Doing Business in India

An Expert's View about Intellectual Property Law in India

Last updated: 9 Feb 2012

By Trustman Business Law Firm India

1.  A general overview of India including its States, languages, population etc.

India is the seventh-largest country in terms of geographical area, the second-most populous country and the world’s largest democracy in the world.

India is a republic consisting of 29 States and 6 Union Territories.

India has legislative powers distributed between Centre and the States with a parliamentary system of democracy.

The official language of the Republic of India is Hindi with English as a secondary official language. There are about 16 officially recognized languages spoken across 28 states in India.

India's average literacy rate is 64.8% (53.7% for females and 75.3% for males). The state of Kerala has the highest literacy rate at 91%. The national human sex ratio is 944 females per 1,000 males. India’s population growth rate is of 1.38% per annum, there are 22.01 births per 1,000 people per year.


2. Economic growth rate, existing growth rate of India and future projections, FDI policy of Government of India

Foreign Direct Investment Policy

Major economic reforms since the year 1991 have transformed India into one of the fastest growing economies of the world.

Foreign investment in Indian is primarily covered under the Foreign Exchange Management Act, 1999 (“FEMA”) the Regulations / Notifications made thereunder from time to time. All Regulations under FEMA are issued by the country’s Central Bank, the Reserve Bank of India (“RBI”). 

Foreign Direct Investment (“FDI”) Policy issued by the Government of India is covered in FEMA. The FDI Policy is periodically reviewed and modified. Changes in sectoral policy/sectoral equity cap are notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy & Promotion (DIPP), Ministry of Commerce and Industry.

The prevailing FDI Policy expressly specifies the sectors wherein foreign investment is specifically prohibited or prior approval of the Government is required to be obtained. In all other sectors, FDI can be made under the automatic route (where no prior government approval is required but some reporting obligations need to be complied with after equity contribution by the foreign investor). The prevalent FDI Policy also prescribes the applicable investment caps in relation to the foreign shareholding in certain sectors.

FDI is prohibited in the following sectors under the current FDI Policy:
i. Gambling and betting;
ii. Lottery Business;
iii. Atomic Energy; and
iv. Retail Trading (except Single Branded product retailing which has FDI cap of 51%)
Sectors in which prior approval of the Government is required are as follows:
i. Manufacture of Cigars & Cigarettes of tobacco and manufactured tobacco substitutes;
ii. Manufacture of all types of Electronic aerospace and defence equipments;
iii. Manufacture of items exclusively reserved for the Small Scale Sector (SSI) with more than 24% FDI;
iv. Proposals in which the foreign collaborator has an existing financial / technical collaboration in India in the ‘same’ field (as covered in 4 digits National Industrial Classification of industries);
v. All proposals falling outside notified sectoral policy/caps as given in the FDI Policy.
FDI proposals which require prior Government approval are considered by the Foreign Investment Promotion Board (“FIPB”), a non statutory body constituted under the aegis of Ministry of Finance.

India provides a liberal, attractive and investor friendly investment climate. India has the most liberal and transparent policies on FDI amongst major economies of the world with 100% FDI allowed under the automatic route in almost all sectors/activities except in a few areas, which require prior approval of the Government or wherein FDI is not permitted.  Additionally, India also has an edge over other economies as it has liberalized and simplified foreign exchange and tax laws allowing repatriation of profits earned and proceeds out of the sale of investments.

Sensitive sectors for FDI

Except to the extent any investment permitted under the FDI Policy, sectors such as telecommunications, defence, insurance, lottery business, real estate, agriculture and plantation, etc., are considered to be “sensitive” and are regulated under the existing FDI Policy. 

More recently, the National Security Council has recommended the enactment of a “National Security Exception Act” which would impose special security screening at the time of approval and operation of FDI in all such sensitive sectors.

GDP

At present, India's GDP is USD 1.237 trillion, which makes it the twelfth-largest economy in the world at market exchange rates and fourth largest in purchasing power. In the late 2000s, India's economic growth has averaged at about 7.5% a year.

A 2007 Goldman Sachs report has projected that "from 2007 to 2020, India’s GDP per capita will quadruple, and the same will surpass the GDP of the United States of America before 2050.”

The country managed a reasonable economic growth of 6.1% during the first quarter of the current fiscal (2009) despite the global financial crisis.

India still a favorite investment destination

Inspite of the global meltdown, India still attracts and would keep continuing international investments as it remains to be one of the economies that have been less affected by the meltdown. Further, the country promises growth at a rate which is far better when compared to some of the major economies of the world that have moved towards a negative growth.

India provides a liberal, attractive and investor friendly investment climate. India has the most liberal and transparent policies on Foreign Direct Investment amongst major economies of the world with 100% FDI allowed under the automatic route in almost all sectors/activities except in few areas, which require prior approval of the Government or wherein FDI is not permitted.

Additionally, India also has an edge over other economies as it has liberalized and simplified foreign exchange and tax laws allowing generally repatriation of profits earned and proceeds out of the sale of investments.

 

3. Sector Specific updates

M&A

The M&A activity during the first quarter of financial year 2009 has witnessed a decline of 12.76% in value terms from USD 10872.06 million during April-June 2008 to USD 9484.91 million during April-June 2009. Additionally, the number of deals has also declined from 92 to 43 during the said period.

The major M&A activities occurred in IT/ITES, telecom, hospitality, BFSI, textile and power sectors. During the first quarter of financial year 2009, IT/ITES sector topped the list with 84.83% of the total valuation of M&A deals that took place in India, telecom sector accounted for 4.80%, while BFSI and hospitality sector accounted for 3.24% and 3.11% respectively.

The M&A activity in the past three months shows that the Indian IT/ITES industry is all set to take on the global markets. There were 11 inbound, outbound and domestic M&A deals in IT/ITES sector during April-June 2009, valuing to USD 8046.24 million, representing 84.83% share in total valuation of the M&A deals that occurred during the period.

Other sectors like banking & finance, telecom, hospitality, power, metal & mining, auto/auto components, real estate, food & breweries and consumer durable witnessed 32 M&A deals for an amount totaling to USD 1358.44 million, contributing a share of 15.17%.

Despite the global recession and liquidity crunch, Indian economy registered 11% rise in FDI in financial year 2008-09. Sectors like Chemicals (other than fertilizers) and Telecommunication recorded the robust growth of 227% and 103%, respectively.

FDI in Chemicals sector (other than fertilizers) in financial year 2008-09 was of USD 749 million as compared to USD 229 million in financial year 2007-08.

During the financial year 2008-2009, the telecom sector registered a growth of 103% as compared to previous fiscal. This sector attracted USD 2558 million FDI as compared to the USD 1261 million in financial year 2007-08 and has acquired a 9.37 % share in total FDI inflow.

The Indian automobile sector has been able to record 70 % growth in FDI. FDI inflow in automobile sector has increased from USD 675 million to USD1,152 million in financial year 2008-09 over financial year 2007-08.

The other sectors which registered growth in highest FDI inflow during financial year 2008-09 were housing & real estate (28.55 %), computer software & hardware (18.94 %), construction activities including road & highways (16.35 %) and power (1.86 %).

The telecom sector was the most active segment this year as the sector alone witnessed deals worth USD 10.3 billion, followed by oil & gas (USD 2.1 billion), Construction (USD 2 billion), Technology (USD 1 billion) and finance (USD 0.80 billion).

Outbound deals: There was a decline in outbound M&A activity by 89.44 %, which decreased to USD 235.85 million during April-June 2009 from USD 2233.49 million in April-June last year. A total of 14 cross border outbound deals occurred with a value of USD 235.85 million, contributing a share of 2.50 % in the total M&A activity during April-June 2009.

Inbound deals: There were 13 inbound M&A deals for a value of USD 5439.23 million during April-June 2008 which declined to 11 deals and registered increase in amount for a value of USD 7907.11 million, contributing a share of 84.08 % in the total M&A activity during April-June 2009.

Domestic deals: There were 34 domestic M&A deals for a value of USD 2728.74 million during April-June 2008 which declined to 18 deals that valued USD 1341.95 million, contributing a share of 14.27% during April-June 2009.

The cross border Inbound, Domestic and Outbound M&A deals occupied a 83.37%, 14.15% and 2.49% share with 11, 18 and 14 number of deals respectively, during the period April-June 2009.


4. What lies ahead


India’s annual GDP growth is likely to accelerate to 7.2% in the next fiscal and further accelerate until reaching a pace of about 9% in the year 2012-2013.

Looking forward, M&A activity in India in the remainder of 2009 is likely to be impacted by a variety of factors.

The resurgence in domestic demand and the performance of Indian companies in recent months has comforted lenders and banks, easing some of the financing pressures of late.  The improved economic outlook along with an assurance of political stability has also ignited hopes of the tide coming back into the capital markets. 

Looking forward, M&A activity or strategic investments in India in the remainder of 2009 is likely to be impacted by a variety of factors.

The resurgence in domestic demand and the performance of Indian companies in recent months has comforted lenders and banks, easing some of the financing pressures of late.  The improved economic outlook along with an assurance of political stability has also ignited hopes of the tide coming back into the capital markets. 

In summary, availability of free liquidity and credit in the Indian market along with the continued uncertainty faced by global companies indicates that in the remainder of 2009, there could be interesting outbound acquisition opportunities for Indian companies.

The government’s stimulus package and continued focus on infrastructure will also generate opportunities for greater inflow of FDI. 

Realistic valuations, understanding the real cost base, addressing capacity utilization issues, evaluating market demand, assessing cash requirements, resolving operational inefficiencies and negotiating workable deals with existing suppliers / customers will be extremely important in the next few quarters, for the deal activity to rebound.

 

 


Posted: 03 February 2012, last updated 9 February 2012

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