southern Asia, bordering the Arabian Sea and the Bay of Bengal, between Burma

and Pakistan

total: 3,287,590 sq km
land: 2,973,190 sq km
water: 314,400 sq km

varies from tropical monsoon in south to temperate in north

upland plain (Deccan Plateau) in south, flat to rolling plain along the
Ganges, deserts in west, Himalayas in north

Resources coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite

titanium ore, chromite, natural gas, diamonds, petroleum, limestone, arable land

azards droughts; flash floods, as well as widespread and destructive flooding from

monsoonal rains; severe thunderstorms; earthquakes

on 1,049,700,118 (July 2003 est.)

wth Rate 1.47% (2003 est)

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s Hindu 81.3%, Muslim 12%, Christian 2.3%, Sikh 1.9%, other groups

including Buddhist, Jain, Parsi 2.5% (2000)

ges English enjoys associate status but is the most important language for national,

political, and commercial communication; Hindi is the national language and primary

tongue of 30% of the people; there are 14 other official languages: Bengali, Telugu,

Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese,

Kashmiri, Sindhi, and Sanskrit; Hindustani is a popular variant of Hindi/Urdu spoken

widely throughout northern India but is not an official language

y definition: age 15 and over can read and write

total population: 59.5%
male: 70.2%
female: 48.3% (2003 est.)

ment federal republic

New Delhi

istrative Divisons 28 states and 7 union territories*; Andaman and Nicobar Islands*,

Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chandigarh*,

Chhattisgarh, Dadra and Nagar Haveli*, Daman and Diu*, Delhi*, Goa,

Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Jharkhand,

Karnataka, Kerala, Lakshadweep*, Madhya Pradesh, Maharashtra,

Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Pondicherry*,

Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttaranchal,

Uttar Pradesh, West Bengal

ndence 15 August 1947 (from UK)

ution 26 January (1950)

System based on English common law; limited judicial review of legislative acts;

accepts compulsory ICJ jurisdiction, with reservations

age 18 years of age; universal

6
 Natu

7
Structure of Government of India

The union government, as India's central government is known, is divided

into three distinct but interrelated branches: legislative, executive, and
judicial.

Parliament consists of a bicameral legislature, the Lok Sabha (House of the

People--the lower house) and the Rajya Sabha (Council of States--the upper
house). Parliament's principal function is to pass laws on those matters that
the constitution specifies to be within its jurisdiction.

The President of India has a specific authority with respect to the function of
the legislative branch . The President is authorized to convene Parliament
and must give his assent to all parliamentary bills before they become law.

According to its Constitution , India is a "sovereign, socialist, secular,

democratic republic." India has a federal form of government. However,
the central government in India has greater power in relation to its states,
and its central government is patterned after the British parliamentary
system.

Real national executive power is centered in the Council of Ministers

(cabinet), led by the prime minister. The president appoints the prime
minister, who is designated by legislators of the political party or coalition
commanding a parliamentary majority. The president then appoints
subordinate ministers on the advice of the prime minister.

The legislatures of the states and union territories elect 233 members to
the Rajya Sabha, and the president appoints another 12. The elected
members of the Rajya Sabha serve 6-year terms, with one-third up for

8
election every 2 years. The Lok Sabha consists of 545 members; 543 are
directly elected to 5-year terms. The other two are appointed.

Each state also has a presidentially appointed governor who may assume
certain broad powers when directed by the central government. The central
government exerts greater control over the union territories than over the
states, although some territories have gained more power to administer their
own affairs.

India's independent judicial system began under the British, and its
concepts and procedures resemble those of Anglo-Saxon countries. In India
there is a single integrated system of Courts, at the apex of it is the
Supreme Court, which comprises Chief Justice, and 25 other Judges . The
exclusive original Jurisdiction of the Supreme Court extends to any dispute
between the Government of India and one or more States, or between the
States themselves .

The High Courts stand at the head of States' judicial administration . There
are 21 High Courts in the country, three of them with jurisdiction over more
than one State. Every High Court has a Chief Justice and such other Judges
as the President may from time to time appoint. The Civil and Criminal
Jurisdictions of the High Courts are primarily governed by the Codes of Civil
and Criminal Procedure.

Lower Courts. In India, states are divided into districts (zillas) having district
courts. The district judges preside over civil cases and the sessions’ judges
address
criminal cases. Further below the district level, there is a hierarchy of judicial
officials.
At the village level, disputes are frequently resolved by people’s courts (lok
adalats) . Lok Adalats are voluntary agencies for resolution of disputes
through conciliatory method.

Law Commission

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Sixteen Law Commissions have so far been constituted by the Government
on judicial reforms, and these have submitted 174 reports on various
subjects relating to law, justice and their reforms. The sixteenth Law
Commission, appointed with effect from September 1, 2000 for a period of
three years, is also headed by Shri Justice B.P. Jeevan Reddy.

Department of Company Affairs

The Department of Company Affairs is the primary agency responsible for

the development and efficient functioning of the corporate sector comprising
the joint stock companies. The objectives in this regard are sought to be
achieved by the Department mainly through administration of the
Companies Act, 1956 and the Monopolies and Restrictive Trade Practices
Act, 1969. Apart from the aforesaid Acts, the responsibility of discharging the
functions of the Central Government relating to the Administration of the
Partnership Act, 1932, the Companies (Donations to National Funds) Act,
1951 and Societies Registration Act, 1860 also rests with the Department

Political Parties

India has over 100 political parties, including national, regional and local
parties.
Among the major national parties are the Congress(I), the Bhartiya Janata
Party
and the Communist Party of India.
India has a tradition of strong opposition parties. The leader of the opposition
party in Parliament is accorded statutory recognition, and is a major force in
the
day to day functioning of the Government

Indian Financial System

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Indian Financial System is broadly classified into two groups :

1. Organised sector
2. Unorganised sector

The financial system is also divided into users of financial services and
providers. Financial institutions sell their services to households, business
and government who are the users of financial services. The providers of
financial services are :

1. Central bank
2. Banks
3. Financial institutions
4. Money and Capital markets
5. Informal financial entreprises

The organised financial system comprises the following subsystems :

1. The banking system

2. The co-operative system
3. Development banking system
a. Public sector
b. Private sector
4. Money markets
5. Financial companies/institutions

The unorganised financial system comprises of money lenders, indigenous

bankers, lending pawn brokers, landlords, traders, etc. There are also a host
of financial companies, investment companies, chit funds, etc. in the

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unorganised sector. These are not regulated by the Central Bank or the
government in a systematic manner. .

Indian Banking System

India’s financial system, which comprises banks (public sector, private sector
and
foreign banks) and financial institutions has kept pace with the growing
needs of
corporate and other borrowers. The interest rates are now more in line with
market
forces and the banks and financial institutions have combated the reduction
in
interest rates and pressure on their margins by constantly innovating and
targeting
attractive consumer segments.

Central Bank

The Reserve Bank of India (RBI) is the country’s Central Bank and was
established
on 1 April 1935 in accordance with the provisions of the RBI Act, 1934.
RBI has been established essentially to regulate and supervise the Indian
financial
system. In addition, it has also been entrusted with the responsibility of
formulating,
implementing and monitoring the Monetary Policy of India. The RBI also
prescribes

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exchange control norms to facilitate external trade and payment and
promote orderly
development and maintenance of foreign exchange market in India.

Types of Banking Institutions

Commercial banks (public sector banks, private sector banks, foreign banks),
cooperative banks and regional rural banks broadly make up the banking
system in
India. While commercial banks typically cater to short and medium term
financing
requirements, national and state level financial institutions meet longer-term
requirements. The public sector banks have a higher percentage i.e. 65
percent of
their total branches in the rural and semi-urban centers while the
corresponding
number for private banks (both old and new private banks) is 54 percent.
Foreign
banks, on the other hand, have most of their branches (99 percent) in urban
or
metropolitan centers. RBI at present permits these banks to operate as
branches of
their overseas parents.

Public Sector Banks

The public sector banks comprise the State Bank of India including its 7
associate
banks and 19 other banks owned by the Government. These banks form the
dominant

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banking group in India and account for approximately 80 percent of total
deposits,
74 percent of loans and 70 percent of total bank branches (46,118 out of a
total of
66,186 bank branches). The Government continues to be the majority
shareholder
in all the public sector banks, although its average holding has fallen
following the
public issue of shares as well as the return of capital to the Government by
these
banks.

Private Sector Banks

The private sector banks comprise 22 ‘old’ banks and 11 ‘new’ banks
(operating a
total of 5,376 branches). 9 licenses for ‘new’ banks were issued in 1993 and
two
more were issued in 2002. The growth in size of the new private sector
banks has been rapid and in financial year 2002 they garnered a share of 7.4
percent of total bank deposits and 11.5 percent of total bank loans. ICICI
Bank merged with its parent ICICI Ltd in March 2002 to become the second
largest commercial bank in the country. It is expected that going forward
mergers and acquisition activity shall increase in the Indian
banking industry.

Foreign Banks

The foreign banks’ network in India comprises of 36 foreign banks (with over
200

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branches) and 26 foreign bank representative offices in India. During
financial
year 2002, foreign banks had a share of 5.4 percent of total bank deposits, 7
percent
of total bank loans and 0.3 percent of total bank branches. Foreign banks are
dominant in the metropolitan areas and only a few have extended their
branch
networks into other urban centers.

Co-operative Banks

Co-operative banks cater to the credit needs of specific communities or

groups of
people in a region and operate in both urban and rural areas. These have
been established under the respective State Cooperative Societies Acts, and
are controlled administratively by State authorities, though their banking
activities come within the purview of RBI.

Regional Rural Banks

Regional Rural Banks were established under an Act of Parliament with the
Central
Government, State Governments and various ‘sponsor’ public sector banks
all
taking holdings in them to improve credit delivery in rural areas.

Financial Institutions

There is a two-tier structure of financial institutions in India – 15 institutions

at the

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national level (referred to as All India Financial Institutions [AIFI]) and 46
institutions
at the State level. The AIFIs comprise term lending institutions, specialized
institutions and investment institutions (comprising seven in insurance and
one
in asset management). The Government holds a majority stake in these
institutions,
either directly or through banks and other institutions. The State Level
Institutions include 18 State Finance Corporations and 28 State Industrial
Development Corporations. Apart from investments in equity, these financial
institutions provide project finance, equipment leasing, corporate loans,
short-term loans and bill discounting facilities to corporates.

Reforms

The Government has from time to time enacted legislations to deal with
specific
issues pertaining to the Indian banking and finance industry. The most
notable
amongst these is the Securitisation and Reconstruction of Financial Assets
and
Enforcement of Security Interest Act, 2002 (SRFAESI). SRFAESI provides a
legal framework for securitisation, asset reconstruction companies and
strengthening of creditors’ rights and is therefore an important structural
development for the Indian banking system. Recently introduced, it is
expected to improve the propensity of defaulters to settle their outstanding
dues.

Money Supply & Banking

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Gold reserves as on February 13, 2004 were US$4.29bn (Rs194.3bn) and
special drawing rights (SDRs) were US$2mn (Rs110mn). Money supply (M3),
expanded 13.7% year on year (yoy) as on February 6, 2004 as against a
16.5% yoy increase in previous year. Growth in M3 since March has been
12.7%. Money supply as on February 6, 2004 stood at Rs19444bn. Net RBI
credit to Government has registered a sharp 63.7% yoy decline during the
current year and stood at Rs401.5bn as on February 13, 2004.
Bank Credit outstanding as on February 6, 2004 stood at Rs8061.8bn, 14.1%
yoy lower
than a year ago. The Reserve Bank of India in the Mid Term Monetary and
Credit Policy announced on November 3, 2003 kept the Bank rate and CRR
unchanged at 6% and 4.5%, respectively. WPI Inflation has been inching up
since August and stood at 5.91% for the week ended February 7, 2004.

Insurance Sector

The insurance industry in India was traditionally a domain of the Government

insurance behemoths such as Life Insurance Corporation (LIC) in life
insurance, General Insurance Corporation (GIC) and it’s four subsidiaries in
the non-life insurance segment, along with Export Credit and Guarantee
Corporation in general insurance. However, in August 2000, the insurance
sector was opened to private participation and since then, 12 new life
insurance and 8 new general insurance companies have entered the market
as joint ventures with major global insurance companies.

The LIC dominates the life insurance sector with a life insurance fund of over
Rs 2,000 billion and market share of 92 percent.. The Insurance Regulatory
and Development Authority (IRDA), established under an act of Parliament
regulates the insurance and reinsurance business in India.

Type of Economy

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India stands as a vibrant and diverse country whose economy is increasingly
integrating with the world economy. The sweeping economic reforms in the
last
decade have had far reaching consequences. The business environment in
the
country is considered conducive for achieving high level of sustainable
growth.
To begin with, when India regained its independence in 1947, it encouraged
selfsufficiency. This was to build up India’s industry and diminish its
dependence on
foreign trade. Economic growth was inadequate until the Government
lessened
state control on the economy during the 1970s. The Government was still in
control
over certain industries in the early 1990s, and economic growth was
achieved with
the help of loans by foreign countries till 1991. But this was also the same
time as
that of the Gulf War, which dealt a severe economic blow to India with a
spurt in oil
prices. Post the economic reforms in 1991, the spirit of economic freedom
revived bringing sweeping changes in its wake. The ambitious economic
reforms aimed at decontrolling the economy and stimulating foreign
investment has moved India
firmly into the front ranks of the rapidly growing Asia Pacific region and
unleashed
the latent strengths of a complex and rapidly changing nation.

Presently, India is one of the key emerging markets in the world. The
country’s

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skilled managerial and technical manpower match the best available in the
world
and a middle class whose size rivals the population of the USA or the
European
Union, provide India with a distinct cutting edge in global competition. GE
Capital
terms it ‘unique’, PepsiCo finds it one of the fastest growing and Motorola
is sure
it will turn into a major sourcing center. Indian operations have occupied
center
stage in these giants’ global networks.

General Economic Trends

Economic Indicators

According to data released by the Central Statistical Organization, (CSO) GDP

at
factor cost at constant 1993-94 prices grew at 4.3 percent in 2002-03, as
against 5.6
percent in 2001-02. Failure of the crucial northeast monsoon rains in 2002
caused
unprecedented drought conditions in the country, and a 12.5 percent decline
in
agricultural production over 2001-02. This combined with sluggish global
economic

19
conditions and regional problems such as the Iraq invasion and the SARS
crisis,
impacted economic growth in 2002-03. The current year 2003 has brought
above-normal rains, prospects of a bumper crop harvest, and expectations of
real GDP growth of 6.5 percent in 2003-04. As per CSO estimates released
recently, during the first quarter of 2003-04, the GDP at factor cost, 1993-94
prices is estimated to have grown by 5.7 percent on a quarter-on-quarter
basis, indicating that the expected economic recovery is underway.

The Index of Industrial Production (IIP), which is computed on a monthly

basis with 1993-94 as the base year, grew by 5.8 percent on an average
during 2002-03 as against 2.6 percent during 2001-02. In November 2003,
Index of Industrial Production grew by 7.4%, the highest growth recorded in
the past 24 months.

The country’s foreign-currency assets have been steadily increasing. Foreign

currency reserves, excluding gold and SDRs, swelled from US $51 billion at
end- March 2002 to US $71.9 billion at end-March 2003, up 41 percent. This
has continued in 2003-04. The reserve figure crossed the $100 billion mark
in February 2004. The primary drivers of this reserve accretion have been
the country’s burgeoning services exports, which have created a current
account surplus, as well as strong capital inflows comprising foreign direct
investment (FDI), foreign institutional investment and portfolio investments
and nonresident Indian deposits.

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Growth in foreign-exchange reserves has facilitated a further relaxation of
foreign exchange restrictions and a gradual move towards greater capital
account convertibility. The healthy foreign exchange reserves position,
strong capital inflows and significant growth in exports have led to a
consistently appreciating Rupee. The Rs / US $ exchange rate, which stood at
48.37 as at end-March 2002 and increased to 48.86 in June 2002 has been
declining thereafter. As at end-March 2003, the exchange rate was 47.55,
and in October 2003, it was ruling at 45.35. The rupee further strengthen its
position and the exchange rate was 44.66 as of March 2004.

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Facilitated by low inflation and easy liquidity conditions on the monetary
front,
interest rates continued to remain soft during 2002-03. The RBI reduced the
benchmark Bank Rate by 25 basis points to 6.25 percent in October 2002
and by
another 25 basis points to 6 percent in May 2003. With this, the Bank Rate
has
been reduced by 500 basis points in the last five years, and it is at its lowest
level
since 1973. Additionally, the Cash Reserve Ratio was reduced by 50 basis
points
to 5 percent from 1 June 2002, by 25 basis points to 4.75 percent from 16
November 2002, and yet again by 25 basis points to 4.5 percent from 14
June 2003. However, banks have not shown similar aggression in cutting
their prime lending rates (PLRs), which have been reduced from 11 percent
to 12 percent to 10.75 percent to 11.50 percent during 2002-03. Further, it is
to be noted that there is immense competition among banks for good quality
credit and deals are typically clinched at sub-PLR rates.

Economic affairs (facts & expected) for the year

2004-05

Indian economy is expected to grow by 8.1% in the current fiscal year on the
back
of a double-digit growth in agriculture. Buoyed by strong revenue collections
from companies amid a rapidly expanding economy, the Government has
revised its FY04 fiscal deficit target to 4.8% from an earlier estimate of 5.6%.
The country’s foreign exchange reserves stood at US$107.51bn as on
February 13, 2004. Net FII investment for the month of January 2004 stood at
US$ 697.5mn. FII’s have invested Rs59 bn (upto Feb 24) in the Indian equity

22
markets since the beginning of the year. MFs were net buyers for the month
of January 2004 at Rs 9.4bn. Exports growth has slowed down to 13.3% to
US$ 42.5bn in the first nine months of 2003-04 (against 17.9% last year),
while imports have risen by 24.7% yoy to US$ 55.2 bn during the period.

GDP, Agriculture and Industry

The Central Government expects GDP to grow by 8.1% in the current fiscal
year, on the
back of the best monsoon in a decade. In FY04, the agriculture sector is
estimated to grow by 9.1%. On the back of a booming economy and rising
consumer demand, the manufacturing sector is expected to register a
growth of 7.1%. The services sector, which contributes over 50% to the GDP,
is likely to grow by 8.4% in FY04. As per the revised estimates of RBI, FY04
GDP is expected to grow by 7-7.5% in the current fiscal. Industry is expected
to grow at 6.1% and Services by 8.3% as per CMIE estimates.

Agriculture sector is expected to grow robustly by 10.7% in FY04 as against a

decline of
5.2% in FY03. The overall agricultural production is expected to grow at
13.8% in 2003-04. Foodgrains production is likely to grow by 14.2% and non-
foodgrains by 13.1% in 2003-04.

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Industrial Growth

India's industrial production grew by 6.2% during Apr-Nov 2003, as per the
quick
estimates of Index of Industrial Production (IIP). Cumulative growths during
the Apr-Nov
2003 over 2002 in mining, manufacturing and electricity sectors were 3.9%,
6.8% and
3.1% respectively.

In November 2003, Index of Industrial Production grew by 7.4%, the highest

growth
recorded in the past 24 months. During Apr-Nov 2003, IIP grew by 6.2%. The
growth was witnessed among most of the product groups. The fastest
growing groups were paper products, transport equipment, beverages and
tobacco, basic metals and wood products. Consumer Goods have registered
a good growth in the first eight months of current fiscal, driven by 8.2%
growth in non-durables. Durables, which grew in double digit from FY00 to
FY02, declined in FY03 and have registered a 7.6% yoy growth in the

24
first eight months of FY04. Basic goods grew by 4.5% yoy in Apr-Nov 2003-
04. Capital goods continued its high growth trajectory and registered an
8.8% growth during Apr-Nov 2003. Intermediaries recorded a growth of 5.4%
in the first eight months of FY04.

Energy

Coal production in November and December 2003 recorded an impressive

growth of 7.4% and 6.3% respectively. In the budget for 2004-05, coal
production is projected at 404.2mn ton. During Q3 FY04, crude oil production
was up by 2.6%. Cumulative production during the first nine months of FY04
was at 24.85mn ton. Hydel power generation registered 11.5% increase
during Apr-Jan 2004. Cumulative power generation growth was lower at 3.3%
during Apr-Jan 2004 as against 4.2% increase recorded in the corresponding
period last year.

Foreign Trade

Exports during Apr-Dec 2003 are valued at US$ 42.5bn compared to US$
37.5bn, a growth of 13.3% as against a growth of 17.9% registered in the

25
same period last year. Imports during the first nine months of 2003 are
valued at US$55.2bn representing an increase of 24.7% yoy as against
14.7% yoy in the corresponding period last year.

Capital Market

FIIs remained net buyers in the equity market for the month of January,2004
with inflows to the tune of Rs31.8bn. Net FII inflow upto February 24, 2004
has remained positive at Rs27.3bn (US$599mn).

26
Source: www.indiainfoline.com

FII investment trend in the equity market in the current year is given in the
table below:
FII investment in Equity

Mutual Funds were net buyers in Indian equities in January 2004 at Rs9.4bn.
However, in he first 23 days of February mutual funds were net sellers at
Rs5.3bn.

27
Source: www.indiainfoline.com,

MF investment trend in the equity market in the current year is given in the
table below:
Mutual Fund investment in Equity

Primary market

Total floatations on the Primary market were at Rs252bn during the first ten
months of
FY04. Among these, total amounts raised from domestic primary capital
markets were at Rs.231.9bn. Funds raised through private placements were
at Rs185bn in Apr-Jan 04 as against Rs273bn during the same period last

28
year. IPOs contributed to the extent of Rs42.3bn as against Rs54.8bn in Apr-
Jan 03.

Initial Public Offers

Primary market being lackluster for the past few years is once again buzzing
with a lot of action. Following is the list of the public issues, which have
already hit the market and
which will be available in the next couple of months.

The Market

One of the important factors responsible for the strong interest of foreign
investors

29
in India is the size and potential for growth of the domestic market.
Sweeping
sociological changes have been brought about by rapid urbanization,
explosion of
electronic media, education and increasing domestic and foreign travel and
changing
nature and composition of expenditure, with growing emphasis on brands,
product
quality, features and convenience.

Consumer Markets

The vast and growing Indian market is a reality. The increase in number of
households headed by salary earners, professionals and businesspersons
and
the emergence of a thriving consumer finance business are expected to
continue
the consumerism boom. Expenditure on consumer durables such as washing
machines, refrigerators and color televisions has shown an impressive
growth since the 1990s. India offers one of the largest markets in the world
for manufactured items of mass consumption such as clothing, footwear,
detergents and cooking oil.

Rural Markets

Rural areas, where nearly 72 percent of Indians live, have witnessed rapid
market
growth in recent times, driven largely by agricultural growth, income
redistribution,
and inroads made by audio-visual media. The rural share of the market for
durable

30
goods has grown steadily over the last few years, and in items such as
bicycles,
mechanical wristwatches, radio / transistors etc the share of the rural market
has
been in excess of 75 percent.

Marketing Infrastructure

India has an extensive sales and distribution network. It is estimated that

there are
over one million market intermediaries-wholesalers, stockists, transporters
and
retailers – that are involved in the distribution of a variety of consumer
goods.
Marketers use this network to access nearly 3,800 cities and towns and over
half a
million villages. While urban areas have a range of distribution outlets from
large
supermarkets and superstores to the smaller neighborhood retail stores,
almost
every village in India is catered to by small shops that are part of the local
supply
network.

Consumer Finance

Extensive banking networks of the country support widespread sales and

distribution network. Consumer financing is an accepted form of consumer
goods
marketing in India. The presence of several non-banking finance companies

31
engaged in leasing and hire-purchase activities have also given a fillip to
consumer
good sales. The credit card market too has shown tremendous growth in
recent years.

Industrial Market

An average annual growth rate of 5.3 percent in industrial production over

the
period 1996-97 to 2002-03 has stimulated rapid growth in the market for
plant and
machinery, chemicals, plastics, instruments, components, metal products
and
transport equipments. Over this period, capital goods production grew at an
average
of 6.5 percent annually, while basic and intermediate goods grew at an
average of
4 percent and 5.9 percent respectively. Production of consumer goods grew
at an
average of 5.8 percent during the same period. During 2002-03, capital
goods and
consumer goods grew the fastest, at average rates of 10.5 percent and 7.1
percent
respectively.

Currency
India’s monetary unit is the Indian rupee (Rs). Under the Constitution of
India,
only the Central Government may legislate matters relating to currency and
coinage.

32
The RBI is the sole authority empowered to issue currency in India. RBI notes
are
fully backed by approved security, including bullion, foreign securities, rupee
coins and rupee securities of the Indian government. The Indian rupee is
divided into 100 paise. The denomination of currency notes and coins used
are Rs 1,000, Rs 500, Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2 and Re 1.

Leading Industries

India has built a diverse industrial sector, which is currently one of the largest in
the developing world. The major industries are automobiles and auto ancillaries,
iron and steel, aluminum, textiles and garments, pharmaceuticals, chemicals and
petrochemicals, oil and gas and other hydrocarbons, electricity, telecommunications,
information technology and business processing outsourcing services, healthcare
and biotechnology. The country is fast emerging as a leading sourcing base for
global players in auto and auto ancillaries, pharmaceuticals, IT and business process
outsourcing services, research and development services and engineering services.
Since the commencement of economic reforms in 1991, successive Governments
have implemented strong measures to liberalize the business environment and
boost industrial growth. The elimination of licensing requirements for all but six
industries has ushered in an era of competition and imparted dynamism to the
industry. Substantial reduction in import tariffs on raw materials and intermediate
products, coupled with rationalization of excise duties, have eased access to inputs
and reduced costs. Forward-looking export-import policies have enhanced the
competitiveness of the country’s exports, and created an environment conducive
to rapid growth in exports. In order to enable industry to imbibe state-of-the-art
technology and global best practices, the Government has been welcoming FDI
and foreign collaborations; FDI limits in almost all industries have been

33
progressively liberalized and approval procedures simplified. In addition, public
sector enterprise reforms have received a strong fillip during the last three to four
years, with the earlier disinvestment process being replaced by definitive
privatization through the sale of enterprises to strategic investors to place them on
the path of profitability and long-term growth. Lastly, the Government of India and
several State Governments are in the process of investing significantly in sprucing
up the country’s infrastructure – roads, seaports, airports, electricity and
telecommunications – to enable the country realize its growth potential.

Energy, Chemicals and Utilities

Oil and Natural Gas

India is the sixth largest consumer of primary energy in the world. Over the years,
the country’s primary energy consumption has grown at a rate faster than that of
the world. The principal driver of this growth has been growth of the Indian
economy. Crude oil import requirement is expected to reach 190 million metric tonnes
perannum by 2011-12. The requirement of additional refining capacity is pegged at 40
million tonnes per annum by the year 2010 to meet domestic consumption. Further,
extensive oil and gas distribution infrastructure such as cross country pipelines, port
terminals, and strategic reserves are also required to be developed to meet with the
projected energy requirements.

On supply side, the scenario seems encouraging with new oil and gas discoveries
by companies such as Cairn and Reliance. The country is expected to witness
many more discoveries in the near future with the opening of new blocks in deep
water, shallow offshore and onland areas through the National Exploration Licensing
Policy (NELP) of the Government. Under NELP, the Government has completely
revamped its policy of awarding blocks and has come out with attractive terms for
private investors. The Government has also delivered on its commitment to award
blocks and sign contracts in a speedy manner. Discoveries particularly in the Krishna-

34
Godavari basin have been amongst the largest made anywhere in the world during the
year 2002.

Power

The country’s power industry essentially comprises utilities owned by Governments both
at the Federal and the State levels and those owned by the private sector. Initially, the
power sector was under the complete control of power ministries of the State
Governments. This control was later extended to the Federal Government. The Federal
Government undertakes both generation and distribution activities. Distribution is
undertaken through a number of the Government owned generators while
transmission activities are carried out through the Power Grid Corporation of India.
The involvement of the State Governments in the power industry is through the
State Electricity Boards (SEBs). The private sector is comparatively small and operates
approximately 11 percent of the country’s total capacity. Tata Power and Reliance
Energy are the key players in the private sector. Private companies have a small
presence in distribution and operate only in six states.

Mining

With its abundance of natural resources, to which minerals hold particular

importance, India produces 4 fuel minerals, 11 metallic minerals, 52 non-metallic
and 22 minor minerals, a total of 89 mineral products. The total value of mineral
production was approximately US $11.902 billion in 2001-02, of which the value of
minerals other than petroleum and natural gas was around US $6.716 billion. The
metallic production is accounted for by iron-ore, copperore, chromate, zinc
concentrates, gold, manganese ore, bauxite and lead concentrates. Amongst the non-
metallic minerals, more than 90 percent of the aggregate value is shared by limestone,
magnesite, dolomite, barytes, kaolin, gypsum, apatite and phosphorite, steatite and
fluorite.
FDI is allowed in the mining sector and most proposals for FDI in the mining sector

35
are eligible for investment without obtaining the Government permission, provided
the prescribed ceiling are adhered to.

Technology, Communications and Entertainment

Information Technology

The Information Technology (IT) industry in India comprises, software services,

manufacture and trading of computers and computer peripherals and IT enabled
services (ITES). India’s IT industry is amongst its fastest growing industries and
it grew at the rate of 17 percent during 2003, recording revenues of Rs 7.93 billion.
In fact, during the period 1999-02, the Indian IT industry recorded a compounded
annual growth rate (CAGR) of more than 40 percent, which is approximately double
the growth rate of IT industries in many of the developed countries.

The key driver for this growth has been the increase in revenues from software
services. The share of software services in the overall IT industry in India has
been increasing continuously, growing from 42.11 percent in 1995 to more than 75
percent in 2003.

The Government has from nascent stage recognized IT as an important vehicle in

the development of the country. According to a World Bank study, India is the
preferred location for software vendors for its quality and cost. In view of the
advantages and opportunities that exist in India with respect to the IT industry,
many leading IT multinationals have set up operations in India. These include
Microsoft, Novell, Oracle, Sun Microsystems, Dell Computers, IBM, Unisys, SAP,
Adobe, Cadence, Computer Associates, Motorola, Digital, HP and Texas
Instruments.

The hardware industry in India has largely catered to the needs of domestic
consumers, with marginal exports. The domestic hardware industry has focused

36
attention on producing and developing low-cost computing solutions including
personal computers. Major players in this sector include foreign players like IBM,
Dell, HP / Compaq, Acer, Apple etc and Indian players such as Zenith and HCL.
Given the availability of relatively cheap and high quality human resources, the
second largest English speaking population in the world and its location in a
convenient time zone, India offers excellent opportunities for outsourcing. In fact
the Indian ITES sector is dominated by the captive back office operations of large
multinational companies.

The following facts emphasize the ITES outsourcing opportunities that exist in
India:

 According to a recent Merrill Lynch survey, 46 percent of the US Fortune 500

companies have expressed the view that they will look to India for outsourcing.

 According to NASSCOM-McKinsey report, the revenues from IT enabled

services have increased by 70 percent to Rs 4.1 billion in 2000-01 as compared
to Rs 2.4 billion in 1999-00, providing employment to over 70,000 people.

 According to International management consultancy major, Jones Lang

LaSalle, India has the lowest average wage rates of US $33.75 per week in the
call center industry compared to the US $400 per week in USA and US $470
per week in Australia.

 Leading companies such as GE, American Express, HSBC, Royal and Sun
Alliance, Le Meridian, Air Infotech, British Airways and iDLX have established
shared services centers in India.

The Government has resolved to make India a global IT power and a front-runner
in the age of Information Revolution. In keeping with its commitment to governance,

37
it is expected that operations such as provident fund, pension, pay and accounts offices,
passports, income-tax, customs and central excise shall be fully computerized.

Telecommunications

The telecom industry is one of India’s fastest growing industries and comprises
fixed line and mobile telephony. In 2002-03, total number of new telephone
connections was 8.94 million, of which 2.68 million were basic services connections
(including wireless in local loop mobile) and 6.26 million were cellular services
connections. Fixed line telephony comprises three distinct market segments, local i.e.
basic services, national long distance (NLD) and international long distance (ILD).
Historically, the basic services sector was the monopoly of the state owned/
controlled operators such as Bharat Sanchar Nigam Limited (BSNL), Mahanagar
Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL).
However, subsequent to the Government introducing liberalization policies, the
segment is now equally represented by private players such as Reliance Telecom,
Bharti Telenet and Tata Teleservices. Services can be provided by telecom operators
by building and utilizing their own network facilities or using built up networks of
‘infrastructure providers’, a separate license category. NLD services have traditionally
been provided by BSNL and MTNL. Reliance, VSNL and Bharti are the new entrants in
the sector. Historically, ILD was the exclusive domain of the partially state owned
carrier, VSNL. However, the Government terminated VSNL’s monopoly over ILD
services with effect from 31 March 2002.
.
The Indian mobile telephony segment, presently is experiencing robust growth
which is witnessed by a manifold increase in subscriber base, penetration into
rural markets, etc. The operators in this segment operate mainly on the GSM and
CDMA platforms. The key players operating on the GSM platform include Bharti,
Hutchison, BSNL, Idea Cellular and BPL Mobile while Reliance and Tatas dominate
the CDMA market.

38
A very recent development in the Indian telecom industry is the unified license
regime proposed by TRAI. In its proposal, TRAI has recommended the Government
introduce the unified license that permits free, unrestricted entry to all segments of
the Indian telecom industry. This proposal has been cleared by the Group of
Ministers and is expected to be finalized in the near future.

Entertainment

The Indian entertainment industry has outperformed the Indian economy and is
one of the fastest growing sectors in India. The current size of the industry as a
whole is estimated at Rs 166 billion and is expected to grow at a CAGR of 20
percent to Rs 419 billion by 2007. Currently, there are 35 companies in the industry
that are listed on the Indian stock exchanges. The Indian entertainment industry can be
broadly categorized into films, television, television software, music, radio and live
entertainment and event management.

Films. The immense popularity of films as a source of entertainment and vast

cultural diversity of the Indian population has been instrumental in making India
the largest producer of films in the world. This segment is poised to grow at an
impressive rate in the future, driven primarily by expansion in exhibition infrastructure
and development of multiplexes, availability of finance from institutional sources,
exports of film and animation software, etc. It is expected that revenues of this sector
will touch Rs 93 billion by 2007 at an approximate CAGR of 15 percent.

Television. There has been a rapid growth in television penetration and the number
of television channels with the entry of private television channels in the early
1990s. Currently, television reaches 40 percent of the total population, 78.7 percent
of the urban population and 39.8 percent of the rural population, according to the
findings of the National Readership Survey 2001 (NRS 2001). From a near zero base in
the early 1990s, the number of cable television households have grown at a scorching

39
pace to a current estimate of 41.5 million. Today, India is the third largest country after
USA and China in terms of number of cable viewers. Further, it is expected that the
industry would grow to a size of approximately Rs 70 billion by 2005.

In order to bring transparency in the cable television industry, the Government has
introduced Conditional Access System (CAS), which essentially stipulates that all
pay channels shall be routed through an addressable system.

Direct to home (DTH) television is expected to make a beginning in India soon and
more players are expected to enter this segment shortly. DTH has the potential to
penetrate remote areas where television viewing was not possible due to absence
of last mile access.

Television software. Television software has been witnessing growth since 1985
when the national channel Doordarshan decided to go for commissioned and
sponsored programmes. The subsequent meteoric rise in the number of private
channels, especially regional channels, resulted in a burgeoning demand for
television content.

Music. The Indian music industry is characterized by dominance of Hindi film

music, capital intensiveness and generation preferences. The current industry
size is estimated to be Rs 10.4 billion in revenues with future growth potential of
Rs 16.4 billion by 2007. This industry is currently undergoing a phase of gradual
reinvention with increased focus on development of non-Hindi film music segment,
market and product expansion and organized music retailing.

Radio. The radio industry in India can be segmented into Medium Wave (MW),
Short Wave (SW) and Frequency Module (FM) based on the frequency of the
stations. In its entirety, radio broadcasting reaches to 99 percent of the Indian
population and is also the most cost effective mass medium. Despite advancement in
television broadcasting, radio continues to be an important and in some places, the sole

40
source of entertainment. Recently, the radio segment has witnessed a jump in listener
ship with the launch of new FM radio stations in the metros pursuant to the privatization
of FM radio. Radio currently accounts for approximately 1.9 percent of the total ad
spend and this share is expected to grow further. The market size is projected to grow
to Rs 6.2 billion by 2007 from the existing size of about Rs 1.6 billion

Live entertainment and event management. Event management in India, which

was born somewhere in the mid-1980s, has grown into a highly professional and
tech-savvy industry over the years. In 2001, the industry managed over 1,000
events, including 22 international events. According to industry sources, while the
industry as a whole is expected to grow at approximately 50 percent per annum, the live
entertainment sector is expected to witness growth in the region of 25 percent to 30
percent per annum.

Financial Services

India’s financial services sector is in a process of rapid transformation and reforms

are continuing as part of the overall structural reforms aimed at improving the
productivity and efficiency of the economy. The financial services industry can be
broadly divided into banking, capital markets (asset management / mutual funds
and portfolio investors), insurance companies and non-banking financial
intermediaries / institutions.

Non Banking Financial Institutions

Non-Bank Finance Companies (NBFCs) NBFCs provide loans and hire purchase
finance, mostly for retail assets. NBFCs are required to be registered with RBI,
which has extensive supervisory and regulatory powers over NBFCs.

41
Housing Finance Companies (HFCs) As the name suggests, the primary objective of
these companies is to extend finance to the public for housing purposes. The sector
was earlier dominated by Housing Development Financial Corporation (HDFC), which
had a 66 percent share in 1998. However, large banks have rapidly gained market
share in the last two years reducing HDFC’s share to an estimated 42 percent in 2002.

Credit Rating Agencies The following entities rate corporate debt, including
debentures and commercial paper: CRISIL, India’s first credit rating agency, ICRA; and
CARE. They also rate the credit risk of companies; a factor often used by nationalized
banks in evaluating loan applications.

Other aspects of the financial services industry

Key Stock Exchanges

India has 23 recognized stock exchanges, which operate under government-approved
rules, bylaws and regulations. These exchanges constitute an organized market for
securities issued by the Central and State governments, public sector companies and
public limited companies. India has modernized the operations of its stock exchanges
through the introduction of screen-based trading.
The Stock Exchange, Mumbai (BSE) (earlier known as Bombay Stock Exchange)
was hitherto India’s premier stock exchange. However, the National Stock Exchange
(NSE), which commenced operations in 1994, and which provides nation-wide
trading facilities to investors through an established nationwide information technology
network, now executes a higher proportion of trades transacted on stock exchanges.

Retail Industry

Organized retailing is a decade old industry in India with an overall market share of
2 percent. Currently, the estimated total sales of organized retailers are Rs.175
billion. The sector has witnessed robust growth during the last two years which
could mainly be attributed to the establishment of international quality formats

42
modified to suit the Indian purchase behavior; entry of several domestic and
international players; development of retail-specific properties; improvement in
retail processes and turnaround in operations of some existing retailers.This growth in
organized retail is being driven by a number of structural, social, and demographic and
macroeconomic factors as well. The increasing globalization of the Indian economy has
led to growing exposure to foreign markets resulting in increasing demand for
international shopping experience in India.

The Indian retailing industry has been witnessing some exciting developments.
Some of such key developments are as follows:

 Emergence of Region-Specific Formats

 Emergence of Discount Formats
 Entry of International Players
 Development of malls
 Improvement in Retail Operating Efficiencies
 Improving Profitability and Retail Revenues

Major retail players having prominence in the organized retail market include
Shopper’s Stop Limited, Pantaloon Retail (India) Limited, Trent Limited etc. The
retail industry is poised for expansive growth over the next few years. The industry
is in an investment mode and requires substantial funds for expansion and growth.

Health Sciences

The health sciences industry comprises of the following segments:

• Drugs and Pharmaceuticals;

• Biotechnology;
• Heathcare;

43
 • Information Management companies;
• Pure Research and Development (R&D) companies;
• Contract Research Organisations; and
• Medical equipment suppliers.

Drugs and Pharmaceuticals

In terms of volume, India is the fifth largest pharma market in the world. However, owing
to the relatively lower prices of drugs in India, it is ranked only thirteenth in value terms.
Pharma exports have recorded a CAGR of 21 percent during the last five years. In
addition, over the next five years, exports are expected to grow at a CAGR of 23
percent. India being a signatory to the GATT is committed to honor global product
patents from 2005. Hence, it is likely that multinational pharma companies may
introduce their latest products into the Indian market thereafter. Going forward, Indian
pharma companies are well positioned to exploit the US $80 billion global generics
market created by several blockbuster drugs going off patent in the next five years.
The domestic pharma market is expected to grow at a CAGR of 9.7 percent over the
next five years owing to an increase in population, higher purchasing power, pruning of
the number of drugs under price control, and introduction of new drugs by multinational
companies. The Indian pharma industry consists of both multinational as well as
domestic players. Major MNCs present in this sector include, Glaxo Smithkline, Pfizer,
Novartis, Aventis and Merck. Major Indian companies present in this sector include
Cipla, Ranbaxy, Nicholas Piramal, Sun Pharma, Dr Reddy’s, Wokhardt, Torrent Pharma
and Lupin.

The primary strengths of Indian companies are a large pool of highly qualiied and
experienced scientists with immense knowledge of chemistry, excellent
manufacturing facilities recognized by the US FDA and other international
counterparts. Increasingly, global pharma companies are regarding India as a
manufacturing base. India is also an attractive market for contract research
organisations, on account of its cost effective capabilities.

44
Biotechnology

The Indian biotech industry comprises of human and animal biotech, agriculture
biotech (including seeds), industrial biotech and bioinformatics. During the last five
years, activity in modern biotechnology such as genetic engineering, immunological
techniques, cell culture methods, hybridoma technology has intensified. The
Government has been increasing the budgetary outlays for biotechnology from just Rs
404 million in 1987-88 to Rs 2,356 million in 2002-03. Several states such as
Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Delhi and Kerala have taken
initiatives to encourage entrepreneurs to set up biotech industries. Some of the key
initiatives include announcement of separate biotech policies, setting up of biotech
parks, and setting up of expert task forces for guidance on policy issues. India is taking
steps to rationalize its policies to be in conformity with provisions of the WTO.

Agricultural biotechnology promises to be an important business segment. There

are sizeable opportunities for foreign bioscience companies seeking research and
business alliances with Indian companies. India offers a huge market for agribiotech
products as the country’s economy is substantially dependent on agriculture.
India is expected to gain leadership in bioinformatics owing to its large resource
pool of molecular biologists, statisticians and software programmers. The global
bioinformatics market is around US $2 billion, which is expected to grow to US $60
billion by 2005. According to experts, India is well placed to garner a 5 percent
share of this global market.
There is an increasing trend to outsource low cost R&D functions by MNCs. This
represents a tremendous opportunity for Indian companies to carry out contract
research for overseas companies. The current global spend on outsourced R&D
is an estimated US $7 billion, which is expected to grow at 30 percent per annum
over the next five years

Healthcare

45
The healthcare industry includes medical care providers – physicians, specialist
clinics, nursing homes, hospitals, medical diagnostic centers, and pathology
laboratories.The size of India’s healthcare industry is currently an estimated Rs 4,860
billion,which is roughly 5.2 percent of the country’s GDP.

Demand for healthcare is expected to see explosive growth with rise in life-style
diseases such as cardio-vascular disorders and cancer. According to the National
Health Policy 2002, an increased fund allocation for the industry is envisaged in the next
few years Government spending is expected to go up to 2 percent of the GDP by 2005
and 6 percent of the GDP by 2010.

Information Management companies

Information Management companies are information driven organizations that

provide non-technical support to organizations in the healthcare industry. Typically,
their services include providing customer companies with information on the
efficacy of marketing initiatives undertaken, efficacy of medical facility,
administration and deliveries, etc. Currently, MNCs such as IMH and Battaerd
Mansley have a presence in the information management segment in India. As the
healthcare industry grows, one could expect tremendous demand for such niche
services.

Infrastructure

Roads

India has an extensive road network of more than 3.3 million kilometers making it
one of the largest in the world. Roads occupy an eminent position in transportation
as they carry an estimated 70 percent of freight and 85 percent of passenger traffic

46
in the country. Traffic in road is growing at 7 to 10 percent annually while vehicle
population has been growing, during the past few years, at around 12 percent
annually. The Government has formulated several policy initiatives to
attract private investment. Till date, 34 projects have been taken up by the private
sector and an investment of Rs 60 billion has been committed by them. 18 such projects
have been completed and toll is being collected by them.

Ports

India has about 13 major ports and 184 operable minor and intermediate ports (of
which 139 are operable) along the 5,560 kilometers long Indian coastline. Major
ports handled around 75 percent of the country’s port traffic a total traffic of 313
million tonnes during the year 2002-03.

With the entry of private sector into port operations, the power to fix and revise tariffs
has been entrusted to an independent authority, the Tariff Authority for Major Ports.

Foreign equity upto 100 percent is permitted in construction and maintenance of

ports and harbors and in projects providing support services to water transport,
such as operation and maintenance of piers, loading and discharging of vehicles
without requirement of an approval.

Civil Aviation

India is one of the fastest growing markets in the world in both passenger and
cargo traffic. India has world-class international and domestic airports (shared
with defense).
Currently there are 7 scheduled private operators and 22 non-scheduled operators
operating these services. Private operators cater to 52.6 percent of the domestic air
traffic. With growing tourism & commercial activity India is sure to see a boom in civil
aviation.

47
Investment Climate and Foreign Trade

Foreign Investment Framework

The Foreign Direct Investment (FDI) regime has been progressively liberalized
during the course of the 1990s (particularly after 1996). Most restrictions on foreign
investment have been removed and the procedures have been simplified. With
very limited exceptions, foreigners can invest directly in India, either wholly or as
a joint venture. Today, there are very few industries wherein foreign investment is
prohibited. It is allowed in virtually all sectors, subject to Government permission in
certain cases. Moreover, investment ceilings, which are applicable in certain cases, are
gradually being removed.

Foreign Investment Policy

India’s economic policies are designed to attract significant capital inflows into
India on a sustained basis and to encourage technology collaborations between
Indian and foreign entities. Policy initiatives taken over the last few years have
resulted in inflows of foreign investment in diverse sectors of the economy.
India welcomes FDI in virtually every sector, except those of strategic concern
such as defense (opened up recently to a limited extent), railway transport and
atomic energy and where the existing and notified sectoral policy does not permit
FDI beyond a certain ceiling.

Economic Policies and Incentives for Foreign Investment

Following are the select notable features of the foreign investment policies and
incentives:

48
 • No Government approval required for FDI in virtually all the sectors / activities,
except a small negative list notified by the Government.
• Decisions on all foreign investment proposals are usually taken within 30
days of application.
• Free repatriation of capital investment and profits thereon is permitted, provided
the original investment was made in convertible foreign exchange.
• Indian capital markets are open to foreign institutional investors.
• Indian companies are permitted to raise funds from international capital markets.
• Special investment and tax incentives are given for exports and sectors such
as power, electronics, software and food processing.
• Single window’ clearance facilities and ‘investor escort services’ have been
provided in various states to simplify the approval process for new ventures.

Foreign Direct Investment

In pursuance of the Government’s commitment for implementation of the

economic reforms and with a view to further unshackle Indian industry from the rigors of
approvals and controls, the Government of India permits FDI on an automatic basis,
except with respect to a small negative list.

Country Wise Share in Approvals

The diagram below shows the country-wise break up of FDI approvals during the
period April 1991 to December 2002. United States and Mauritius have contributed
the maximum to the country’s aggregate FDI inflows followed by United Kingdom,
Japan and South Korea.

49
Foreign Portfolio Investment

Besides direct investment in India, nonresidents can also make portfolio

investments. Foreign institutional investors (FIIs) are allowed to invest in the
primary and secondary capital markets in India under the Portfolio Investment
Scheme (PIS). FIIs must register themselves with SEBI and comply with the exchange
control regulations of the RBI. Foreign pension funds, mutual funds, investment trusts,
asset management companies, nominee companies and incorporated / institutional
portfolio managers or their power of attorney holders are allowed to invest in India as
FIIs. They may invest in securities traded in both the primary and secondary markets.
These securities include shares, debentures, warrants, and units of mutual funds,
Government securities and derivative instruments. No permissions are required from
the RBI so long as the FIIs purchase and sell on a recognized Indian stock exchange.
The FIIs can invest either their own proprietary funds or the funds of their clients.

50
Investment in Export Trading Companies

Trading is permitted under automatic route with FDI up to 51 percent provided it is

primarily export activities, and the undertaking is an export house / trading house
/ super trading house / star trading house. In addition to the Automatic Route, 100
percent FDI is permitted under the Government Route for trading activities involving:

• Exports;
• Bulk imports with ex-port / ex-bonded warehouse sales;
• Cash and carry wholesale trading; and
• Other import of goods or services provided at least 75 percent is for
procurement and sale of goods and services among the companies of the
same group and not for third party use or onward transfer / distribution /
sales.

Foreign Investment Promotion Board

The FIPB is a specially empowered board chaired by the Secretary, MoF, set up
specifically for expediting the approval process for foreign investment proposals.
The FIPB has flexibility to examine all proposals in totality, free from predetermined
parameters or procedures. Its approach is liberal for all sectors and all types of
proposals. While applications are subject to stages of negotiations, it is important
for the investors to convince the FIPB on the benefits to the Indian economy from
the project. Some of the other parameters that the FIPB considers while evaluating
proposals are the levels of investment proposed, the technology to be inducted,
the export potential or the import substitution factors and employment potential.

51
Foreign Exchange Controls

Foreign Exchange Policy

India’s journey on the exchange control front is one well traveled. Since 1991, the
country’s foreign exchange reserves have surged from US $2 billion to
approximately US$ 100 billion in March 2004. This achievement has been well
supported by an increasingly liberalized exchange control policy of the Government.
The Foreign Exchange Management Act, 1999 (FEMA) virtually provides for full
convertibility on capital and current account transactions for nonresidents.

The key changes under FEMA relate to the removal of rigid and stringent controls
over transactions with nonresidents. With the introduction of FEMA, the objective
of the Government has shifted from the conservation of foreign exchange to
promoting an orderly development and maintenance of the foreign exchange market
in India.

External Commercial Borrowings (ECB)

Debts raised in foreign currency fall within the purview of the definition of ECBs,
and are regulated by the MoF and the RBI. The guidelines issued by the MoF have
prescribed various schemes through the use of which corporates and institutions
may raise ECBs. Indian corporates are permitted by the Central Government to raise
ECBs for the purposes of expanding their existing capacity and for infusing fresh
investments into their venture. In general, foreign loans raised by Indian corporates are
subject to regulations on inter-alia period of maturity of loan, interest rate and end use
restrictions, depending on the quantum of the loan.

52
Economic Laws and Regulations

Economic laws and regulations include Indian Contract Act, 1872, intellectual
property rights protection, labor laws, anti trust regulations, consumer protection
act, arbitration and company law

Indian Contract Act, 1872

The Indian law of contract is based on common law principles of contract, and is
codified as the Indian Contract Act in 1872 (ICA). Through subsequent amendments,
the provisions concerning certain specific forms of contract including contract of
partnership, contract of carriage and contract for sale of goods were removed from the
ICA and enacted into separate legislation.

Today, the Act includes the following general principles of contract:

• the formation of a contract;
• competence of contracting parties;
• validity of a contract;
• breach of contract; and
• damages.

Intellectual Property Rights Protection

The term ‘Intellectual Property’, in the international legal parlance covers patents,
industrial designs, copyrights, trademarks, know-how and confidential information.
The laws relating to Intellectual Property in India are still undergoing changes and
are in the process of being harmonized with corresponding laws in developed
countries. As a signatory to GATT and TRIPS agreements in the capacity of a member
of WTO, India is required to lay down minimum norms and standards with respect to
following areas of intellectual property:

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 • Copyrights and other related rights
• Trademarks
• Patents

Copyright Act, 1957

India’s copyright law, laid down in the Indian Copyright Act, 1957 as amended by
Copyright (Amendment) Act, 1999, fully reflects the Berne Convention on
Copyrights, to which India is a party. India is also an active member of the World
Intellectual Property Organization (WIPO), Geneva. The law of copyright in India has
been amended from time to time to keep pace with changing requirements. The
amendments made to the copyright law from time to time, have ushered in
comprehensive changes and brought the copyright law in line with the new
developments in satellite broadcasting, computer software and digital technology.

Trademarks

A ‘Trademark’ may consist of a word or invented word, signature, device, letter,

numeral, brand, heading, label, name written in a particular style, the shape of
goods other than those for which a mark is proposed, or any combination thereof
of one undertaking from that of other undertakings. Such distinguishing marks
constitute matter subject to protection under the provisions of the Trade Related
Intellectual Property Rights (TRIPS) Agreement. The Trademarks Act also provides for
the procedure of assignment and transmission of trademarks.

Patents

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The Indian Patents Act, 1970 provides for the grant, revocation, registration, license,
assignment and infringement of patents in India. A patent is a monopoly right
granted to a person who has invented a new and useful article or an improvement
of an existing article or a new process of making an article. Following is a list
containing the concept of patent and its essential ingredients.
• Novelty;
• Inventiveness; and
• Industrial Applications
Any infringement of patent is punishable under the terms of this Act. To harmonize the
law pertaining to patents and other form of intellectual property and to fulfill its
obligations under the WTO agreement, India has become an active party to the
International Convention for the Protection of Industrial Property (Paris Convention),
GATT and TRIPS agreements.

Labor Laws

India is a member of the International Labor Organization and complies with

conventions that it has ratified. It has enacted comprehensive legislation to provide
a good working environment for labor and to protect their interests. The Government
continuously reviews various labor laws to keep them in line with changing
circumstances. These laws address various issues such as resolution of industrial
disputes, working conditions, labor compensation and insurance.

The various labor laws applicable to employers in India have been outlined.

Employees Provident Fund and Miscellaneous Provisions Act, 1952

The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPFMPA)
seeks to provide financial security for employees in an establishment by providing
a system of compulsory savings. The EPFMA provides that the employee’s
contribution shall be at least equal to the contribution payable by the employer in

55
respect of him. However, the employee is entitled to contribute more than such
minimum contribution, if he so desires.

Industrial Disputes Act, 1947

The Industrial Disputes Act, 1947 (IDA) provides for investigation and settlement
of industrial disputes or certain other matters in an industrial establishment relating
to lockouts, lay-offs and retrenchment etc. It provides the machinery for conciliation
and adjudication of disputes or differences between employees and employers
and vice versa, between workman and workman and between employer and
employer. The IDA applies to any ‘Industrial establishments or undertaking’, which
means an establishment or undertaking in which an industry is carried on.

Payment of Bonus Act, 1965

The Payment of Bonus Act, 1965 (PBA) provides for the payment of bonus to
persons employed in certain establishments on the basis of profits or on the basis
of production or productivity and for matters connected therewith.
The PBA is applicable to factories and establishments employing 20 or more persons
on any day during an accounting year. The Government has been empowered to
extend its provisions to any other establishments employing ten or more employees.
The PBA is applicable to persons, other than apprentices, employed on a salary or
wage not exceeding Rs 3,500 per month, in any industry, to do any skilled or
unskilled, manual, supervisory, managerial, or administrative work etc., whether
the terms of employment are express or implied.

Payment of Gratuity Act, 1972

The Payment of Gratuity Act, 1972 (PGA) provides for a scheme for the payment of
gratuity to all employees engaged in factories, mines, oilfields, plantations, ports,
railway companies, shops and other establishments employing 10 or more

56
employees in the preceding twelve months.

The PGA is applicable to all employees employed on wages to do any skilled,

semiskilled, or unskilled, manual, supervisory, technical or clerical work, whether the
terms of such employment are express or implied and whether or not such person
is employed in a managerial or administrative capacity.

Workmen’s Compensation Act, 1923

The object of the Workmen’s Compensation Act, 1923 (WCA) is to compensate an

employee for any injury suffered during the course of his employment.
The WCA is applicable to provide for the payment of compensation by certain
classes of employers to their workmen (as defined under the WCA).

The Industrial Employment (Standing Orders) Act, 1946

The Industrial Employment (Standing Orders) Act, 1946 (IEA) seeks to require
employers in industrial establishments to provide for conditions of employment
for employees. The IEA requires the employer to clearly define the conditions of
employment to its workers by issuing standing orders / service rules relating to the
matters set out in the Schedule of the IEA.

The Minimum Wages Act, 1948

The Minimum Wages Act, 1948 (MWA) seeks to determine the minimum rates of
wages in certain employments specified in the Schedule of the Act. The MWA
applies to any person who is employed for hire or reward to do any work in a
scheduled employment and includes an outdoor worker to whom any articles or
materials are given for doing some work either at home or at any other premises.

The Payment of Wages Act, 1936

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The Payment of Wages Act, 1936 (PWA) seeks to regulate the payment of wages
to certain classes of employed in an industry. It seeks to ensure that the wages
payable to the employees covered under the PWA are disbursed by the employers
within the prescribed time limit and that no deductions other than those authorized
by law are made by the employers.

Anti-Trust Regulations
The antitrust laws are designed to preserve the free enterprise of the open
marketplace by making illegal certain private conspiracies and combinations formed
to minimize competition. Most violations of antitrust laws involve either price fixing
(entities conspiring to set fixed market prices / rates) or unfair allocation of
customers or markets (entities agreeing to limit their units / areas of trade).
In line with global norms and to prevent monopolies from creating restraints on trade or
commerce and reducing competition in India, the Government of India has evolved an
antitrust regulatory framework that revolves principally around the following legislations:

• Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), which is
in the process of being replaced by the Competition Act, 2002 (No. XII of
2003) (Competition Act);
• Consumer Protection Act, 1986 (CP Act); and
• Certain provisions under the Companies Act, 1956

These laws are designed to maintain economic liberty and to eliminate any unfair
restraints on trade and competition. The following are salient features of each of
the above legislations.

Monopolies and Restrictive Trade Practices Act, 1969

The Competition Act received the assent of the President of India on 13 January
2003 and was published in the Gazette of India on 14 January 2003. The Act intends

58
to repeal the MRTP Act. However, as of date, except for certain provisions relating
to the formation and establishment of the Competition Commission of India (CCI)
and selection of the Chairman and members of the CCI, no substantive provision of the
Act is in force and the same would come into force as and when notified by the Central
Government. The MRTP Act is still in force.
The MRTP Act governs the activities / practices of all ‘undertakings’, however not
including Government undertaking in India. It encompasses within its ambit,
essentially the following types of prohibited trade practices, namely, ‘Restrictive
Trade Practice’, ‘Unfair Trade Practice’ and ‘Monopolistic Trade Practice’:

Competition Act

The Competition Act, which seeks to replace the MRTP Act, has been enacted
with a view to promoting and sustaining competition in markets in India. The
Competition Act seeks to achieve the following objectives:
• To promote and sustain competition in markets.
• To protect the interest of consumers.
• To ensure freedom of trade.
• To provide for the establishment of the Competition Commission of India.
The major provisions of the Competition Act relate to the following areas:
• Prohibition of Anti-Competitive Agreements
• Prohibition of Abuse of Dominant Position
• Regulation of Combinations

Consumer Protection Act

The Consumer Protection (CP) Act is a legislation, which has been enacted for
protection of consumer interest and for that purpose to provide for the establishment
of consumer councils and other authorities to settle consumer disputes.
The CP Act aims to regulate the activities of a ‘manufacturer’ or ‘Service’ provider
to ensure that the consumer does not suffer from defective goods and / or deficiency

59
of services.

Arbitration

The Arbitration and Conciliation Act, 1996 has been enacted to replace three
previous laws dealing with various aspects of arbitration. This Act is essentially
based on the Model Law on International Commercial Arbitration adopted by the
United Nations Commission on International Trade Law (UNCITRAL) in 1985. It
has consolidated into one statute, the law relating to domestic arbitration,
international commercial arbitration, enforcement of foreign arbitral awards and
conciliation. It allows the contracting parties to decide upon the venue / place and
procedure of the arbitration proceeding.

Special Investment Considerations

Special Economic Zones (SEZs)

Facts
The Exim Policy provides for setting up of SEZs in the country with a view to
provide an internationally competitive and hassle free environment for exports.
Units may be set up in an SEZ for manufacture, trading, re-conditioning and repair
or for services activity. Units in the SEZs have to be net foreign exchange earners
but are not subject to any pre-determined value addition or minimum export
performance requirements. The policy provides for setting up of SEZs in the public,
private, joint sector or by State Governments. The Central Government also converted

60
some of the existing EPZs into SEZs such as the EPZs at Kandla and Surat (Gujarat),
Santa Cruz (Maharashtra) and Cochin (Kerala) from 1 December 2003.
The Government till date has approved 21 locations for setting up of SEZs. Some
of the SEZs approved of set up are at Positra (Gujarat) in the private sector and by
the State Governments at Dronagiri (Maharashtra), Nanguneri (Tamil Nadu),
Kulpi (West Bengal), Paradeep (Orissa), Bhadohi, Kanpur and Greater Noida (Uttar
Pradesh), Kakinada (Andhra Pradesh), Indore (Madhya Pradesh) and Hassan
(Karnataka) on the basis of proposals received from the State Governments.

Incentives for Special Economic Zones Units

• No license required for import.

• Duty free import of capital goods, raw materials, consumables and spares.
• Profits from export of articles, things or computer software of a unit set up in
an SEZ, computed in accordance with a prescribed formula, are exempt from
income tax. The exemption is available for a maximum period of ten years. This
exemption, however, is available only till the financial year ending 31 March
2009.
• For all new SEZ units that have commenced production after 1 April 2002, 100
percent tax exemption would be available for five years, followed by a 50
percent deduction for further two years.
• Duty free procurement of capital goods, raw materials and consumable spares
from the domestic market.
• Manufacturing, trading or service activity allowed.
• Domestic sales on full custom duty subject to import policy in force.
• No fixed wastage norms.
• Full freedom for subcontracting.
• Subcontracting of part of production permitted abroad.
• No routine examination by customs of export and import cargo.
• Facility to realize and repatriate exports proceeds within 12 months.

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 • Facility to retain 100 percent of foreign exchange receipts in Export Earners
Foreign Currency Account.
• Duty free import / procurement from domestic tariff area of specified goods for
setting up of factory in the SEZ is permitted.
• SEZ trading units permitted to sell goods in the domestic tariff area in
accordance with the import policy in force.

State level incentives

Various incentives are offered by State Governments to encourage investment and

attract capital. These commonly take the form of investment incentives, power
tariff incentives and other fiscal benefits.

Investment Incentives This involves the state financing a certain percentage of the
fixed capital cost of a project. Various states have designate areas as ‘A’, ‘B’, and ‘C’
according to their level of development. The level of incentive provided by a state varies
and is generally larger for investments made in backward areas. Further, the terms and
ceiling of the incentives vary across states, depending on the nature of industry that the
state is trying to promote.

Power Tariff Incentives Power tariff incentives are extended by State Governments in
various ways, such as exemption from the payment of electricity duty, freeze on the
tariff charged for new units for a few years after commencement of production,
assurance of uninterrupted electricity supply, concessional rates of billing subject to
certain conditions and fiscal incentives for purchase and installation of captive power
generation sets.

Other incentives

Some states extend other incentives to small-scale units or priority industries as

defined in their industrial policy statements. An indicative list of such incentives

62
that may be offered is:
• Concessional rate of interest on loans granted by State Finance Corporations.
• Price preference on goods made by small-scale industries in purchases made
by government and semi-government organizations.
• Exemption from the payment of octroi (entry tax) for a certain specified period.
• Preferential allotment of land and sheds in industrial areas to small-scale
industries.
• Grant of interest free loans in lieu of deferred sales tax.

Major Trading Partners and Leading Imports and Exports

Trading Partners The United States has replaced the former Soviet Union as India’s
major export market. Japan is India’s largest trading partner in Asia and third largest
trading partner worldwide. Australia is a primary source for supplies of cooking coal,
pulses, wool and non-ferrous metals.

Foreign Trade Policy The new Export and Import Policy (EXIM) announced by the
Government seeks to complete the process of India’s integration with the global
economy by removal of quantitative restrictions and seeks to provide fresh direction to
exports by setting up Agricultural Export Zones and providing special benefits to SEZs.
The new EXIM policy is outward looking and liberal and is the logical conclusion to
India’s commitments under the WTO agreement.

Most goods are freely importable on payment of specified customs duty. A small
number of goods fall in the prohibited / restricted list of imports. Such restrictions
are generally on grounds of national security, health and environmental protection.
There are no quantitative restrictions on import of capital goods and intermediates.
Further, import of second hand capital goods older than 10 years is permitted only
against import licenses.

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Other Incentives
• Duty drawback available for imported raw materials for export production.
• Duty free import of raw materials possible for export production in specified
conditions.
• Concessional duty rate available for capital goods under the Export Promotion
Credit Guarantee Scheme.
• Imports from certain countries permissible at reduced rates.

Raw materials, intermediates and components meant for manufacture of goods for
export, can be imported duty free against an advance license. Input - output norms
have been laid down to determine the amount of duty free import of inputs allowed
for specified products to be exported. Issue of duty free license under this scheme
is subject to achievement of positive value-addition and export obligations.

Exports & Imports

Export of goods is allowed freely, except for few restricted items. Exports are the
major focus of India’s trade policy, and a thrust area in the new economic policy of
the country. The export promotion package compares favorably with incentives
offered anywhere in the world. It makes a special effort to attract foreign investors
to set up EOUs and units in SEZs.

Exports: US $52.37 billion (2002-03)

Principal Exports: Traditional exports include cotton yarn and textiles, readymade
garments, leather goods, gems and jewellery, and agricultural products.
However, information technology services, engineering products, and
chemicals and pharmaceuticals are rapidly growing export segments now.
Principal Markets for export: USA, Canada, UK, Germany, Japan, Italy, France,
Netherlands and Belgium in the OECD region, UAE and Saudi Arabia in the

64
OPEC region, Brazil and Mexico in the Latin American region, and China,
Hong Kong, Singapore, Bangladesh and Sri Lanka from the Asian region.

Imports: US $61.44 billion (2002-03)

Principal imports: Capital goods, crude petroleum and petroleum products,

gold, precious and semi-precious stones, chemicals, edible oils, electronic
goods and coal.
Principal Markets for import: USA, UK, Japan, Germany, Belgium and
Switzerland in the OECD region, Iran, Kuwait and Saudi Arabia in the OPEC
region, South Africa from the African region, China, Hong Kong, Malaysia,
South Korea, Singapore, Indonesia and Thailand in the Asian region and
Australia.

Tariff Liberalisation

The current trade policy is characterized by rationalized tariff levels and removal of
quantitative restrictions. There has been a consistent decline in the rates over the past 7
years, from peak rates of 350 percent in June 1991 to 35 percent in 2000-01. Most
capital goods imports attract a basic customs duty at the rate of 25 percent. Import
duties on equipment are lower for projects in specific sectors. The tariff structure is
favorable for companies wanting to import equipment to set up projects in the
infrastructure sector.
The Union Government has boosted the upbeat economic sentiment, and in an effort to
sustain the ‘feel good’ factor announced a set of significant customs and excise duty

65
reductions across all sectors. These changes have come into effect from January
2004. Specifically, the peak rate of basic customs duty has been reduced from 25% to
20% and the special additional duty (SAD) at 4% has been abolished. Significant excise
duty concessions have also been extended to sectors, prominent amongst which are
infrastructure, IT, telecom and electronics.

Companies
Forms of Enterprise
Following are the principal forms of business organization in India:
• Corporations both public and private
• Partnerships
• Sole proprietorships

Corporations incorporated in India and foreign corporations having presence in

India are regulated by the provisions of the Companies Act, 1956. The Companies
Act, 1956, has been enacted to oversee the functioning of corporations in
India. The registrar of companies and the Company Law Board, both working under the
Department of Company Affairs, have been entrusted with the responsibility to ensure
compliance with the provisions of the Companies Act, 1956.

Brief Description of Major Types of Corporate Forms

Corporations in India may be broadly classified into public sector and private
sector corporations.

Private Corporations
A private corporation incorporated under the Companies Act, 1956 has the following
characteristics:
• the right to transfer shares is restricted;

66
 • the maximum number of its shareholders is limited to 50 (excluding employees);
• no offer can be made to the public to subscribe to its shares and debentures;
and
• no invitation or acceptance of deposits from persons other than members,
directors or relatives is allowed.

Public Corporations

A public corporation is defined as one that is not a private corporation. A subsidiary

of a public corporation is also treated as a public corporation. A public corporation
is required to have a minimum paid up capital of Rs 0.5 million.

Foreign Corporations

Foreign corporations that are incorporated outside India but having presence in
India in the form of representative offices, project offices, branch offices, etc. are
also governed by the Companies Act, 1956, which contains special provisions for
regulating such entities.

Structures Typically Used by Foreign Investors

Foreign corporations conducting business in India may operate in various forms.

Common business structures employed by foreign investors in India are private
limited companies (mostly wholly owned subsidiaries of the foreign companies),
liaison offices, branches offices, and project offices. These business structures
are discussed in the following paragraphs:

Subsidiary Companies

67
Foreign corporations can set up their subsidiary companies (in the form of private
companies) in India. The subsidiary company, incorporated under the laws of India, is
treated as a domestic company for tax purposes. Following are some of the
features of a subsidiary company:
• Funding could be via equity, debt (both foreign and local) and internal accruals;
• Indian transfer pricing regulations shall apply; and
• No approval required for repatriation of dividends.

Branches

Foreign corporations engaged in manufacturing and trading activities abroad may

open branch offices to conduct business in India. The branch office can carry the
same or substantially the same activities as the ones carried on by the foreign
corporation overseas. For opening a branch office in India, foreign corporations require
a specific approval from the RBI. Such approval prescribes the activities that a branch
office may undertake in India. A branch office is also required to register itself with the
registrar of companies and comply with certain procedural formalities prescribed under
the Companies Act, 1956.

Representative Offices

Foreign corporations are permitted by RBI to open liaison offices in India for
undertaking liaison activities on its behalf. These offices act as a communication
channel between the foreign corporation and Indian customers. The setting up of a
liaison office in India is also subject to the conditions outlined in the permission granted
by RBI. The liaison office also requires registration with the registrar of companies.
The RBI permits liaison offices to undertake only specific activities in India.

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Project Offices

A foreign corporation, which has secured a contract from an Indian company to

execute a project in India, may establish a project office in India without obtaining
prior permission from the RBI. The exchange control norms also prescribe the
following additional requirements:
• the project should be funded directly by inward remittance from abroad; or
• the project should be funded by a bilateral or multilateral international financing
agency; or
• the project must be cleared by an appropriate authority; or
• the Indian company awarding the contract should have been granted a term
loan by a public financial institution or a bank in India for the project.
However, the foreign corporation would be required to furnish a prescribed report
to the concerned regional office of the RBI under whose jurisdiction the project
office is set up. Like a branch office, a project office is also treated as an extension of
the foreign corporation in India and taxed at the rate applicable to foreign corporations.

Taxes on Corporate Income

`
India has a well-developed tax structure, with the authority to levy taxes divided
between the Central Government and the State Governments. The Central
Government levies direct taxes such as personal income tax, corporate tax and
indirect taxes such as customs duty, excise duty, central sales tax and service tax.
The States are empowered to levy professional tax and state sales tax apart from
various other local taxes such as entry tax, octroi, etc. In the wake of economic reforms,
the tax system has undergone tremendous changes in the past eight to ten years. The
tax rates have been rationalized and compare favourably with most other countries.
Further, tax laws have also been simplified to ensure better compliance.

The Indian fiscal year begins on 1 April and ends on 31 March. A corporation’s tax

69
year also generally ends on the same date as the financial statement year-end. All
corporations are required to file tax returns by 31 October and must file them even
in the event of a loss. Nonresident corporations must file the Indian income tax
return if they carry on business in India or have any office in India or earn income
from any Indian source, asset, and property or business connection.

All corporations having Indian taxable income must register with their respective
jurisdictional tax authorities. Corporate tax liability is required to be estimated and
discharged by way of advance tax in four instalments on 15 June, 15 September, 15
December and 15 March during the tax year beginning on 1 April and ending on 31
March. The balance taxes, if any, must be paid on or before the date of filing the
return.

Corporations not adhering to due date of filing deadline are not permitted to carry
forward their net operating losses / revise their returns.

Corporate Income Tax

For Indian income tax purposes, a corporation’s income essentially comprises

income from business, net taxable capital gains realized on any
disposition of the corporation’s capital assets and residual income arising from
non-business activities. Corporations resident in India (whether owned by Indians or
nonresidents) are taxed on their worldwide income arising from all sources. Nonresident
corporations are essentially taxed on income earned from a business connection in
India or from other Indian sources. A corporation is deemed to be resident in India if it is
incorporated in India or if its control and management is situated entirely in India.
If a tax treaty exists between India and the country in which the taxpayer is resident,
the determination of whether a nonresident is taxable in India may be restricted or
modified, and lower rates may apply, subject to provisions of the tax treaty. In
general, India’s tax treaties provide that residents of the other country are subject

70
to Indian tax on business profits derived from undertaking business in India only
if the nonresident has an Indian permanent establishment.

Rates of Corporate tax

Resident corporations are subject to tax at a basic rate of 35 percent enhanced by

a 2.5 percent surcharge. Nonresident corporations are subject to a basic tax rate of
40 percent also enhanced by a 2.5 percent surcharge. However special rates have
been prescribed in respect of royalties or fees for technical services earned from India.

Dividend Income.
Dividend income is exempt in the hands of the recipients. However, resident
corporations are required to pay a dividend distribution tax at the rate of 12.5 percent on
dividends declared, distributed or paid by them. The above rates may be subject to
more beneficial provisions contained in the tax treaty entered into between India and the
country in which the taxpayer is resident.

Minimum Alternate Tax

The Indian tax laws provide for a Minimum Alternate Tax, to be paid by corporations
on the basis of profits disclosed in the financial statements. Corporations must
pay 7.5 percent (plus 2.5 percent surcharge) of book profits as tax, if the tax payable
as per regular tax provisions is less than 7.5 percent of its book profits. Book
profits for this purpose is computed by making prescribed adjustments to the net
profit disclosed by corporations in their financial statements.

Tax Incentives
The Government of India has been extending a host of incentives and concessions
to eligible corporations in certain specific industries. Broadly, the tax incentives
include tax holidays for corporate profits, accelerated depreciation allowances and
deductibility of certain expenses subject to fulfillment of prescribed conditions.

71
Foreign Tax Relief

Tax treaties entered into India and several other countries govern foreign tax relief
for the avoidance of double taxation. If no such agreement exists, resident
corporations may claim a foreign tax credit for the foreign tax paid by them. The
amount of credit granted is the lower of Indian tax payable on the income that is
subject to double taxation and the foreign tax discharged.

Other Significant Taxes

Excise Duty / Central Value Added Tax

Excise duty is a tax applicable on the manufacture of goods within the country.
Excise duties are governed by the Central Excise Act, 1944, and the Central Excise
Tariff Act, 1985. Basic excise duty is levied at a uniform rate of 16 percent. Further there
is levy of additional duty of Excise and Special Excise duty on specified products.
Excise duty is mostly levied on advalorem basis (i.e. on the basis of value). However,
there are commodities, which attract excise duty at specific rates, which are based on
quantity or weight.

The Excise law provides for a Central Value Added Tax (CENVAT) Credit Scheme,
which limits the cascading effect of duty incidence on a number of excisable goods
that are used as inputs / capital goods for use in manufacture of other excisable
goods. Under the scheme, CENVAT credit can be claimed on the excise duty,
special excise duty and additional duty of customs imposed on raw materials
and capital goods, whether purchased locally or imported. This credit can be
utilised for payment of excise duty on the finished products.

Customs Duty

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Customs duty is levied on import of goods into India. A downward trend in customs
duty rates has been seen over the past few years. The peak rate of basic customs
duty has now been reduced to 20 percent. The levy and the rate of customs duty are as
per the Customs Act, 1962 (the Customs Act), and the Customs Tariff Act, 1975 (the
Tariff Act), respectively. Customs duty on imports comprise the following:

• basic customs duty;

• additional customs duty; and
• special additional customs duty of 4 percent (now removed w.e.f January 9th
2004.

The rates of basic customs duty are specified under the Tariff Act for each item and
vary according to the description of the said goods. Additional duty is equivalent
to the excise duty that would have been payable if the goods were manufactured
in India. The primary basis for valuation of goods under the Indian customs law is the
transaction value. The transaction value of the goods is the price actually paid or
payable by the buyer to the seller.

Service Tax

Service tax is a tax levied on certain identified taxable services provided in India by
specified service providers. Currently, over 60 services are included within the
service tax ambit. Service tax is a ‘destination based consumption tax’ and ‘export of
services’ are not liable to service tax. The service tax rate has been increased from 5
percent to 8 percent with effect from 14 May 2003 and consequently all existing taxable
services provided on / after 14 May 2003 attract service tax at the rate of 8 percent.
Generally, the liability to deposit service tax is on the service provider. In case the
service provider is a nonresident / person from outside India, not having an office
in India, the person liable to service tax is the service recipient in India.

Sales Tax

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Sales tax is levied on sale of movable goods. This tax is imposed either by the
Central Government or by the State Government depending upon whether the
sales are in the nature of inter-state sales or intra-state sales. In the event the sale
takes place within a state i.e., an intra-state sale, the relevant state sales tax legislation
would be applicable. However, if the sale involves movement of goods from one
state to another within India, i.e., inter state sale, then the Central Sales Tax Act
would be applicable. Sales tax is paid by the seller and passed on to the buyer by
including the amount of sales tax paid in price of the goods. Therefore, even though the
incidence of sales tax is on the seller, the eventual impact is essentially borne by the
buyer. Inter-state sales generally attract sales tax at the rate of 4 percent. This rate has
been proposed to be reduced to 2 percent and eventually to NIL once the value added
tax regime is introduced across India.

Octroi / Entry tax

Octroi / Entry tax is a levy on the entry of goods into a particular municipal / State
jurisdiction for use, consumption or sale. Depending on the municipal/ State
jurisdiction where the goods are proposed to be used, consumed or sold, either
Octroi or Entry tax may be levied. Octroi is predominantly a municipal specific levy.
Within the state there may be several jurisdictions where Octroi / entry tax may be
levied depending on the specific rules thereof.
Value Added Tax

The existing sales tax structure prevailing for more than five decades is expected to
give way to a new Value Added Tax (VAT) based taxation regime in future, bringing
in its wake a fundamental shift in the way business transactions are taxed, and
consequently in the way they are managed. VAT is expected to bring about a significant
change in the nature of business systems including sourcing, distribution/sales network,
costing and pricing, warehousing, accounting, compliance procedures and IT systems.
VAT, an indirect tax on consumption, is proposed to be levied on the value addition that

74
occurs in relation to a product at each stage as it moves through its production-
distribution chain. However, unlike VAT internationally, VAT in India will be initially
confined to goods only and services are initially proposed to be kept outside the purview
of VAT. VAT as proposed to be introduced in India is likely to replace the local sales tax
regime only. That means that Central Sales Tax and other indirect taxes such as
customs duty, excise duty, service tax etc. are going to continue in the manner they
operate today.

While the existing local sales tax is mostly applicable only on the first sale of
goods within a particular State, VAT is to be applicable on every stage of sale
with a mechanism of credit for input VAT paid. It is expected that in VAT regime there
would be only 4 tax slabs :

• 0 percent for essential commodities.

• 4 percent on industrial inputs and capital goods and items of mass
consumption.
• demerit rate of 20 percent on luxury items such as tobacco, liquor etc.
• all items not covered above at a Revenue Neutral Rate (RNR) of 10 percent
to 12.5 percent.

Other Taxes
• Transfer of assets attracts stamp duty.
• Some states impose real estate taxes based on assessed values.
• Municipalities levy tax on real estate in their jurisdiction.

Financial Reporting and Auditing

Sources of Accounting Principles

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Companies in India follow fundamental accounting principles and practices. The
Accounting Standards Board of the Institute of Chartered Accountants of India
(ICAI) issues Accounting Standards to be followed by companies. Accounting
Standards are based largely on the International Financial Reporting Standards
and relate to the accounting treatment of items such as depreciation, fixed assets,
inventory valuation, revenue recognition, investments, construction contracts
and accounting for foreign-exchange transactions. All the 28 Accounting Standards
issued to date are mandatory and companies are required to disclose their policies
on these standards in the financial statements (the applicability of these standard
varies depending on the listing status of the companies and their turnover).

Statutes / Bodies Governing the Reporting Requirements

The Securities Exchange Board of India, the Companies Act, 1956, the Income tax
Act, 1961, the department of company affairs and the RBI, primarily govern the financial
reporting requirements of companies in India. Further, the Central Government, through
special acts and orders, also governs the financial reporting requirements.

Fundamental Concepts

Accounting Methodology

The fundamental accounting concepts of going concern, consistency and the

accrual of income and expenses need not be disclosed in the financial statements.
Departures from these basic concepts, however, must be disclosed. All significant
accounting policies should be disclosed in one place in a separate statement or

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schedule to the financial statements. The effect of any material changes in accounting
policies must be quantified and the reasons for such changes explained. If, any material
change is not quantifiable, the fact should be stated.

Funding of Indian Businesses

Share Capital

The Companies Act, 1956 permits companies to issue only the following two kinds
of share capital:

• Preference share capital (preferred stock); and

• Equity share capital (common stock).

The restriction is, however, not applicable to private companies which are not
subsidiaries of a public company. Redeemable preference shares issued by a company
must be redeemed within 10 years. Pricing of new issues of share capital has been
substantially freed from the administrative control authority that prevailed earlier. The
issue of capital is governed by guidelines issued by SEBI, the body that regulates and
oversees the functioning of the Indian stock markets.

Debentures and Public Deposits

Companies can raise funds by issuing debentures, bonds and other debt securities.
They can also raise funds by accepting deposits from the public. However, the Act
strictly forbids debentures from carrying voting rights and prescribes the manner
and the source from which deposits can be invited and accepted.
Debentures can be redeemable or perpetual, bearer or registered and convertible

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or non-convertible.

Disclosure, Reporting and Filing Requirements

Disclosure Requirements

Financial statements should consist of the following items:

• A balance sheet; (in the standard format detailed in Schedule VI of the

Companies Act, 1956)
• An income statement;
• Notes to the financial statements;
• An auditor’s report ; and
• For listed companies and companies with a turnover exceeding Rs 500 million,
a cash flow statement.

Annual Reporting Requirements

Reporting. Companies in India are required to comply with various reporting

requirements. The requirements are greater for public companies than for private
companies. The significant documents that need to be filed are the annual return,
balance sheet and profit and loss account and the auditor’s and board of directors’
reports and charges. Annual financial statements must be sent to all shareholders and
debentures holders . Listed companies must send annual financial statements to their
stock exchange. In addition, listed companies have to publish half yearly financial
statements. At every annual general meeting, the board of directors are required to
present the company’s financial statements comprising a balance sheet and a profit and
loss account (income statement) and the auditors and board of directors reports to the

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shareholders. The formats of the balance sheet and the profit and loss account are
prescribed by the Companies Act, 1956 and companies are required to publish annual
accounts in those formats.

Filing Requirements

After the annual financial statements have been presented to the AGM, three
certified copies of the same must be filed with the registrar of companies within 30
days of adoption by the shareholders.

Double Tax Relief and Tax Treaties

If a foreign source income of a resident is taxed in a country with which no double

taxation avoidance agreement exists and such income is also taxed in India, then
resident taxpayers may claim a tax credit in respect of such doubly taxed income to
the extent of taxes paid in the source country or the rate of tax in India, whichever
is lower. Taxpayers have the option to choose between the provisions of the tax treaty
or the Act, whichever is beneficial to him.

SWOT Analysis of India as a commercial destination

Strengths:

Developing Economy
Cheap Human Resource

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Availability of Natural Resources
Knowledge pool
Secular State
Population
Liberal economy
Technologically growing at an immense pace
English speaking people
Political Stability
High GDP Growth
Forex Reserve

Weaknesses

Infrastructure Problems
Bureaucratic Bottlenecks
Legal hassles
High Tax Rates
Complicated Tax Structure
Corruption
Labour problems

Opportunities

Growing Market
Rising Standard of Living
Tax Benefits if units set up at specified locations (SEZ, EPZ etc.)
Inexpensive labour

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Globalization & Liberalization
Advancing Technology
Brand INDIA (India Rating going up steadily)

Threats

Coalition Government
Natural Hazards
Labour Unrest
Capital Market Volatility
Other Developing economies

Bibliography

Websites
www.ciionline.org
www.indiainfoline.comwww.indiainfoline.com

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www.cmie.com www.indiainfoline.com
www.ficci.com

www.finmin.nic.in
www.irdaindia.org
www.petroleum.nic.in
www.nasscom.org
www.indiaoppi.com
www.rbi.org.in
www.sebi.com
www.trai.gov.in
Books & Journals

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