Investment and incorporation of companies is regulated by the Companies Act, 2013. The Act regulates the establishment of domestic and foreign companies, the power and responsibilities of senior management as well as details relating to audits and accounts. Other key legislation includes the Industries (Development and Regulation) Act 1951 which guides Government industrial policy objectives. The Indian Contract Act 1872 governs transactions relating to industry and trade, while the Industrial Disputes Act 1947 determines the settlement of industrial disputes. Other Acts that are relevant for business are the Competition Act of 2002, and laws and regulations relating to intellectual property rights (see further details in Section 3.3.5).
Foreign investors can establish in India through multiple routes: as a branch, as joint ventures with Indian partners, as a limited liability company or a wholly-owned subsidiary. There are certain advantages to incorporation as a domestic company. They are required to obtain approval from the Reserve Bank of India and are subject to policies, FDI limits and sectoral legislation relating to foreign investment (see below).
Establishing a company in India requires investors to register or obtain licences from various Government agencies, both in the Central and relevant State Governments. This is time consuming and confusing. The Department of Industrial Policy Promotion based in the Ministry of Commerce and Industry (DIPP) indicates that some 16 steps must be completed before an investor can establish a company. This has led to India being consistently ranked poorly by the World Bank's "starting a business" ranking (179 out of 189 economies in 2014 compared to 177 in 2013).25 To streamline the process, the Government through the DIPP is establishing "eBiz", a web-based portal which is a one-stop shop for delivery of services to investors by the Government which is expected to address the needs of business from inception through its lifecycle. This is expected to significantly reduce the amount of time and money spent by investors in obtaining licences to start a business.26 According to the September 2014 "Make in India" initiative of the new Government, all Central and State Government departments and ministries were expected to be integrated in eBiz by end-2014. The project which is being operated as a public-private partnership covers five pilot States during the first year covering 65 services (18 central Government and 47 State services, with a further 21 (8 Central and 13 State) services to be added during the second and third years of the project. The project is also expected to be extended to a further five States. The Government expects to provide over 200 State and central Government services through this platform during the next seven years.
Compulsory Industrial licensing
The Industries (Development and Regulation) Act, 1951 enables the Government "to direct investment into desired channels of industrial activity, inter alia, through the mechanism of licensing keeping with national development objectives and goals".27 Thus in addition to procedures for establishment, industrial licences are required for investing in certain industries and sectors. These industries (Table 2.3) remained unchanged from the time of the previous Review. In addition to these industries, licences are required for investment by non-medium and small scale enterprises manufacturing items reserved for the medium- and small-scale sector.28
Table 2.9 Industries for which industrial licences are compulsory, 2014
Industry
Electronic aerospace and defence equipment
Industrial explosives including detonating fuses, safety fuses, gunpowder, nitrocellulose and matches
Cigars and cigarettes of tobacco and manufactured tobacco substances (new licences for which have been discontinued since 1999 on health grounds)
Specified hazardous chemicals: hydrocyanic acid and its derivatives; phosgene and its derivatives; and isocyanates and diisocyantes of hydrocarbon not elsewhere specified
Source: Department of Industrial Policy and Promotion, Annual Report 2012-2013. Viewed at: http://commerce.nic.in/MOC/publications.
There are also two industries reserved for the public sector: atomic energy and railway operations other than construction, operation and maintenance of: (i) suburban corridor projects through public-private partnerships; (ii) high-speed train projects; (iii) dedicated freight lines; (iv) rolling stock including train sets and locomotives or coach manufacturing and maintenance facilities; (v) railway electrification; (vi) signalling systems; (vii) freight terminals; (viii) passenger terminals; (ix) infrastructure in industrial parks pertaining to railway line or sidings including electrified railway lines and connections to main railway lines; and (x) mass rapid transport systems.29 Investors in all other sectors and industries do not require approval from the Government but must file an "Industrial Entrepreneurs Memorandum" (IEM) with the Secretariat for Industrial Approval (SIA) in the DIPP. Procedures for filing the IEM have been simplified by making it possible to do so electronically since January 2014. The IEM, according to the authorities, is required principally for data collection purposes on investment and type of industrial activity. Industrial licences are valid for an initial period of three years following which they are extendable for up to a maximum period of seven years.30 If the licensee commences production during this period, the licence continues to be valid.
In November 2011, the DIPP also notified the National Manufacturing Policy (NMP) whose overall goal is to raise the share of manufacturing in GDP to 25% and create 100 million jobs over a decade or so. To implement the policy, national investment and manufacturing zones (NIMZs) have been created which provide infrastructure, land use on the basis of zoning, clean and energy efficient technology and social infrastructure and skill development facilities.31 The NIMZs are to be declared industrial townships with their own planning and investment clearance facilities. According to the authorities these will be different from special economic zones (SEZs) in terms of size, infrastructure, governance structures related to regulatory procedures, exit policies and fiscal incentives. The NIMZ will be much larger – a minimum of 5,000 hectares, compared to 500 hectares for a SEZ – although sector-specific NIMZs can be as small as 50 hectares; incentives for the NIMZ will include assistance with water and environment audits, easing access to finance, rationalization and simplification of business regulations, as well as for acquiring technology, compared to tax incentives provided for SEZs. The NIMZ must be declared so by the relevant State Government under the Constitution so that it can function as a self-governing and autonomous body while the SEZ operates under its own Act (SEZ Act, 2005).
In addition to compulsory industrial licensing and reservations for the public sector, environmental clearance under the Environment Protection Act, 1986, is required from the Ministry of Environment and Forests, for 29 industries prior to establishing industrial units.32 At the level of State Governments, companies are subject to land use, and industrial location laws. Most States also provide incentives for investment.
2.4.1.1 Micro, small and medium enterprises
Micro, small and medium enterprises (MSMs) as defined in the Micro, Small and Medium Enterprises Development Act, 2006 (Section 3), account for around 8% of India's GDP, 45% of manufacturing output and 42% of exports, and provide employment for a significant share of the population according to estimates by the Ministry of Micro, Small and Medium Enterprises.33Historically, in order to support these enterprises, the production of certain products could only be carried out by them. The number of such reserved items has been reduced gradually over the years with around 20 items currently on the list (see Section 3.3.1.4).34 Despite this reservation, approved non-medium and small-scale companies may also produce items reserved for the MSMs on condition they obtain an industrial licence from the DIPP and undertake to export at least 50% of their annual production.
2.4.2 Foreign investment
2.4.2.1 Policy
India's foreign investment policy has been consolidated in the Circular on Consolidated FDI Policy which is updated every year by the DIPP; the latest version available has been updated up to 17 April 2014.
It is implemented through the Foreign Investment Promotion Board (FIPB) comprising representatives from the Departments of Economic Affairs, Industrial Policy and Promotion, and Commerce and the Ministries of External Affairs and Overseas Indian Affairs. The FIPB can also co opt senior officials from other Ministries, financial institutions, and industrial sectors as and when required.
There are two main routes for FDI in India: the automatic route requires investors to register with the regional office of the Reserve Bank of India (RBI) and provide information to the RBI within 30 days of inward investment or issuing shares to non-resident shareholders. The non automatic route requires approval from the Government through an application to the FIPB. Most sectors are currently open for investment through the automatic route (except for investment by citizens of Bangladesh and Pakistan, which are subject to Government approval). FDI remains prohibited in certain agricultural activities, gambling and lotteries and real estate (Table 2.4). Those which require Government approval include tea, including plantations, defence, titanium mining, pharmaceuticals (brownfield), some broadcasting services, print media, telecommunications (above 49%), public and private banks (above 49%), non-scheduled air transport services (above 49%) as well as retailing services (above 49% for single brand and up to 51% for multi-brand) (Table A2.2).
For activities that require prior Government approval, the FIPB considers all investment valued at below Rs 12,000 million (around US$200 million); FDI above this amount is considered by the Cabinet Committee on Economic Affairs as are any other proposals referred to it by the FIPB of the Minister of Finance.
Since the previous Review in 2011, a number of changes have been made to investment policies. The key changes include permitting FDI in limited liability partnerships; FDI up to 100% is permitted in pharmaceuticals (greenfield and brownfield, the latter subject to Government approval); FDI through the automatic route is now permitted for petroleum-refining by the public sector enterprises of up to 49%, up to 100% in courier services, up to 49% in commodity exchanges, up to 74% (raised from 49%) for credit information companies, and up to 49% in infrastructure companies in the Securities Market and in power exchanges; in air transport services foreign airlines have been allowed to invest in the capital of Indian companies operating scheduled and non-scheduled air transport services, up to 49% (including both FDI and Foreign Institutional Investment) of their paid up capital, subject to approval by the FIPB and compliance with other relevant Government regulations; a lifting of FDI limits in single-brand product retail trading from 51% to 100% including up to 49% through the automatic route; and the introduction of FDI up to 51% in multi-brand trading subject to Government approval; for single- and multi-brand retailing other conditions also apply including local sourcing of up to 30% from Indian "small industries" and establishment only in cities with a population of above 1 million (Table A2.2).35
Table 2.10 Sectors in which FDI is prohibited, 2014
Sector
Agriculture other than floriculture, horticulture, apiculture, and cultivation of vegetables and mushrooms under controlled conditions; development and production of seeds and planting materials; animal husbandry (including breeding of dogs), pisciculture, aquaculture, under controlled conditions; and services related to agro and allied sectors
Plantations other than tea plantations
Lottery business including government/private and online lotteries etc.
Gambling and betting, including casinos etc.
Chit funds
Nidhi company
Trading in transferable development rights (TDRs)
Real-estate business or construction of farm houses
Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
Activities/sectors not open to private sector investment: atomic energy and railway operations (other than permitted activities in railway infrastructure (see Table A2.1))
Source: Department of Industrial Policy and Promotion (DIPP), Consolidated FDI Policy Circular of 2014 (effective from 17 April 2014), 17 April 2014; DIPP, Press Note No. 8 (2014 Series), 27 August 2014; and WTO (2011), Trade Policy Review: India, Geneva.
Most recently (on 25 September 2014) as part of the "Make In India" campaign, the Government raised the FDI limit in defence from 26% to 49% and permitted portfolio investment in defence up to 24% through the automatic route. In addition, up to 100% FDI will be permitted in defence industries for "modern state-of-the-art technology" on a case-by-case basis. FDI of up to 100% through the automatic route has also been permitted in certain railway infrastructure activities such as high-speed trains, dedicated freight lines, railway electrification, signalling, passenger and freight terminals and mass rapid transport systems.36 In the construction development sector, the Government has relaxed requirements for the minimum area and capitalization norms (which will not apply to investors which commit at least 30% of the total project cost for low-cost affordable housing) and the exit provisions for foreign investors. With the passage of amending legislation in March 2015, the FDI limit in an Indian insurance company has been raised from 26% to 49%.
India has bilateral investment promotion and protection agreements (BIPAs) that are in force with 72 countries and regions. In addition, Bilateral Investment Treaties (BITS) with 14 countries have been signed but are not yet in force.37
2.4.2.2 Incentives
A number of investment incentives are provided both by the central and State Governments to encourage investment in certain regions or activities (Section 3.3.1). In September 2014, the Government launched the "Make in India" programme which encourages investment in industry and services.38
