LABOUR LAWS AND LEGAL ENVIRONMENT IN INDIA FOR EUROPEAN INVESTORS
Prepared by MUPPALA SEKHAR REDDY RACHAKONDA RAGHAVENDRA RAO SAHA RAJ KUMAR
Definition Abstract 4 5 6 6 6 7 7 8 9 9 10 10 10 11 11 12 13 14 14 14 15 16 17 17 18 19 19 20 20 21 21 22 22
Labour laws and legal environment
1. Labour laws and social security system 1.1. Trade union act 1.2. Wages regulation act 1.3. Minimum wage structure in India 1.4. Payment bonus act 1.5. Working conditions act 1.6. Temporary, permanent and contract employees 2. Legal environment in India 2.1. Intellectual property protection 2.2. Law of trademarks 2.3. Law on copyright 2.4. Law of patent 3. Business regulations 3.1. Foreign exchange regulations 3.2. Industrial licensing regulations 3.3. Trade regulations 3.4. Import restriction 3.5. Export restrictions 4. Business regulations for foreign companies 4.1. Employment regulations for foreign nationals 4.2. Capital market regulations 4.3. Completion regulations 4.4. Corporate governance 4.5. Environment regulations 4.6. Technical and quality standards 4.7. Business and corporate social responsibilities 5. Commercial laws and tax system 5.1. Taxation of foreign companies 5.2. Double tax avoidance agreement 5.3. State government taxes
6. Foreign investment regulations 6.1. Direct investment law 6.1.1. Direct investment 6.2. FDI procedures at the federal level 6.3. Registration and approval system 6.4. Liaison and branch offices 6.4.1. Liaison office 6.4.2. Branch office 6.5. Foreign investment is not permitted 6.6. Foreign investment in small scale industries 6.7. Investment in existing companies 6.8. Foreign investment in trading companies 6.9. Dispute resolution 6.10. Arbitration 7. European investors in India 7.1. EU and India trade facts and figures 7.2. India bilateral investment trading with European countries 7.3. India trade with world 7.4. EU-27 trade with India 7.5. European Union and India FTA 7.6. Indian pharmaceutical companies and patents 7.7. Key issues of concern to the EU in trade facilitation in India 7.8. What are the advantages of EU-India FTA? 7.8.1. Promoting sustainable development 7.8.2. Ever growing trade and investment 7.8.3. Bringing people together 7.9. European Union relationship with India and china 8. Conclusion 9. Abbreviation 10. Source
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Labour laws and legal environment provides an idea and clear vision for the companies and citizens of the country. If any foreign companies want to introduce themselves they should follow the rules and laws of the county regarding the foreign policy of the country. In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated economic growth of the country, Government of India initiated a slew of economic and financial reforms in 1991. India is now ushering in the second generation reforms aimed at further and faster integration of Indian economy with the global economy. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all the economic activities under the automatic route. For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a result, there was lesser number of companies that showed interest in investing in Indian market. However, the scenario changed during the financial liberalization of the country, especially after 1991. Government, nowadays, makes continuous efforts to attract foreign investments by relaxing many of its policies. As a result, a number of European companies have shown interest in Indian market. There are a number of reasons why the European companies are coming down to India. India has got a huge market. It has a population of over a billion with a rapidly expanding middle class of at least 200 million. It has also got one of the fastest growing economies in the world. European companies can bring hi-tech industries, high-valued goods and given the opportunity, well developed expertise in the service sector including legal services to India. Indian companies can take advantage of their expertise in business operations, a rapid expanding Research and Development base and the cost advantages of large-scale production. Besides, the policy of the government towards FDI has also played a major role in attracting the European companies in India.
Labour laws and legal environment provides an idea and clear vision for the companies and citizens of the country. If any foreign companies want to introduce themselves they should follow the rules and laws of the county regarding the foreign policy of the country. In the same way India has its own laws and legal terms for the foreign investors. Previous days some obstacles like beaurocracy, redtapism and political hassles were there so many foreign companies had shown no interest to start business in India. India had a complex image within European investors and companies. The country had somewhat poorly marketed itself, and traditional images still abound of some sort of backwardness in economic or potential terms. The relations with the Indian administration are often difficult, more at local / State levels than with the central authorities. The level of “hassle costs”, and the predictability of decisions are considered as the most difficult points in the overall relationship with administrative bodies. In the last decade there has been lot of changes in the laws and business environments in favor to the foreign companies, which is attracting and encouraging the foreign as well as the European investors to start business in India. For instance 6 years back the percentage of FDI investment in India is 20-25% in the capital but now it has been modified to 49% of capital. India and EU has been negotiating a comprehensive free trade agreement (FTA) covering trade in goods and services, intellectual property rights and government procurement since 2007. Under the proposed India-EU free trade agreement, the European Commission (EC) has sought an expansive mandate to negotiate on investment issues on the behalf of the European Union. The EC officially made recommendations to the European Council seeking modifications in the negotiating directives for the trade agreement with India. If these recommendations are accepted, the European Commission would pursue comprehensive cross-border investment liberalization and protection provisions under the proposed free trade agreement with India. From the year 1997 to 2000 there has been modifications in the FDI investment in all sectors like insurance, real estate, print media, defense and agriculture etc. which allowed the investors to invest with the percentage from 45% to 100%. Previous years these fields were negative list for the FDI’s. These investments are accepted under the rules of FEMA (Foreign exchange management act) and FERA (foreign exchange regulation act).
Labour laws and legal environment:
1. 2. 3. 4. 5. 6. 7. Labour laws and social security system Legal environment in India Business regulations Business regulations for foreign companies Commercial laws and tax system Foreign investment regulation European investors in India
1. Labor laws and social security system
India has an extensively regulated system for protecting the interests of industrial workers, employees in government enterprises, and government-controlled sectors like banking and infrastructure, where collective bargaining determines working conditions and regulations. However, regulations are not as strong in employment categories such as administrative and management staff, employees in non-manufacturing enterprises, casual workers, domestic help etc., where individual contracts govern the employment conditions. Disputes on employment related issues are heard by Labor courts in case of industrial employees and by civil courts for other categories.
Labor laws fall under the following groups, governed by several Acts Industrial relations - Industrial Disputes Act: 1.1. Trade Unions Act
The Industrial Disputes Act governs the conduct of industrial relations and provides the framework for fair and just settlement of disputes by negotiation, arbitration, conciliation, compromise or adjudication. The Trade Unions Act provides for the registration of trade unions, to manage industrial relations on behalf of the workers. Collective bargaining, conciliation, arbitration and adjudication usually negotiate wages in the organized sector. Most trade unions are connected with a political party, and the leading political parties sponsor trade union wings.
1.2. Wage regulations
The Minimum Wages Act empowers the Government to fix minimum wages for employees working in specified employment categories, especially in industry. India’s minimum wages range between Rs. 1500 and 3000 per month depending on the location and skill levels, and are subject to periodic review and revision. Prevailing wages generally tend to be higher than the stipulated levels, but can be lower in situations where collective bargaining is not in place contract labor, for instance.
1.3. Minimum Wage structure in India
Source: Ministry of Labour, http://labour.nic.in/welcome.html, India, 01/04/2011
1.4. The Payment of Bonus Act
Provides for a minimum bonus of 8.33% of salary, and a maximum of 20 % of the annual income. For bonus calculations, the upper limit of salary is fixed at Rs. 3.500 per month (even if the salary is higher, say Rs 5,500). All establishments employing twenty or more persons even for one day during a year are required to pay bonus. New units are exempted till they start making profits or for five years of operation, whichever comes first.
The Payment of Gratuity Act provides for payment of gratuity to employees having
completed five years service, at the rate of 15 days’ salary for each completed year of service, payable at the time of retirement/ settlement, and tax-free up to Rs. 350,000. Every establishment having more than ten employees is required to register under this Act, within five years of being set up.
Social Security - Provident Fund, Employee State Insurance Act, Maternity Benefits Act,
Workmen’s Compensation Act, etc
The Employees Provident Fund and Miscellaneous Provisions Act provides for the
retirement benefits in the form of provident fund, family pension and deposit-linked insurance to employees. Companies employing more than 20 persons are covered by the Act, and employee and employer are required to contribute a minimum of 10% of the basic salary to the regional Employee Provident Fund; these contributions attract tax exemptions/concessions.
The Employees State Insurance Act provides for medical care benefits in case of
sickness, maternity, employment injury and pension for dependants in the event of the death through accidents at the workplace. The Act specifies a deposit of 6.5% of the salary, of which 1.75% is to be contributed by the employee, the rest by the employer, and applies to all employees with salaries below Rs 6500 per month under this Act.
The Maternity Benefit Act regulates the provision of maternity and other benefits to
women employees for a certain period before and after childbirth. A woman employee is entitled to post natal leave of six weeks, with full pay. The Workmen’s Compensation Act provides for payment of compensation to workmen and their dependants in case of injury and accident (including certain occupational disease) arising out of and in the course of employment and resulting in disablement or death. Compensation is determined on the basis of loss of earning ability created by the accident and is linked to current salary.
1.5. Working conditions
The Factories Act is the principal legislation for regulating various aspects relating to safety, health and welfare of workers employed in factories. It forbids employment of children less than 14 years of age in any factory, prescribes a 48-hours limit per week for adult workers, and sets the minimum standards of lighting, ventilation, safety and welfare services, which employers must provide in their factories. The Act applies to all establishments having not less than ten persons carrying on a manufacturing/ industrial activity using electricity, or having twenty or more persons carrying on manufacturing or industrial activity without the use of electricity. The Equal Remuneration Act provides for payment of equal remuneration to men and women workers for the same work and prevents discrimination against women in matters of recruitment and also in relation to matters such as promotion, training or transfer.
The Child Labour Act prohibits employment of children in certain hazardous
occupations and processes and regulates their employment in some other areas. Legislative provisions have also been made in various laws to protect children from exploitation at work and to improve their working conditions.
The Contract Labour Act regulates establishments and contractors employing at least
twenty workmen as contract labour on any day during the year, and provides for the welfare and health of contract labour involved in any activities that are not intermittent or casual in nature. All contract workmen employed for more than 200 days during a year, are entitled to wages and other benefits on the same lines and terms as regular employees, and are to be absorbed as regular employees of the establishment.
1.6. Temporary, permanent and contract employees
A fundamental distinction exists among temporary, permanent and contract workmen in the context of the workplace. Indian laws recognize a category of regular workers called contract workers, who are not on the rolls of the enterprise itself, but are provided through registered external contractors. Contract labour is essentially used for jobs that are of an intermittent or casual nature- landscaping, cleaning and estate maintenance, construction, etc., but not any jobs that are related with the main business process of the enterprise. Contract labourers do not get wages and benefits similar to the permanent employees of an enterprise, nor the membership of the trade unions recognised by the enterprise.
2. LEGAL ENVIRONMENT IN INDIA
2.1. Intellectual property protection
Before joining the WTO, India recognized only the following forms of intellectual property: • Patents • Trade Marks • Copyrights • Industrial Designs Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS) required India to enact new legislation in respect of ‘Geographical Indications of Goods’ and ‘Integrated Circuits and Industrial Secrets’, besides effecting significant changes in existing laws on Patents, Trademarks and Copyrights.
India has now put in place new laws extending intellectual property rights to all convention countries on a most favored nation (MFN) basis. While new laws on Trademarks, Geographical Indications and Copyrights have been framed without any controversy and in harmony with prevailing international practices, the issue of Patents has attracted enormous controversy and divided opinions within the country, despite a new Patents Act coming into force in 1999. The salient features of current laws on intellectual property protection are enumerated below.
2.2. Law of trade marks
In India, a trademark can be registered under the Trade and Merchandise Marks Act. The major features of India’s trademark protection regime are:
Trademarks can be assigned to goods and services Certain kinds of marks are not be allowed (obscene text, marks affecting religious sentiment, prohibited names etc) Trademarks from a convention country shall be allowed registration in India with retrospective effect (if applied for within six months) Registration is valid for ten years, with the option for renewal for similar periods. Trademarks are licensable/ assignable against consideration. Trademarks registered in other convention countries are accorded protection in India (on bilateral basis) even if they are not in use or well-known in India
2.3. Law on Copyright
India enacted its first legislation to protect copyright in 1957, and amended it last in 1999. Copyright registration in India classifies works in six categories: 1. Literary works other than computer programmes, tables and databases and dramatic works 2. Musical works 3. Artistic works 4. Cinematographic films 5. Sound recordings 6. Computer programmes, tables and compilations including databases Copyright is available during the lifetime of an author and for a further sixty years from the year of the author’s death.
While the subject of copyright is fairly old, new dimensions have arisen in areas such as computer software development Where professional skills are the most important element in bringing revenues. India’s Copyright Act provides that the Company or employer indeed owns the copyright on works developed by employees. Similarly, a client has copyright in respect of all materials that are commissioned on others for exclusive development on behalf of the client.
2.4. Law of Patent
India’s patent laws deviate from laws in developed countries in the following respects: Patents are not given for testing methods, agriculture/ horticulture production methods, and discovery of a new application/ Property of a known item, inventions in atomic energy, inventions that are contrary to the law, and frivolous inventions. Plants, animals and biological processes- especially genetically engineered species are not patentable. Product patents are not allowed in case of food, drugs, medicines and a few specified chemicals, unlike in several other countries. Only process patents are allowed in these areas. Patent period is shorter - 14 years for products, and 7 years for processes relating to food, drugs, medicines and specified chemicals, unlike the 20 year protection given in several other countries. However, under the TRIPS - India has a transition period of 10 years, expiring on Jan1, 2005, to enact a product patent system In order to give effect to those provisions. By then, India must move to a system of product patents in respect of all products except life forms, and enact a sui generis system of protection to plant varieties which would be in the nature of a separate law and not governed by patent protection. India has a draft Plant Protection Bill that was introduced in Parliament in 1999 and is under deliberation.
3. BUSINESS REGULATIONS
India’s business regulatory environment covers all aspects of trade, industrial activity, taxes, foreign exchange, competition, intellectual property and social security. India administers policy regulations and procedures through a system of notifications, which requires interested persons to continually keep track of the latest amendments applying to their business interests. The regulatory environment in India broadly applies to the following aspects of business:
Foreign currency regulations: Remittances are allowed only for approved categories of
trade and capital transactions, and cover foreign inward remittances of equity, sale/transfer of shares to residents, repatriation of profit/dividend, royalties and technology fee, repatriation of share capital following disinvestment or winding up,
capital gains and savings overseas borrowings, overseas placement of equity, acquiring or investing in overseas ventures. (Foreign Exchange Management Act, FEMA).
Industrial regulations: Establishment of industrial units attract the provisions of
Industrial Licensing (only in a specified list sectors), local permissions for pollution control, power and water connections, employment regulations, industrial safety and working conditions, workmen statutory benefits registrations, use of contract labor, and other industrial regulations (Industrial Disputes Act, Factories Act, Payment of Bonus Act, Environment Protection Act, etc)
Regulations for managing business enterprises: Conduct of company affairs,
accounting practices and other compliance (Companies Act, Accounting Standards, Corporate Governance reporting, Transfer Pricing rules, etc); competition regulations Regulations concerning taxation (Income Tax Act, Customs Act, Excise and Salt Duties Act)
Regulations covering capital markets: listing requirements, initial public offerings,
rights and preferential issue of capital, share buyback and delisting, (guidelines issued by the Securities and Exchange Board of India SEBI) 6. Regulations concerning business and trade practices and antitrust matters (Consumer Protection Act, Corporate Governance rules, Substantial Acquisition and Takeovers Act, Competition Policy) Trade regulations – regulations covering export and import of goods and services (EXIM Policy, GATT agreements)
Intellectual Property Regulations: Regulations dealing with the proprietary rights and
protection of intellectual property (Patents Act, Trademarks Act, Industrial Designs Act, Copyrights Act, Geographical Indications Act)
3.1. Foreign Exchange Regulations
Liberalization of trade and investment policies in the 1990s has progressively seen India move toward liberalising its foreign exchange regulations. Foreign exchange related regulations are embodied in the Foreign Exchange Management Act (FEMA), which has progressively simplified foreign exchange transactions: For Indian business-entities, the Indian Rupee is now fully convertible on the current account (covering trade transactions and invisibles – travel, tourism and services), although not yet on the capital account Indian companies can raise borrowings and equity funds abroad without prior permission, within specified ceilings and in accordance with guidelines. Part of these funds can be retained abroad and invested for specific purposes
The most important FEMA regulations applying to foreign entities and people resident outside India are: 1. Foreign entities and persons residing outside India shall not make investment in India, in any form, in any company or partnership firm or proprietary entity, whether incorporated or not, in the following businesses: • Business of chit funds, • Agriculture or plantation activity • Real estate business or construction of farm houses • Trading in transferable development rights (certificates issued by the Govt. for land acquired for public purposes) 2. All payments for investments allowed under capital account transactions must be remitted through official channels and accompanied by a decaration as specified by the Reserve Bank of India. 3. Foreign investments, which are converted into rupees after receipt into India, can be repatriated on the capital account, for both principal and profits (dividends), subject to clearance of all tax dues in India. 4. Foreign nationals/ entities may not acquire or sell immovable property in India without prior permission of the Reserve Bank of India. However, an Indian company, even being a subsidiary of a foreign company, can buy land for based industrial activity as specified in its approval letter. Such title can be sold subsequently, but capital gains from the sale of such immovable property may not be allowed to be repatriated outside India.
3.2. Industrial Licensing Regulations
India’s New Industrial Policy (first announced in 1991 and modified several times subsequently) monitors certain types of industrial activities through compulsory licensing. As of now, licensing is compulsory for the following: Industries requiring compulsory licensing Industries reserved for exclusive manufacture in small-scale industries (a list of nearly 820 products considered to be low technology and labour-intensive) Industries not falling under the above categories, but falling within the urban limits of specified cities (indus- tries located within 25 km of highly populated cities require specific licenses)
Industries not governed by licensing are called Delicensed Industries, and may be established without a prior approval, and require only filing an Industrial Entrepreneurs Memorandum (IEM). However, they must follow other guidelines, especially with respect to foreign investment ceilings specified under the foreign investment regulations.
3.3. Trade regulations
Simplification of export-import regulations has been a highlight of India’s reform process, especially in the post WTO period. India’s current trade regulations consist of import and export restrictions applying to specified goods on one or more of the following grounds: Religious, social or defense security concerns Safety, hygiene and phytosanitary considerations Sensitivities of domestic self-sufficiency and availability for internal consumption Preservation of endangered species and conservation of biodiversity
Barring a short list of goods, all other products are freely allowed for imports and exports, including for trading purposes. The categories of restrictions in brief are enumerated below:
3.4. Import restrictions
Prohibited items like tallow, animal fats etc
Restricted items-which can be imported against a specific import license or by special
notifications and special permissions. Restrictions may be on account of phytosanitary considerations for propagating materials (seeds, cuttings, etc.), or on grounds of nonessentiality such as alcoholic spirits, and certain types of consumer goods.
Canalized items – which are allowed to be imported only though designated State
Trading Enterprises (STEs). At present, agro commodities like edible oil and wheat, fertilizers and certain petroleum products are canalized. The WTO allows canalizing agencies even after lifting import restrictions but requires that they operate on commercial terms and do not cross subsidies any products.
3.5. Export restrictions
Exports of all categories of goods is freely allowed and encouraged, except for the following: Prohibited items - on religious grounds (beef for example) or environmental and bioconservation grounds- all wild animals and exotic birds and their parts, and endangered plant species declared under the CITES convention; seashells of certain species
Restricted items – chemicals included in the Chemical Weapons Conventions; cattle, camel and horses; agriculture products that are seasonal or in which India is not fully self-sufficient, and requiring an export quantity registration or licence from the Export Development Authority (skimmed milk powder, pulses, edible oil in bulk, sugar, wheat and non-basmati rice etc). Restrictions may also be extraneous- such as those specified by the destination country on health and phytosanitary grounds (as in the case of mango exports to Japan) Canalized items- several mineral products- mica, iron ore, other ores, slag and ash; petroleum crude, naphtha, kerosene and motor spirit; and onion, Niger seeds, are canalized through nominated state agencies. Import safeguards – anti dumping, quality standards All other tariff lines are allowed to be imported/ exported without any quantitative restrictions. However, all imports attract specified levels of import duties, which can be varied from time to time, under the provisions of India’s trade policies, including allowable measures under the WTO with respect to tariff bindings, import safeguards and anti dumping.
4. BUSINESS REGULATIONS FOR FOREIGN COMPANIES
The Government of India approved new rules on foreign direct investment. They were issued on March ,26 ,2010 by the Department of Industrial Policy and Promotion (DIPP) and entered into force on April 1. Under the liberalized measures, the Finance Minister can endorse proposals involving foreign equity of up to INR1200 crore [1 crore equals 10,000,000 Indian rupees (INR)] (about US$268 million as of April 5, 2010) without seeking approval from the Cabinet Committee on Economic Affairs (CCEA), creating an automatic consideration procedure. Moreover, foreign investors will no longer need to obtain no-objection certificates (NOC) from domestic company joint-venture partners in order to invest on their own in the same sectors. The requirement under Press Note 1/2005 whereby foreign companies needed to obtain an NOC
before investing in the same sector was a major hurdle for diversification of such companies' operations in India. All private and public limited companies incorporated under Indian laws are required to conduct their affairs in accordance with the provisions of the Indian Companies Act, 1956. However, foreign companies i.e. companies that are not registered in India, operating from a place of business in India (branch/ liaison offices) is required to: Notify the Registrar of Companies of their place of business, within 30 days of establishing the same Notify the Registrar of its authorised persons in India to receive notices or documents issued on the company Display on the premises, the full name of the parent company with the country of origin Notify the Registrar of any changes in the Memorandum and Articles of the parent company as well as change of address etc.
File annual statement of operations, authenticated bank account statements, etc duly
certified by a practicing accountant/ auditor.
Employment regulations for foreign nationals
Foreign nationals are allowed, in principle, to be employed in India either on a short duration or in regular employment on a non-permanent basis, for periods usually up to three years.
The basic requirements are:
A valid business visa/working permit Prior approval by the Reserve Bank of India, for repatriation facilities. Permission from the Ministry of Home Affairs, for extended stay in India (exceeding three months)
Permission from the Dept of Company Affairs for appointment of an Expatriate as
Whole-time Director if he was not resident in India during the past twelve months
Clearance from the Dept of Company Affairs for managerial remuneration to the
Managing or Whole-time Director, in excess of specified norms
With the exception of short-term engagements, all other forms of employment of foreign nationals require prior approval as listed above. Initial permissions are usually granted for terms up to three years. Although there are no restrictions on the number of expatriates in any company, the Government policy is to encourage indigenous skills as much as possible. Foreign nationals in regular employment of Indian Companies (including joint ventures) can remit up to 75% of their monthly earnings abroad to meet their overseas expenses or maintain the family etc, after payment of any taxes in India. Retirement facilities to foreigners allow capital repatriation up to Rs 1 million, besides all savings generated from bonified income, without any restrictions.
4.2. Capital market regulations
Well-defined and detailed guidelines exist in India for the following types of capital market operations:
Public issue of shares by companies having a track record/ without a track record
Issue of equity under the book-building route Issue of Employee Stock Option Plans Buyback of shares by a company Substantial acquisition/ take-over of a company shares from the secondary market Code of Corporate Governance for all public companies Operating guidelines for Foreign Institutional Investors Operating guidelines for Venture Capital Companies/ Funds/ Mutual Funds Code of Conduct of Merchant Bankers, Brokers and Depository participants
India’s earlier competition laws were based on size-turnover, market share and asset base- of companies, and need to be reviewed in the context of globalization and open market competition. A review of India’s current regulations- the Monopoly and Restrictive Trade Practices Regulations-on the above areas has been proposed through a new National Competition Policy, currently before Parliament for approval.
Based on international models, the proposed competition legislation focuses on the following areas:
Agreement among enterprises that may restrict competition: Agreements may be
horizontal (agreements of collusion amongst competitors), or vertical (agreements between buyer/seller firms). Horizontal agreements relating to collusive tendering, pricefixing, production controls, etc. as well as vertical agreements for exclusive supply/distribution contracts and refusal to supply are all considered anti-competitive.
Abuse of dominance: Abuse of dominance will include practices like quantity
restrictions, predatory pricing to eliminate competitors and marketing below costs to drive out competitors in order to recover market shares, etc. However, in determining competitive pricing, the pro-posed law makes a significant departure by recognizing the important benefit of competition- consumer welfare and social benefits and not always taking an adverse view. In this regard, predatory pricing will be considered adverse only if used by a dominant undertaking and dealt with on the basis of rule of reason.
Mergers and combinations among enterprises: The proposed law cautions against
monitoring all types of mergers, given that several Indian enterprises do not have international scale of operations and could benefit by restructuring through mergers and acquisitions. Therefore, it proposes to have a system of prior notification for mergers beyond a threshold limit: asset values exceeding Rs 5 bn for the merged entity, and/ or Rs 20 bn for the parent group holding the merged entity. Notifications shall be considered as approved if no objections or orders are issued within 90 days by the adjudicating authority.
4.4. Corporate governance
While India’s Companies Act has several regulations dealing with statutory declarations of business results and general conduct of a company through its Board of Directors, the subject of Governance is more specific on the responsibilities of the Board of Directors towards ensuring transparency, unbiased conduct and non-concealment of important and material facts of interest to investors and other stakeholders. In this regard, obligatory Corporate Governance guidelines have been specified for all public listed companies, with the following important provisions:
Composition of the Board of Directors: to include non-Executive Directors. Independent
Directors – who have no pecuniary interest outside their director’s remuneration or material transactions with the company or its subsidiaries or its promoters that may influence their judgment- must form at least one-third of a Board’s strength where the
Chairman is a non-Executive Director, and half its strength where the Chairman is an Executive Director.
Audit Committee: Every company shall have an audit committee of at least three
members, all being non-executive Directors, at least two being independent and at least one possessing financial and accounting knowledge. The committee must meet at least thrice a year and perform its role (specified in detail in the guidelines) to overview the company’s financial reporting process and ensure the correctness and credibility of its financial statement.
The company must attach a Management Discussion & Analysis Report with the Annual
Report to the shareholders covering important matters on the sector outlook, risks and other internal aspects of the company.
The Annual Report shall contain a corporate governance section with a detailed
compliance report on the guidelines. And also obtain a compliance certificate from statutory auditors. The guidelines are mandatory and must be implemented latest by March 31, 2003 for all companies presently listed with paid up capital of Rs 30 mn or more; and at the time of listing for all companies seeking listing for the first time.
4.5. Environment regulations
India’s Environment Protection Act deals with all statutory regulations dealing with the environmental impact of various industrial and commercial activities. The Act addresses prevention as well as control aspects that potentially affect the quality of environment. All industrial units require prior environmental clearances under the Water Pollution Act and Air Pollution Act, which are screened by the state Pollution Control Boards. Industrial units falling under 17 highly polluting categories- including steel, aluminum, pesticides, refineries, paper, leather, dyes and pigments, etc- is actively monitored, and are required to set up captive effluent treatment plants meeting the specified discharge levels for their activities. Of late, the judiciary has been playing a proactive role in matters concerning public health and safety, especially in urban areas. The most notable example in recent times is the Supreme Court’s intervention in control of vehicular pollution in Delhi, which had become one of the world’s most (air) polluted cities. The court banned all commercial vehicles more than eight years of age from plying in the city, and mandated all public transport to switch over to CNG from diesel and petrol within a six-month period.
4.6. Technical and quality standards
Businesses are required to observe mandatory quality standards in all products/ services affecting health, hygiene and public safety. Food, medicines and several service industries are governed by
safety standards instituted by the Ministries of Health, Food Processing and other administrative authorities governing various services like public transport, civil construction, etc. Besides mandatory standards, India has its own Bureau of Indian Standards, which develops national standards for several categories of industrial and consumer products, which differentiate products and brands based on these qualifying standards. Manufacturers complying with Indian standards are allowed to use the BIS certification mark on all their products passing the IS requirements. BIS certification is often included as a pre-qualification in public tenders. Besides product standards, India has also introduced quality system standards in line with international standards such as the ISO 9000 series. Certification under quality standards is increasingly becoming a prerequisite for procurement by large institutional buyers and in international contracts.
4.7. Business and corporate social responsibility
While profits are the primary motive of business, there is a ground-swell of opinion that business, being a part of the social system, must seek to serve social causes, as well. In this regard, ethical and socially responsible conduct is becoming not only desirable values but also guiding business principles in several companies, world-wide. Internationally, several businesses follow a formal code of ethics that encompasses one or more of the following: • Business conduct • Law and Government • Community and Society • Environment On the other hand, when businesses accept and indulge in corruption, bribes and other forms of gratification as normal costs of doing business, they give their tacit approval to a value system that punishes honesty, diligence, merit and excellence as cherished qualities in society. In India, there are few examples of companies having formal codes addressing social responsibility and explicitly defining business conduct ethics, partly due to the systemic inadequacies and challenges in which business enterprises must operate. Indeed, tampering with Govt. contracts and tenders, obtainingundue information about competitors’ offers, tax evasion and speed money exist as business practices in India, and ‘good liaison skills’are considered important for business.
5. COMMERCIAL LAWS AND TAX SYSTEM
India has a tax system covering business income, personal income, capital gains, wealth formation and most forms of commercial transactions. Tax rates have been consistently falling in the 1990s as a part of economic liberalisation. However, because duties and taxes account for
66% of the government’s revenue, the scope for any drastic reduction in tariffs and tax rates from existing levels is rather limited.
Indian taxes can be grouped in two categories:
Direct Taxes: Income Tax; Wealth Tax; and Gift Tax, which apply on income Indirect Taxes: Customs Tariffs; Excise duty; Sales tax; Service tax; Octroi/ entry tax; Stamp duty (on conveying/ transfer of title); Property tax; etc., which relate to commercial transactions. Taxes are collected by the central as well as state governments. The central government levies all direct taxes such as personal income tax, corporate tax, capital gains tax, and transfer of property, besides some indirect taxes such as customs duties, excise duties and central sales tax. State Governments levy local taxes such as land revenue, tax on agricultural income, property tax, octroi, entry tax and local sales tax.
5.1. Taxation of Foreign Companies
Indian tax laws distinguish between domestic and foreign companies in administering tax rates. Indian Companies are taxed on their worldwide income, while foreign companies are taxed only on the income that arises from Indian operations. Indian income includes royalties, technical service fees, dividends, and capital gains on sale of Indian company shares, besides business income originating from branch or project operations. Certain categories of business expenditure are also disallowed or capped, for computation of net income, chief among which are: entertainment expenses, interest remittances abroad without withholding taxes, administrative costs of overseas headquarters, etc.
Foreign companies (companies registered and located outside India) not having a permanent establishment in India are taxed under the withholding provisions of bilateral Double Taxation Avoidance Treaties, in respect of royalties and fees for technical services, interest on foreign currency loans, dividend and income from specified on mutual funds, remitted from India.
5.2. Double Tax Avoidance Agreements
India has signed bilateral treaties with several countries, providing tax credit for the foreign tax paid on overseas income. Credit is generally given for those foreign taxes withheld or paid that correspond to Indian income tax. The tax credit is limited to the lower of the tax paid abroad and the Indian tax on the foreign company.
The Indian income tax for overseas companies is determined by dividing the Indian income tax on the total taxable income (including the doubly taxed income). Foreign taxes, to the extent they cannot be set off against the Indian tax liability for the year, are permanently lost. Taxation treaties exist between India and several countries including the Netherlands, addressing the issue and avoidance of double taxation.
5.3. State government taxes
Local sales tax
Local sales tax is imposed on all sales within the state, and varies from state to state. Different rates exist for different products groups. Sales tax rates for the same product varied widely among states, due to policies to attract business and investment, and created trade distortions besides losses to the exchequer. Several states have also used Sales Tax Holidays as an investment incentive to new units. In January 2000, the Union Govt. overruled the States’ jurisdiction and enacted a uniform Sales Tax policy for the entire country. While existing sales tax holidays granted in various states continue to remain in force, no new schemes are allowed.
6. FOREIGN INVESTMENT REGULATIONS
India’s present policy framework for inward FDI was introduced by the Industrial Policy Statement of July 24, 1991. The framework has subsequently evolved and enlarged in line with reforms and structural developments in the economy. The present policy allows foreign investors to invest in resident entities through either the automatic route or the government-administered route. Most sectors and activities qualify for the automatic route. This route allows investors to bring in funds without obtaining prior permission from the Government, RBI, or any other regulatory agency. However, invested enterprises are required to inform RBI within 30 days of receipt of funds and also comply with documentation requirements within 30 days of issue of shares to foreign investors. The following guidelines govern the foreign investment approval
6.1. Direct investment law
Foreign companies can establish a business presence in India either as foreign legal entitiesliaison office/branch office/project office- or as Indian legal entities- joint ventures/ subsidiaries in the form of private or public companies incorporated under the Indian Companies Act. Branch offices and liaison offices do not come under the purview of foreign direct investment. Approvals for liaison and branch offices are valid for limited time periods (up to three years) and require periodic revalidation, and are limited in the scope of their activities in India.
6.1.1. Direct investment
Establishing an investment presence can involve setting up one or more of the following types of business structures in India, under the Indian Companies Act, 1956:
Investing in a joint venture company as a foreign investor (minority, equal or majority
Setting up a holding company (Investment Company) in India with plans for downstream
investment in other activities/Indian companies
Setting up a wholly owned subsidiary in India, 100% owned by foreign shareholders The
business structure depends, besides specific considerations of the parties involved, on the foreign investment guidelines governing the area/ sector under consideration.
6.2. FDI PROCEDURES AT THE FEDERAL LEVEL
Approval for FDI is granted through the automatic route (which does not require pre-
approval from the government) or government approval (through the Foreign Investment Promotion Board-FIPB) In case of automatic approval, investors are required to notify the concerned regional office of the Reserve Bank of India (RBI) within 30 days of receipt of inward remittances and file required documents with that office within 30 days of issue of shares to foreign investors. Under the government approval route, FDI proposals are received by the Department of Economic Affairs (DEA), Ministry of Finance (MOF). However proposals from nonresident residents and single brand retailing are received by Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce & Industry (MOCI). Foreign investors are also guided by the Foreign Exchange Management Act (FEMA) administered by the RBI. Portfolio investment is guided by the RBI and Securities Exchange Board of India (SEBI) All foreign investment proposals considered by the FIPB are forwarded to it by the Secretariat of Industrial Assistance (SIA), DIPP. Applications can also be made with the Indian missions abroad who forward it to the DEA. Information of FDI policies and procedures are available on the DIPP website.
Entrepreneurs require environmental clearance for 31 types of industries. The industries
include petrochemical complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilisers, dyes, paper etc. There are exemptions in this. Setting up of projects in environmentally fragile areas are regulated by Ministry of Environment & Forests guidelines. Foreign investors can enter India as incorporated entity (Under the Companies Act 1956) through joint venture or wholly owed subsidiary routes or as unincorporated entity as liaison/representative office, project office or branch office. There is no restriction on repatriation of profits or dividends. Any foreign investor who has the RBI approval to establish an entity other than a liaison office is permitted to acquire immovable property in India. However they cannot transfer ownership of such property without prior permission of the RBI. The SIA has been set up to ‘provide a single window for entrepreneurial assistance, investor facilitation, assisting entrepreneurs in setting up of projects (including liaison with other organisations and state governments) and monitoring implementation of projects’. Foreign Investment Implementation Authority (FIIA) has been set up to facilitate quick translation of Foreign Direct Investment (FDI) approvals into implementation, to provide a pro-active one stop after care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies to find solution to their problems. Source: Centre for the Analysis of Regional Integration at Sussex (CARIS), university of Sussex.
6.3. Registering and approval system Select Application Forms
Declarations under the automatic approval route are to be made in Form FC (GPR) to: The Reserve Bank of India Exchange Control Department Foreign Investment Division Central Office Mumbai 400 001 Approvals are normally granted in 30 days. Applications under the specific approval route are to be made in Form FC/IL to: The Secretariat of Industrial Assistance Department of Industrial Policy and Promotion. Ministry of Industry, Udyog Bhavan, New Delhi Fax: 91 11 301 1770 Approvals are normally granted in 30 days.
The Ministry of Industries now has an automatic tracking system for all SIA applications, which can be accessed through its web site www.indmin.nic.in by feeding the application registration number. Even applications can be submitted electronically
6.4. Liaison and branch offices 6.4.1. Liaison offices
The Indian Government does not encourage foreign companies to set up representative offices for the purposes of internal trading and commercial activities. However, offices are allowed to carry out liaison work for the normal business activities of the parent company, such as developing trade relations, collecting market information, inspection and coordination of purchases for exports to parent company, but without engaging in any direct commercial activity whatsoever.
A liaison office is not entitled to earn any income, commissions or other remuneration in
The Liaison office shall not carry out any trading, commercial or industrial activity
without the prior permission of the Reserve Bank of India (usually not given)
All expenses of a Liaison Office need to be met exclusively from overseas remittances
through normal banking channels
Annual statement of remittances received and annual accounts authenticated by an
accountant need to be filed with the Reserve Bank
Posting of foreign nationals as the representative or the head of the liaison office is
permitted, the application form should contain the relevant details; there is no restriction on employment of Indian staff and other personnel. Permissions for liaison offices are normally granted for a specific period not exceeding 3 years. Permission is easier for companies in the services industry and more difficult for manufacturing/trading companies with a supply rather than purchase focus. Foreign companies can also get permissions to set up temporary project/site offices in India to execute specific projects/contracts approved by the Govt. of India, and are treated similar to liaison offices for approvals. The term of approval is based on the proposed duration of their engagement in the project.
6.4.2. Branch Office
Traditionally, foreign companies engaged in specific service industries like banking, shipping, airlines, insurance etc have been allowed to set up branch operations, usually on a reciprocal
basis with the investing country. However, the re-cent policy provides for manufacturing and trading companies to set up branches for carrying out following activities: Represent the parent company or other foreign companies as buying/selling agents
Conduct research in which the parent company is engaged, provided the results of such
research are made available to Indian companies also Undertake export/ import trading activities Promote technical and financial collaborations between Indian and foreign companies. In this sense, branch offices are allowed to carry out research and commercial activities for the parent companies and principals. Approvals are easier to get for large trading companies, with the potential to supplement exports from India, or to MNCs and large industrial companies known in India. Applications for a liaison office or branch offices are considered and approved by the Reserve Bank of India.
6.5. Foreign investment is not permitted in the following (negative list) areas:
Industry Atomic Energy, Retail trading (except single brand Broadcasting services Foreign Directive Investment Not Allowed Condition
Financial services , Stock Exchange Aviation services, airport developmen
Foreign equity up to a maximum of 46% . FDI and FII limits capped at 26% and 23% respectively Foreign equity
Requires FIPB approval and is subject to guidelines of Ministry of Information and Broadcasting
Up to 74% under automatic route and
up to 100% with condition Mining services
Construction; development services – housing, commercial premises, resorts,
FIPB approval thereafter. Under automatic route subject to provisions of Coal Mines Nationalization Act (1973) Under automatic route; subject to: Minimum capitalization of US$10 million for WOSs and US$5 million for joint ventures with funds to be brought in within six months of commencement of Business. FIPB approval Beyond 49%. Companies must divest 26% equity in favor of Indian public if they are listed in other parts of the World. Also subject to licensing and security Requirements.
Real estate Business Telecommunication services – a) ISPs without gateways, b) Infrastructure provider of dark fiber, right of way, duct space and c) electronic mail & voice mail Agriculture, Plantation, postal service
Not Allowed Automatic route up to 49%.
Source: Department of Industrial Policy and Promotion (DIPP), 31/mar/2011
Specific prior approval is compulsory in a few sectors: banking, Non Banking Financial Companies(NBFCs), civil aviation, telecom services, petroleum exploration, venture capital funds, trading, defense production, atomic energy (specified activities), bulk drugs and intermediates, mining, advertising and films. Specific approval is required in all proposals: involving items that require industrial license; foreign investment being more than 24% in the equity of units manufacturing items reserved for small-scale industries; where the foreign applicants have a previous venture/ tie-up in India; involving acquisition of existing shares in an Indian company by a foreign investor; where proposals fall outside the sector policy /caps or under sectors in which foreign investment is not permitted under the automatic route.
6.6. Foreign investment in small scale units
The Government allows upto 24% equity by foreign companies, in products that are exclusively reserved for the Small Scale Industries- defined as industrial undertakings with a maximum investment in plant and machinery of Rs.10 million. There are over 820 products that are presently reserved, including cotton socks, furniture, etc., which may be of interest to foreign investor. Approvals for higher levels of ownership, including 100%, can be obtained on condition of an export obligation of at least 50% of the production from the unit, to be achieved within three years from the date of Implementation.
6.7. Investment in existing companies
Foreign companies can take equity in existing Indian companies either under the automatic route or under the specific approval route, in accordance with the same guidelines as applying to fresh investments. However, the following additional conditions apply for consideration under the automatic route:
Foreign equity must come either for the purpose of funding and expansion or for
diversification into a sector in which the automatic route applies.
In case no expansion plans accompany the proposal, there should be an expansion of the
equity capital of the Indian Company as a result of inducting foreign capital In all other cases, i.e. in cases where the equity capital is not expanding, or if there is a restructuring of equity among existing Indian and foreign shareholders, a specific approval is required. Foreign investment in existing companies requires board approval of the board and shareholders in certain cases.
6.8. Foreign investment in trading companies
Foreign equity holding is allowed in the following types of trading activities: Trading is permitted under automatic route with FDI up to 51% provided it is primarily for export activities, and the undertaking is an export house/trading house/ super trading/ trading house/ star trading house. However, under the FIPB route, even 100% FDI is permitted in case of trading companies for the following activities: Exports; Bulk imports with sale from bonded warehouses; Cash and carry wholesale trading; Other import goods or services provided at least 75% 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 Several specified activities as appearing in the policy
6.9. Dispute resolution
Businesspersons must take note of the lengthy mainstream adjudication process in India and Endeavour to use alternative dispute settlement mechanisms as their principal recourse in commercial disputes/ disagreements concerning their business interests in India.
• • •
However, under Indian law, the following types of differences cannot be settled by arbitration, and therefore must be settled only through civil suits: Matters of public rights Proceedings under the Foreign Exchange Regulation Act (FERA) which are quasicriminal in nature Validity of intellectual property rights granted by statutory authorities Taxation matters beyond the will of the parties Winding up under the Companies Act Disputes involving insolvency proceedings Disputes relating to persons who are not party to the agreement, or affect the public at large or bring a change in status of individuals or impose fine or imprisonment Disputes founded on an agreement void on account of its consideration or objects being unlawful
India’s Arbitration and Conciliation Act, 1999 provides for domestic as well as international disputes to be settled by arbitration, provided there is an explicit arbitration clause or a separate agreement between parties to refer their differences to arbitration. Disputes that have been agreed to be resolved by arbitration are not admissible in a court of law, unless the validity of arbitration agreement or the arbitrability of the subject itself is in dispute. India has accepted the United Nations Commission for International Trade Law (UNCITRAL) model law on International Commercial Arbitration, to bring greater uniformity between its law and needs of international arbitration. A few important features of the Indian Arbitration & Conciliation Act are:
• • • • •
Domestic as well as international commercial arbitration are included in its scope Arbitrators can be of any nationality, unless otherwise agreed by the parties The arbitration process is not bound by the Indian Evidence Act (witnesses) Arbitration awards are final and binding on parties, subject to set time limits for responsive action such as application correction/interpretation, setting aside the award. Foreign awards can be enforced in India – against proof/evidence of such awards
This enables arbitration to emerge as a complete dispute resolution mechanism supplementing the mainstream court system. Running the business
7. EUROPEAN INVESTORS IN INDIA
“India has centuries old commercial, political and military ties with the nations of the Europe, Particularly Britain, Portugal, France and the Netherlands” By European Union
India is an important trade partner for the EU and a growing global economic power. The EU and India hope to increase their trade in both goods and services through the Free Trade Agreement (FTA) negotiations that they launched in 2007. The essential of the FTA between India and EU is described below. As per the, latest statistics of the European union director general of trade, India is the 9th largest import partner of the EU and 8th largest partner of the export and Trade partner. The below figure explains that European Union is the number one trade partner of India. These figures explain the business relation and trade between India and EU has been in the up word direction. India and EU has seen lot of trade changes in the past decade, as EU is the main trade partner to the India as in the imports, exports and trade. Below figure explains the facts and figures of India and EU trade
Source: Eurostats, 17/mar/2011 7.1.
EU and India Trade Facts &Figures:
In the recent analysis of European Union about India and its trade, show the below figures about bilateral trade. The EU is India's biggest trading partner with 20% share of India's foreign trade. India is now the EU's 9th trading partner – overtaking Brazil and Canada in 2006. Europe is the first or second market for every one of India's top ten exports.
Europe exported €29.5billion worth of goods and €9billion worth of services to India in
2007. Europe imported €26.3 worth of goods and €6.6billion worth of services from India in 2007. EU trade with India has more than doubled since 2000. Europe has a trade surplus with India for both goods and services. The EU is a big investor in India, with €10.9billion invested in 2007. The EU accounted for 65% of all FDI flows into India in 2007. Indian investment into the EU is booming: India's foreign direct investment into the EU increased from €0.5billion in 2006 to €9.5billion in 2007.
Three quarters of Indian imports are inputs for manufacturing or services trade, so these
tariffs affect the costs of Indian businesses. One of India's core development priorities is to strengthen and grow its manufacturing sector.
7.2. India Bilateral investment treaties with European countries
The Ministry of Finance website gives the text of a model BIPA signed by India. However there may be minor differences e.g. in the clauses on compensation for losses, dispute settlement or promotion and protection clauses etc. However pre-entry national treatment has no been accorded to any foreign investor.
EU countries with which India has entered into BIPA (and date on entry into or ratification) Country Austria Belgium Bulgaria Cyprus Czech Republic Denmark Finland France Germany Hungary Italy Netherlands Poland Portugal Romania Spain Sweden United Kingdom Date of signed 1 March 2001 8 January 2001 2 September 1999 12 January 2004 6 February 1998 12 August 1996 9 April 2003 17 May 2000 13 July 1998 2 January 2006 26 March 1998 1 December 1996 31 December 1997 19 July 2002 9 December 1999 16 October 1998 1 April 2001 6 January 1995
Source: Ministry of finance, India
7.3.India Trade with world
Source: IMF international monitary fund, 12/april/2010
7.4. EU -27 trade with India
Source : EuroStatistics, 17/mar/2011
7.5. European Union and India Free Trade Agreement (FTA):
Economic liberation and foreign direct investment (FDI) have been key drivers of India’s successful economic advance in recent decades. As per the world trade organization report, India has seen its overall trade with the European Union in both services and goods grow by the impressive rate around 7% per year in between 2005 to 2009. India and EU has the chamber of commerce to develop the trade and increase the investments in both sides, EU-India summit has held on December-2010 in New Delhi and as well as Indian delegates had meeting European commission on the same date in Brussels, both parties has been discussing the further process about the FTA between in India and EU . As part of our literature and interview process we gone through the interview summery of Mr. GEOFFREY VAN ORDEN he is the founded chairman of Europe India chamber of commerce (EICC). The main aim of bilateral free trade agreements (FTA), to eliminate tariffs between the parties on substantially all trade and thus provide opportunities. for current and potential exporters to develop their business and diversify the export base. The challenge for the FTA is not only to accelerate liberalization in India’s services sectors but also to facilitate the implementation of a range of complementary reforms designed to improve the quality of regulation. Externally, India faces contrasting challenges in securing access to European markets in its areas of comparative advantage. The main cause for the delay of the FTA is Intellectual Property (IP) rights and data exclusivity in the Pharmaceutical field. When the IP concern to the Indian pharma companies, India is the biggest manufacturer of the bulk drugs in the world with affordable cost. India has a thriving generic drug industry. It did not allow patents on pharmaceutical products until 2005, when it adapted its laws to conform to the World Trade Organization’s intellectual property rules. Products produced prior to that date are still not patentable, and in many other respects India’s intellectual property regime is more flexible than that of the EU and the U.S.A. Moves to limit India’s generics industry would have far-reaching consequences for developing countries, where access to medicine is most limited, given India’s substantial exports of generics. As per the report of US national library of medicine and health states that 85 percent of generic antiretroviral drugs destined for sub-Saharan Africa were produced in India. An increase in their cost would translate into reduced quantities of drugs available to AIDS patients.
7.6. Indian Pharmaceutical Companies and Patents
The pharmaceutical industry is among the most globally competitive industries in India, with over one-third of its output being exported. The Indian government and industry realize that a strong IPR regime is required to ensure an attractive foreign investment climate and for the Indian pharmaceutical (and other sectors such as IT) to maintain their impressive growth. Indian pharma companies realize the importance of IPR, both as an asset and as a marketing tool- they have been benefited from patent protection in other countries. Many of these companies have established patent cells attached to their R&D Departments as their customers insist on receiving non-infringement statements. The number of patent applications in India has increased- a large number of them from the domestic industrysignaling a growth in the IP culture in India. India is also rapidly emerging as a centre of innovation and contract research, which requires a strong IPR regime. An implication of the new Patent Act of 2005 is that the Indian Pharmaceutical industry must innovate. Though Indian companies have been involved in new models of research and development, production and of export of generic medicines and have been Expanding their operations in several EU countries e.g. Finland, UK, no new molecule Has been discovered and patented by an Indian company.
7.7. Key issues of concern to the EU in trade facilitation in India
The last session of India and EU FTA discussions has focused on Key issues Has complained by EU, of burdensome customs registration and documentation procedures/requirements, lack of transparency/discretionary criteria for valuation by customs officials and resultant frequent delays in the export of food stuffs, professional equipment, machinery, textiles and clothing, automobiles and energy and environmental services.
Transparency: The rules of import and export are published and available in the public
domain but these are complex and subject to frequent modifications.
Different implementation/enforcement policies: Many policies are at the discretion of
the customs officials and degrees of enforcement vary.
Complex procedures for calculating customs duties: Tariff structures in India are
complex and non-transparent as are the procedures for calculating import duties.
Delays in customs clearance: While there has been an improvement in the time taken
for the imported goods to be cleared by customs, delays still occur on account of burdensome documentation requirements, customs valuation and classification issues, and compliance with pre-import requirements and inspections to assess compliance with respect to other agencies.
Internal transit procedures: Each state has its own legislation and there are difficulties
in obtaining inland clearance.
Source: Biz@ India, Version 6, December, 2010.
Recent issue of Time magazine printed about the EU and India summit in Brussels, European Union seeking India to cut off 95% of the import tariff lines, exactly as it is providing, but India says it will agree to only 90% tariff lines. EU also seeking cut in various sensitive areas like agricultural procedure, wines and alcoholic beverages, cars, dairy products.EU also keen that India liberalize the financial services, telecom, retail, postal and professional services.
What are the advantages of EU-India Free trade agreement?
As the result of our data analysis based on statistics and text states that, The India-EU relationship has been growing steadily since 1962 when diplomatic relations were Established with the European Economic Communities. A regular political dialogue has been Boosted through the first Summit held in 2000 and, since the 2004 Summit, is taking the shape of a Strategic Partnership, making India one of the EU’s carefully selected main global partners. Services is the fastest growing part of the Indian economy and India has offensive interests in GATS (call centers, down the line software engineering) and (business visas, software engineers, accountants, lawyers in both directions) liberalization. Both parties are therefore interested in including services in a FTA agreement.
Potential for 30% increase in each way flows of bilateral FDI as a direct result of signing
In recent years the attractiveness of India as a destination market for foreign direct
investment has substantially increased and this has been reflected in an increase in FDI inflow. FTA between the EU and India which would improve market access for goods and services, covering substantially all trade except for public procurement which India is not willing to include in the FTA. Bilateral trade is expected to exceed €70.7 billion by 2010 and €160.6 billion by 2015. Services are the fastest growing sector of the Indian economy. Bilateral trade in services is expected to exceed € 246.8 billion by 2015 by the time the FTA in Services is implemented, according to the Federation of Indian Chambers of Commerce and Industry. Promoting Sustainable Development:
Through their joint work programme, they are further developing their cooperation in research, environment and energy to address the impacts of climate change. Both sides are actively pushing for a global agreement on this issue. Ever-growing trade and investment: Over the last five years, EU-India trade has more than doubled and investments have multiplied ten-fold. Both parties are currently negotiating a broad-based Bilateral Trade and Investment Agreement, which should maximize business opportunities for companies on both sides. Bringing people together: Educational exchanges enable increasing numbers of young Indians to study in Europe. Cultural exchanges are also becoming more prominent and are stimulating greater awareness of cultural diversity, helping to tackle poverty while improving in particular healthcare and access to good education.
European Union relationship with India and china:
As per the press release of directorial general of trade of EU in March 2011.China is the strategic partner of European Union; china is the number one exporter to the European Union with 18.9% and second trade partner after USA. But India is at the 9th place in the trade with EU, has only 2.2% of the total trade. At the same time as we discussed above EU is the number one exporter of India. Europe's imports from China have grown by around 16, 5% per year for the period 2004-2008 but this growth rate reversed in 2009 and recorded a 13% drop due to the crisis. Nevertheless, in 2009, the EU still imported €215 billion worth of goods from China. China thus remains Europe’s biggest source of manufactured imports. But service market for Europe runs a surplus on trade in services with China of €5, 0 billion in 2009 (up from €4, 9 billion in 2008). This is about 27 times smaller than its trade deficit for goods. India has significant number in trade with EU the service sector; in 2009 the trade in service is 8.7% in exports and 7.3% in imports. Proving that India is the largest partner for EU in service. European companies invested €5,3 billion in China in 2009 (up from €4,7 billion in 2008). China invested €0, 3 billion in 2009 (compared to a net disinvestment of €1,8 billion in Europe in 2008).
The Indian economy is the tenth largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP) by the reports of the International monetary fund. India GDP is divided by sector is service 55.3%, Industry 28.6% and Agriculture 16.1%. Labour force is 478 million, in that agriculture is 52%, industrial is 14% and service is 34%. Exports of the India are $201 billion dollar and imports is $327 billon dollar, main business partners are UAE, China, USA, and EU. India is 134th place in easy of doing business in the world by world bank rankings, at the same time China is 84th. Indian economy is mainly depending on three sectors Services, industries and agriculture. With global industrialization, this sector is the key driver of economy of all countries in the world. In India industrial growth increasing is not up to the mark when it compares to the service. Agriculture is also key driver of Indian economy and food needs to the 1.2 billion, India is the second largest producer of the rice in the world after china. But this industry growing like a snail walk. India and China are the rapidly growing economies in the world with it strong labor, industrial and agriculture. When we compare both countries in the growing relation with the western countries and European Union, India is in the backward position. Same time china is growing high in bilateral and strategic partnership with partner countries. Agricultural industry in India is lacking of technology and equipments, as it compare to china it is the world leader in agriculture products by using the latest technology and strategic partnership
with the developed countries like European Union, USA and other countries. In the same way the industrial sector has been facing the same problem in showing the significant growth. Below table show how India is allowing the FDI’s into the various sectors at the same time it also indicates how china has the FDI policy. Main fields like agriculture and industries has strong and difficult to invest and enter of FDI. Infrastructure in India is in growing stage but, because of the restriction for the foreign companies, the development has lacking the technology and planning for the new projects. As India needs the technology to build the sophisticated structure, Europe has the best technology to develop the infrastructure system. If India can allow the European Union strategic partnership in its infrastructure development, it can bring new technology and better system to India.
SERVICE SECTOR Accountancy
ISSUES FDI not allowed; FSP not allowed undertaking statutory audit of companies. Only partnership firms allowed with number of partners limited to 20. No cap on FDI. Foreign architects need to be registered by the Council of Architecture as individuals. Appointment of foreign architects as consultants to Indian architects subject to case-by-case approval by Government of India. FDI not allowed. International law firms not allowed presence. Indian advocates cannot enter into profit-sharing Arrangements with nonIndian advocates. No cap on FDI. Price preference to PSUs, as well as a large number of barriers that are external to the sector: Land ceiling; unclear land titles; minimum area restrictions; minimum capitalization norm; restriction on repatriation. No cap on non-retail segments and 51% limit on FDI in single brand product retail. Lack of clear responsibilities within the government.. Foreign equity limit of 26% in most segments. Minimum capitalization norms; Funds of policy-holders to be 27 retained within the country; Compulsory exposure to rural and social sectors and backward classes. Private domestic equity limited to 49% and foreign equity limited to 74% with 10% voting rights. FDI and portfolio investment in nationalized banks subject to overall statutory limits of 20%. Mandatory priority sector Lending and rural branch requirements for domestic banks. No cap on FDI. Movement of FSP subject to registration by the Medical/Dental/Nursing Council of India. FSP cannot provide services for profit. Responsibilities divided between the Centre and states; Absence of a Standardized accreditation system. FDI is permitted in entertainment services (including theatre, live bands and cultural services), libraries, archives and museums. FDI is restricted to 26% through the Government route in print media. FDI is not allowed in News Agency Services. Lottery, betting and gambling is not allowed. 100% FDI in maritime and road transport but significant restrictions in air and rail transport. Restrictions on inter-state movement of goods; Overlapping responsibilities and coordination issues between
India’s autonomous policy on services
CHINA 2008 - Taxation fully liberalized. And wholly foreign owned subsidiaries permitted by Source: India’s FDI policy and WTO 2007. (2010), World Bank, 2006. CHINA 2008 - Fully liberalized barring CHINA 2008 - Full foreign ownership not restrictions on Mode 1. For mode 3, wholly allowed and needs based foreign owned
Construction and related engineering
Distribution Financial services (Insurance) Financial services (Banking)
CHINA 2008 - Continued restrictions on business scope. CHINA 2008 - Restrictions on business scope of fully foreign-owned enterprises CHINA - Continued restrictions on large chain stores. By 2006, no restrictions on Products foreign majority control allowed except in chain stores with more than 30 outlets selling a range of
Health & Social Services
Recreational, Cultural & Sporting
CHINA 2008 - By 2004, fully liberalized except 50% foreign ownership limit in life insurance. CHINA 2008 - Fully liberalized, geographic limitations phased out gradually by 2006
AIDS BIPA BIS CAP CCEA CITES CNG DEA DIPP EC EICC EU EXIM FDI FEMA FERA FII FIIA FIPB FSP FTA GATS GATT GDP IEM INR IPR Acquired Immune Deficiency Syndrome Bilateral Investment Promotion and Protection Agreement Bureau of Indian Standards Capital Cabinet Committee of Economic Affairs Convention on International Trade in Endangered Species Compressed Natural Gas Department of Economic Affairs Department of Industrial Policy and Promotion European Commission Europe India Chamber of Commerce European Union Export and Import Policy Foreign Direct Investment Foreign Exchange Management Act Foreign Exchange Regulatory Act Foreign Institutional Investors Foreign Investment Implementation Authority Foreign Investment Promotion Board Financial Service Providers Free Trade Agreement General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Products Industrial Entrepreneur Memorandum Indian National Rupee Intellectual Property Rights 42
ISO ISP MFN MNC MOCI MOF NBFC NOC PSU RBI SEBI SIA STE TRIPS UNCITRAL WTO
International Standard Organization Internet Service Provider Most Favored Nation Multinational Corporation Ministry of Commerce and Industry Ministry of Finance Non Banking Finance Company No Objection Certificate Public Sector Units Reserve Bank of India Security Exchange Board of India Secretariat of Industrial Assistance State Trading Enterprises Trade Related Aspects of Intellectual Property Rights United Nation Commission for International Trade Law World Trade Organization
Ministry of Labour official website, http://labour.nic.in/welcome.html Ministry of commerce and industry, Department of Industrial Policy and Promotion (DIPP) http://www.dipp.nic.in/manual/FDI_Manual_Latset.pdf Europea, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/india/ http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf IFRI: - The Institut Français des Relations Internationales, http://www.ifri.org/?page=contribution-detail&id=5569&id_provenance=97 US national library of medicine and health, http://www.nlm.nih.gov/ Time, www.time.com Economic times, http://economictimes.indiatimes.com/ Biz @ India magazine, version 5, version 6, December 2010.