SECTION 1: Market outlook
1.1 How would you summarise your jurisdiction's attitude
towards the influence of Japanese corporate culture in its
Japan has a tremendous cultural and traditional influence
over business in India. Both countries are very relationship
focused rather than deal focused, which is evidenced by the
long success enjoyed by companies like Suzuki (since 1982) and
Honda (since 1984) which have become household names in India
and whose products still dominate the markets. In the words of
Prime Minister Narendra Modi, "Japan in India is a benchmark of
quality, excellence, honesty and integrity". Signing of the
historic India-Japan Comprehensive Economic Partnership
Agreement (CEPA) in August 2011 accelerated economic and
commercial relations between the countries.
1.2 What is the outlook for Japanese investment into your
jurisdiction over the next 12 months?
India remains one of the most attractive investment
destinations globally, including for Japanese companies. India
has been ranked as the most attractive investment destination
in a survey of Japanese manufacturing companies, conducted by
the Japan Bank for International Cooperation.
Foreign direct investment (FDI) by Japan has increased in
recent years. Based on the data released by the Department of
Industrial Policy and Promotion, with a cumulative inflow of
$18.9 billion from April 2000 to June 2015, Japan has emerged
as the fourth largest contributor to FDI, contributing seven
percent of the total FDI invested into India. Japanese FDI has
mainly been in the automobile, electrical equipment,
telecommunications and pharmaceutical sectors. Japan has
financed many infrastructure projects in India, most notably
providing investment and critical technology for the metro
system in Delhi, which has transformed the transport
infrastructure of the Indian capital. The countries have signed
a Memorandum of Understanding introducing Japan's high speed
railways technologies (the Shinkansen or bullet train
system), between Mumbai and Ahmadabad.
Both governments have taken various steps to bolster
Japanese investments in India such as the Act East policy,
Japan Plus and the development of Japan industrial townships by
various state governments. Japan has been and will continue to
be an important partner in India's progressive journey. Prime
Minister Modi visited Japan for the Annual India-Japan
Bilateral Summit held in November 2016, where several major
pacts were signed.
Japan has been associated with Vibrant Gujarat Global Summit
(VGGS) since 2003. In the VGGS held in January 2017, Japan
indicated intent to establish a dedicated industrial park for
Japanese companies. Gujarat is a favoured investment
destination, with above 100 Japanese companies having
established business in Gujarat.
The government is undertaking various initiatives such as
Make in India, Digital India, Smart City and Start-Up India,
which, along with Japan's continued interest in providing
technological information and financing is bound to see
progress across various sectors including, nuclear energy,
defence, food industries and trade.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and
India has made substantial changes to its FDI policy. FDI
can be of two types: greenfield FDI and brownfield. Greenfield
FDI is investment by a foreign investor in a new venture in
India while brownfield FDI is investment by a foreign investor
in existing companies. The government of India has
substantially eased inflow of FDI in both greenfield and
brownfield projects. FDI is allowed in virtually all sectors
under the Automatic Route, meaning without requiring prior
approval either of the government or the Reserve Bank of India
(RBI) and is subject only to sectoral caps. A limited list of
sectors fall under the Government Route, for example where FDI
is subject to prior approval of the government.
Under the Government Route, the proposal would need to be
approved by the Foreign Investment Promotion Board, which is an
inter-ministerial body and follows a single window model for
clearing proposals. Recently, in the federal budget 2017, the
government announced its intent to abolish this body, while
stating its intent to further liberalise the FDI policy. These
are all very welcome changes.
2.2 Are there any investment restrictions in specially
regulated sectors and is the government entitled to any special
rights in these sectors?
FDI is prohibited in a few sensitive sectors such as atomic
energy, lottery and gambling businesses, cigarette
manufacturing and railway operations (other than certain
In certain key sectors (which are perhaps prone to political
influence) such as retail (wholesale and single-multi brand),
defence, civil aviation, financial services, brownfield
pharmaceuticals, telecommunications services and others, FDI
will have to be made through the Government Route.
2.3 Which authority oversees competition clearance? Please
give a brief overview of the merger clearance process.
The Competition Commission of India (CCI) is the nodal
agency established under the Competition Act 2002, which
oversees merger clearances.
The substantive provisions of the Indian merger control
regime are set out under the Competition Act and the
Competition Commission of India (procedure in regard to the
transaction of business relating to combinations) Regulations
2011 (Combination Regulations).
The Competition Act requires mandatory notification in case
of acquisition of assets, shares, control or voting rights of
an enterprise or in case of a merger or amalgamation of
enterprises, if the assets or turnover thresholds prescribed
under the Competition Act are exceeded.
The Competition Act states that the notifying parties cannot
consummate the transaction prior to receiving the CCI's
approval or until the 210-day period lapses. The Competition
Act empowers the CCI to impose a penalty of up to one percent
of the combined assets and turnover, whichever is higher, for
violating the suspensory regime and consummating a transaction
prior to the CCI's approval. The CCI can also impose this
penalty in case of failure or delay in notifying a
Competition Act extends to combinations taking place outside
India, even when the target enterprise/business/unit or the
transacting parties are located outside India. Given the
suspensory regime, a global transaction cannot be consummated
in territories outside India, until the CCI's approval.
The notification is required to be filed with the CCI within
30 days of:
- The board approval of the proposal
relating to the merger or amalgamation; or
- Execution of an agreement or other
document (in case of an acquisition). Other document, in
terms of the Combination Regulations, includes the public
announcement made in terms of the Indian Takeover Code.
However, binding term-sheets would not be considered a
trigger for notification provided it is subject to further
conditions such as receipt of regulatory approvals.
2.4 Are there further approval requirements that foreign
investors should be aware of?
Certain sectors have specific FDI linked performance entry
conditions, such as minimum capitalisation norms for FDI in
non-banking finance companies. Foreign investors should also be
mindful of the immediate business compliance requirements
relating to incorporation of a new company, appointment of
directors and tax registrations. Further, depending on the
business of the company, additional compliances and license
requirements for a manufacturing unit may become
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for
Japanese investment in your jurisdiction?
Foreign strategic investors, including Japanese investors,
intending to set up substantial business operations in India
most commonly choose to set up a wholly owned subsidiary (WOS)
or a joint venture (JV) in India.
Foreign investors are increasingly exploring the option of
incorporating a limited liability partnership (LLP), which has
the hybrid characteristics of a limited liability company and a
partnership. FDI is permitted in LLPs, undertaking activities
in sectors in which 100% FDI is allowed without any approval
and there are no entry conditions. However, LLPs are not yet
Unincorporated entities such as a liaison office, branch
office or project office can be established, by seeking
approval from an Authorised Dealer Category-I Bank. An approval
from the RBI is only required in certain specific cases. These
are useful for representing the parent company/group companies
in India, promoting export/imports from/to India, promoting
3.2 What are the key requirements for establishment and
operation of these legal entities?
A company can be incorporated according to the procedure
under the Companies Act, 2013 and needs to be registered with
the Registrar of Companies (ROC). A company will also be
required to obtain Director Identification Numbers and Digital
Signature Certificates for its directors, registrations for
Service Tax, Value Added Tax and Professional Tax. It may be
noted that a company incorporated in India requires at least
one director to be resident in India.
An LLP can be incorporated by two or more persons (including
by a company) by obtaining a Certificate of Incorporation from
the ROC, in accordance with the procedure under the Limited
Liability Partnership Act, 2008 (LLP Act). Every LLP is
required to nominate at least two designated partners, one of
whom should be resident in India.
A branch office must be registered with the ROC and should
normally be engaged in the same activity as the parent company,
unless otherwise specifically permitted by RBI. A liaison
office is permitted to carry on liaison activities only and
cannot carry on any commercial, trading or industrial activity
either directly or indirectly.
They are required to obtain a permanent account number from
the Indian tax authorities and file an annual activity
certificate (AAC) with the RBI.
A project office is typically set up by foreign companies
undertaking large projects such as major construction, civil
engineering and infrastructure projects. Securing a contract
from an Indian entity to execute a project is a pre-requisite
for setting up a project office. A project office is also
required to file an AAC.
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute
resolution proceedings, and what should Japanese investors be
particularly aware of?
The enforcement and dispute resolution proceedings of local
courts depend on the nature of action pursued. Due to recent
changes to arbitration law and setting up of commercial courts
and the National Company Law Tribunal in India, the
jurisprudence has shifted towards the speedy (strict timelines
prescribed) and efficient (technical qualifications prescribed)
resolution of commercial matters, especially involving
international entities. It should be noted that in almost all
cases till date, Japanese investors have preferred to contend
their claims against Indian parties via offshore seated
arbitration with Indian governing law, usually in
Investors should, however, be particularly aware of the
various appellate stages that a particular dispute may need to
go through before the same is finally resolved, including any
regulatory hurdles, as the same may result in varying time and
cost impacts. The main concern for all litigants continues to
be the substantial time taken to resolve their cases.
4.2 Does your jurisdiction have a bilateral investment
protection treaty with Japan and is that commonly used by
Due to the socio-economic situations in both countries, the
CEPA has not been fully utilised for the purpose of
facilitating inter-country investments. Consequently, the
development of jurisprudence, if any, with respect to any
dispute resolution under the CEPA has been impeded.
It remains to be seen if the recent steps taken by the
countries to improve bilateral relations and promote
cross-border investments will trigger greater utilisation of
4.3 Do local courts respect foreign judgments and are
international arbitration awards enforceable?
Japan is a non-reciprocating country with respect to India
and therefore, in order to enforce a judgment passed by a
competent court in Japan a fresh civil action (suit) needs to
be filed in a competent court in India, showing that the
foreign decree satisfies certain statutory tests. Courts will
not examine the sufficiency of evidence on merits or test the
correctness of the decision, and proceed with the execution of
International arbitration awards made in Japan are
enforceable in India under the New York and the Geneva
Conventions. Courts would merely interfere in the execution of
the same to satisfy itself that the prescribed conditions for
the enforcement of such awards are met.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should
foreign investors be aware of?
In an issue or transfer of shares of a private company to
foreign investors, the pricing should not be less than the fair
value determined through internationally accepted pricing
methodology on arm's length basis. Consequently, the pricing
for transfer of shares from a non-resident to a resident cannot
exceed the minimum price as determined above. Pricing of shares
of a listed company issued to or purchased by a person resident
outside India under the FDI Policy should not be less than the
price determined in accordance with the Securities Exchange
Board of India (SEBI) guidelines.
SECTION 6: Tax implications
6.1 Are there tax structures and/or favourable intermediary
tax jurisdictions that are particularly useful for Japanese
investors into the country?
There are no intermediary tax jurisdictions that are
particularly useful for Japanese investors, as compared to
others. Moreover, Japanese investors do not usually route
investments into India through other jurisdictions as the
India-Japan Double Taxation Avoidance Agreement (DTAA) is quite
Intermediary tax jurisdictions such as Mauritius, Singapore
and Cyprus were typically used to route FDI investments in
India due to a low capital gain taxation regime combined with a
favourable DTAA with India. However, these agreements have now
been re-negotiated in order to make them more stringent and
plug taxation loopholes that were being misused.
6.2 What are the applicable rates of corporate tax and
withholding tax on dividends?
The corporate taxation rate for foreign companies in
financial year 2016-17 is 40% and for domestic companies is
30%. For domestic companies whose gross receipt or turnover is
less than INR500 million ($7.66 million) in the financial year
2015-16, the Finance Bill, 2017 proposes the tax rate to be 25%
in the financial year 2017-18 for such companies, subject to
certain conditions. A company incorporated in India by Japanese
investors will be considered as domestic company.
A dividend distribution tax (DDT) of 15% is payable by
companies. Dividends received by foreign shareholders are not
taxable in India and dividends are not subject to withholding
Tax rate are further increased by surcharge, education cess
and secondary and higher education cess, which varies based on
the total income of the taxpayer.
6.3 Does the government have any tax incentive schemes in
There are various tax incentive schemes available for
setting up businesses in India. Some business activities are
subject to certain conditions, entitled to tax holidays from
income tax including:
- Developing, operating and maintaining
- Setting up of a unit in a special economic
zone (SEZ) for undertaking permitted activities;
- Processing, preserving and packaging
fruits or vegetables, meat and meat products, poultry, marine
or dairy products or the integrated business of handling,
storing and transporting food grains; and
- Setting up and operating a cold chain
facility, warehousing facility for agricultural produce,
laying and operating a cross country natural gas or crude or
petroleum oil pipeline network.
India has a Minimum Alternate Tax (MAT) which is payable by
companies which have high profits but negligible tax liability.
However, subject to conditions, MAT is not applicable to
foreign companies that do not have a Permanent Establishment
(PE) in India. Further, it also provides for concessional tax
treatment for capital gains arising on transfer of listed and
6.4 Are there any reciprocal tax arrangements between your
jurisdiction and Japan? If so, how can they aid investors?
India has a DTAA with Japan along with the CEPA. There is
also an agreement between Japan and India on Social Security,
Key Takeaways for investors:
- The profits of an enterprise of Japan
shall be taxable only in Japan unless the enterprise carries
on business in India through a PE situated therein. In many
cases activities that are preparatory or auxiliary to the
main business activities will not create a PE even if these
are carried out in India. For example, a liaison office will
not create a PE.
- Interest, royalties and fees for technical
services earned by resident of Japan from sources in India
are subject to a lower withholding tax rate of ten
- Interest arising in India and derived by
the Japanese Government, the Central Bank of Japan or any
financial institution wholly owned by Japan (for example the
Bank of Japan, Japan Bank for International Co-operation and
Japan International Co-operation Agency) is exempt.
- The Agreement on Social Security exempts
employees posted to the host country under short term
contracts (up to five years) from making social security
payments in such host country as long as social security
contributions have been made in the home country and
certificate of coverage in respect of the same has been
Managing partner, Cyril Amarchand
T: 91 22 2496 4455
Cyril Shroff has over 34 years of experience in a
range of areas, including corporate laws, securities
markets, banking, infrastructure, private client
practice and others. He is regarded and has been
consistently rated as India's top corporate, banking
and project finance lawyer by several international
surveys, including those conducted by International
Financial Law Review and Chambers Global.
Shroff heads the firm's Japan desk, and in addition
to advising on India – Japan transactions, he
regularly travels to Japan to speak at India-focused
seminars. Shroff has been recognised as a "legendary
figure in the Indian legal community". He is often
regarded as the "M&A king of India". He is a member
of the advisory board of the Centre for Study of the
Legal Profession established by Harvard Law School, the
advisory board of the National Institute of Securities
Markets and the board of IIM, Trichy. Shroff is also
part of various committees of the Confederation of
Indian Industry (CII) – the national council
on corporate governance, the national committee on
capital markets, private equity and venture capital,
commodities markets, financial investors and regulatory
affairs. Shroff was admitted to the Bar in 1982 after
receiving his BA LLB degree from the Government Law
College in Mumbai. He is a solicitor, High Court of
Bombay, since 1983.
Partner, Cyril Amarchand
T: 91 22 2496 4455
Rishabh Shroff joined the firm's Mumbai office in
2007, after completing his LLB from the London School
of Economics, London. He was admitted as an advocate in
the bar council of Maharashtra & Goa in 2007, and
is also a solicitor, Supreme Court of England and
Rishabh is a member of the firm's corporate team and
has been involved in a number of cross-border and
domestic transactions. He is the co-head of the firm's
Japan desk, and works very frequently with Japanese
clients. He has been part of the Japan desk for over
eight years, and during this time has advised a number
of leading Japanese and international companies on
their investments into India. He specialises in foreign
investments into India, private mergers and
acquisitions, domestic and foreign joint ventures, and
insurance. He has also worked in the firm's projects
and project finance team for two years
(2007–2009). He regularly travels to Japan for
India focused seminars and Japan – India
transactions. He is the general editor of
Shinkansen to India, the firm's
bespoke in-house publication for its Japanese
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