US Overseas Investment Report 2017: India
Feroz Dubash, Shruti Zota and Kanwardeep Singh, Talwar Thakore & Associates
SECTION 1: Market outlook
1.1 What is the outlook for US investment into your jurisdiction over the next 12 months, given the new US administration's protectionist focus?
In the absence of specific tax or regulatory changes, the outlook remains positive, although this may change rapidly depending on such change and market sentiment.
1.2 Are there any industries in particular that you think are more likely to be affected by the US's new economic stance?
Both the IT and pharma sectors may be impacted though the impact is difficult to accurately quantify. New immigration restrictions and more aggressive Food and Drug Administration (FDA) involvement may both have an impact, although these may be offset by currency fluctuations and increased domestic demand.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
Foreign investments can be made into India as foreign direct investment (FDI) or portfolio investment.
FDI is regulated by way of government policy (FDI policy), which frequently changes. There are two regimes for FDI: the automatic route and the approval route.
If the FDI proposal is within the limits prescribed by the FDI policy for the automatic route in that particular sector and the investment satisfies certain specified conditions, a foreign investor does not have to obtain any prior consent to make an investment, unless the sector specific guidelines specify otherwise (eg broadcasting, single-brand retail).
If the FDI proposal is outside the sector specific limits prescribed by the FDI policy for the automatic route and/or the investment proposal fails to satisfy any conditions set out in the FDI policy, the investment must be approved. In addition, where an Indian company is engaged in an industry sector with foreign investment limits, prior approval will be required for any action that would result in the aggregate foreign equity interest increasing beyond 50% and/or non-Indian residents acquiring control of that entity (control being defined as the power to appoint a majority of the board of directors or to control the management or policy decisions).
The regulatory authorities which regulate FDI are the Reserve Bank of India (RBI), which is the central bank of India, and (post the abolition of the Foreign Investment Promotion Board, which took place in June of this year) certain administrative ministries (Competent Authority) have been designated for processing the approval for FDI.
Downstream investments are also required to comply with same norms as applicable to direct FDI in respect to sectoral conditions and investment caps.
The Department of Industrial Policy and Promotion (DIPP) has released a standard operating procedure (SOP) which will regulate the procedure for processing FDI proposals. It prescribes a time frame of eight to 10 weeks. However, since this is a recent amendment the market practice will now evolve.
In addition to the above, foreign investment can also be made by portfolio investors and foreign venture capital investors. We have focused here on the regulatory regime governing FDI into India.
2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?
Currently, there remain only a handful of industry sectors in which no FDI is permitted – these tend to be sensitive industries, either for security reasons, such as atomic energy, or for political reasons, such as agriculture (except certain permitted activities), lottery, chit funds (types of savings scheme), tobacco, real estate, railway operations and gambling.
There are certain sectors which are partially under the approval route; or where certain conditions for FDI have been provided for. For example, FDI above 49 % in the insurance sector requires government approval. In sensitive sectors such as defence, broadcasting and civil aviation sector, FDI is subject to security clearances. FDI in print media, telecom, broadcasting and private security agencies is subject to compliance with sector specific conditions.
For sectors under the approval route, the government has the right to grant approval subject to such conditions as it may deem fit on a case by case basis.
2.3 Which authority oversees competition clearance and give a brief overview of the merger clearance process?
The Competition Commission of India (CCI) established under the Competition Act, 2002 (Competition Act) is the statutory authority that regulates combinations (acquisitions, mergers, amalgamations and de-mergers) in India and assesses whether or not they cause or are likely to cause an appreciable adverse effect on competition within the relevant market(s) in India.
Any acquisition, merger or amalgamation that exceeds the financial thresholds prescribed under the Competition Act amounts to combination, which is reportable to the CCI unless expressly exempted under the Competition Commission of India (Procedure in Regard to the Transaction of Business Relating to Combinations) Regulations, 2011 (Combination Regulations) or by government notification. A merger, amalgamation or acquisition is exempt from the requirement to notify if the target i.e., the relevant portion or division or business which is being acquired, has assets in India of not more than INR3.5 billion ($55 million); or turnover in India of not more than INR10 billion. If a combination does not benefit from any of the exemptions, the parties are obligated to file a notice with the CCI and cannot consummate the transaction before receiving it or if no order is passed within 210 calendar days from the date of filing.
Upon completion of the review, a non-confidential version of the final order passed by the CCI is published on its website. In addition, the CCI also provides for informal, oral and non-binding pre-notification consultation, which may relate to procedural or substantive issues. The CCI neither discloses the parties' query nor its opinion on its website or otherwise.
2.4 Are there further approval requirements that foreign investors should be aware of?
All FDI proposals with total foreign equity inflow in excess of INR5,000 crore (INR50 billion) need to be approved by the Cabinet Committee of Economic Affairs (CCEA). Additionally, approvals may be required depending on the structure of the transaction (eg transfer or issue of shares which are not in compliance with pricing guidelines). For FDI under the automatic route, certain post investment filings are required.
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for US investment in your jurisdiction?
The FDI regulations contemplate multiple forms for a foreign presence in India: a liaison office (LO); branch office (BO); project office (PO); the establishment of a company; or a limited liability partnership firm (LLP) in India. Important considerations for the type of investment vehicle include the nature of the proposed business in India, liability, tax treatment, intellectual property and employment issues.
a) LO: An LO acts as a representative of the foreign parent company in India. It is not permitted to do any business in India or undertake any revenue-earning activities. Therefore, LOs are used where the operation in India is limited only to marketing activities or to procure business for the overseas parent.
b) BO: Branches of foreign companies are permitted to undertake limited activities. These activities include export/import of goods and promoting technical or financial collaborations between Indian companies and parent or overseas group company.
c) PO: Foreign companies are permitted to establish offices in India to execute projects they have secured in India, subject to meeting certain specified conditions.
d) Company: Large scale business activity with FDI (from countries including US) is usually conducted through a company incorporated in India. Such a company may either be a private company or a public company or a listed company. The company can be a wholly-owned subsidiary in sectors where 100% FDI is permitted, or, in other sectors, a foreign investor will have to enter into a joint venture with an Indian counterparty.
The investment in a company can be through equity, convertible preference shares and convertible debentures, partly paid shares and warrants. There are, however, certain restrictions on convertible debentures and convertible preference shares issued to foreign investors.
e) LLP: An LLP is a legal entity separate from that of its partners, and enjoys perpetual succession. FDI is permitted through the automatic route in LLPs operating in sectors where 100% FDI is permitted under the automatic route with no FDI-linked performance conditions (subject to meeting certain specified conditions). LLPs with FDI are also permitted to make downstream investments in companies or LLPs.
3.2 What are the key requirements for establishment and operation of these legal entities?
The key requirements for the establishment of such legal entities are discussed below:
a) BO/ LO/ PO: The RBI has delegated its powers to the authorised dealer category-I bank (AD Bank) for considering applications for setting up of a BO/ LO/ PO in sectors in which 100% FDI is permitted under the automatic route. However, applications made by persons from certain specified countries or for establishing a BO/ PO/ LO in certain specified sectors will require prior permission of the RBI.
b) Company The Government of India regulates all Indian companies through the Ministry of Corporate Affairs (MCA). The administrative function of the MCA is discharged by regional registrars of companies (ROCs), who are responsible for registering companies incorporated within their jurisdictions and ensuring that companies comply with statutory requirements under Companies Act 2013 and the rules and regulations framed thereunder (Indian Companies Act). The regulatory framework applicable to all companies is primarily set out in the Indian Companies Act. The Indian Companies Act was notified on August 30 2013, replacing the erstwhile Companies Act 1956. The incorporation of a company under the Indian Companies Act is a relatively straightforward process and can be completed in approximately one to two weeks. Broadly, the major steps involved in incorporating a company include: applying for a unique director identification number for each proposed director; applying to the relevant ROC for a name for the proposed company; and submitting the constitutional documents. As a part of its efforts to provide speedy incorporation services in line with global practices, the MCA has introduced a new simplified electronic incorporation process called SPICe (Simplified Proforma for Incorporating Company Electronically).
c) LLP The incorporation of an LLP is primarily regulated by the Limited Liability Partnership Act, 2008 along with the various rules and regulations framed thereunder (LLP Act). Broadly, the major steps involved in the incorporation of an LLP include preparation of the partnership agreement providing for details such as the name, proposed business and registered office of the LLP, names and addresses of the partners and designated partners of the LLP. The partnership agreement must be filed with the ROC along with a prescribed fee.
The key requirements for the operation of such legal entities will include compliance with the Indian regulatory framework. The regulatory framework applicable to a company is mainly found in the Indian Companies Act. A listed company, in addition to compliance with the Indian Companies Act, is required to comply with certain continuous listing obligations which are prescribed in the Sebi (Listing Obligations & Disclosure Requirements) Regulations, 2015.
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should US investors be particularly aware of?
Litigation in India tends to be cumbersome, lengthy, and expensive. Suits admitted by Indian courts can take up to 20 years to be concluded with parties making interim applications and appeals at multiple levels. The High Courts and Supreme Court are experiencing backlogs of 10 to 15 years. It is for this reason that alternative dispute resolution methods are gaining popularity.
In an attempt to expedite the Indian judicial system, the High Courts and the district courts have established special commercial divisions for expediting hearings of commercial disputes valued over INR10 million. The arbitration application and appeals relating to commercial disputes will also be taken up by such specialised courts. It is hoped that these courts will expeditiously deal with commercial disputes.
In addition to the courts, various specialised tribunals have exclusive jurisdiction over specified subject matters (such as the National Company Law Tribunal, Securities and Exchange Board etc.)
Arbitration is a well-settled mode of resolving commercial disputes. However, the Indian courts have been known to interfere with the arbitration process and this has contributed to delay and increased costs. Recently, there appears to be a shift in the attitude and the courts seem to be adopting a less intrusive approach.
4.2 Does your jurisdiction have a bilateral investment protection treaty with the US and is that commonly used by investors?
At present, India does not have a bilateral investment protection treaty (BIPT) with the US and negotiations are ongoing. Like US, India also has adopted a revised model BIPT in the year 2015.
India and US have entered into a double taxation avoidance treaty.
4.3 Do local courts respect foreign judgments and are international arbitration awards enforceable?
Enforcement of foreign judgments
A foreign judgment is considered conclusive regarding the matter adjudicated upon between the same parties, except where it:
a) has not been pronounced by a court of a competent jurisdiction;
b) is not on the merits of the case;
c) appears on the face of the proceedings to be founded on an incorrect view of international law or a refusal to recognise applicable Indian law;
e) where the proceedings in which the judgment was obtained are opposed to natural justice;
f) has been obtained by fraud; or
g) sustains a claim founded on a breach of Indian law.
Conclusive judgments of courts of a notified reciprocating country can be enforced like a decree of an Indian court. Judgments given by other foreign courts can be enforced only by instituting a fresh suit in a court in India and the judgment of foreign court can merely be adduced as evidence.
The US is not a notified reciprocating territory. Therefore, if a judgement passed by a US court needs to be enforced against a party in India, an entirely new proceeding will need to be started in India and the judgement of the courts in US can merely be adduced as evidence. The US is a notified country.
Enforcement of international arbitration awards
A foreign arbitral award is an award issued in relation to an agreement covered under the New York Arbitration Convention on the Recognition and Enforcement of Foreign Arbitral Awards or the Geneva Convention on the Execution of Foreign Arbitral Awards which is final, pertains to a commercial dispute and is passed in a notified reciprocating country.
The grounds to challenge enforcement of such foreign arbitral award are limited and the courts are not otherwise permitted to re-examine the award on the merits of the decision.
Awards not covered under these conventions cannot be enforced in India as arbitral awards.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should foreign investors be aware of?
The RBI has been granted authority under the Foreign Exchange Management Act (Fema) for implementing and enforcing foreign exchange regulations. Transfers of INR and non-INR currencies from and to India are subject to RBI regulations that specify the purposes for which such transfers can be undertaken, and the limits applicable thereto. The Indian Rupee is not a freely convertible currency and restrictions apply to the sale, purchase and transfer of foreign currency by or to resident individuals in India.
Fema also prescribes certain pricing requirements which must be adhered to while undertaking transactions between an Indian resident (IR) and a non-resident (NR). Therefore, a transfer of shares of an Indian company from an IR to an NR cannot take place at a price lower than the fair market value of the shares; and from an NR to an IR cannot take place at a price higher than the fair market value of the shares. The fair market value is determined by a chartered accountant or merchant banker registered with Sebi using any internationally accepted valuation methodology.
Section 6: Tax implications
It is recommended that detailed tax advice should be sought.
6.6 Do you think that the introduction of new rules and regulations in the US, such as the Bring Jobs Home Act, is likely to have an impact on investment into your country?
A very popular practice adopted by US companies has been to outsource jobs to other countries including India. The primary trigger for such practice has been substantial savings in terms of costs when such jobs are performed out of India. The Bring Jobs Home Act aims to provide tax benefits to those companies which discontinue outsourcing jobs and relocate such jobs back to US. However, while such a move will create job opportunities in the US, we believe it will not significantly affect the FDI flow into India.
About the author
Partner, Talwar Thakore & Associates
T: + 91 22 66136900
F: + 91 22 66136901
Feroz Dubash spent eight years at Linklaters in the project finance and corporate departments and was a founding member of the India Group before helping set up TT&A in 2007. He has a wide range of experience advising clients on transactions including joint-ventures, public and private acquisitions and disposals, banking and project financing. He has focused on corporate transactions in the financial sector since he moved to TT&A.
About the author
Counsel, Talwar Thakore & Associates
T: + 91 22 66136900
F: + 91 22 66136901
Shruti Zota is a counsel with a wealth of experience advising international banks and financial institutions and other regulated intermediaries on licensing, governance, compliance and regulatory issues. She has advised clients on confidentiality requirements and data protection legislation. While focusing on the financial regulatory practice, she has also been closely involved in advising a variety of clients on mergers, acquisitions, joint-ventures, disposals (public and private) and private equity investments.
About the author
Associate, Talwar Thakore & Associates
T: + 91 22 66136900
F: + 91 22 66136901
Kanwardeep Singh is an associate who has advised a variety of clients on general corporate and regulatory issues. While focusing on corporate transactions, he has also been involved in advising domestic and international banks and financial institutions on various issues relating to banking and finance law.