I.

INTRODUCTION

A transnational corporation (TNC) is any enterprise that undertakes foreign direct

investment, owns or controls income-gathering assets in more than one country, produces
goods or services outside its country of origin, or engages in international production
Although TNCs were in existence prior to the 20th century (the far-flung enterprises of the
European colonial powers were the precursors of the modern TNC, it is only since the 1960s
that they have become a major force on the world stage1 (World Bank, 1987:45).
In 1900, only European corporations were major transnational players, but by 1930 American
TNCs had begun to make their presence felt. The year 1960 is pivotal because it marks the
beginning of a new era in corporate Trans-nationalization. For each of the decades from 1960
to the present, world FDI stock more than tripled, whereas it only doubled during the entire
first half of the 20th century. The phenomenal increase in transnational corporate activity
during the latter part of the 20th century may be accounted for in large part by technological
innovations in transportation, communication, and information processing which have
permitted corporations to establish profitable worldwide operations and still maintain
effective and timely organizational control.
The existence of Transnational Company in India is not a recent phenomenon rather such
subsistence is approximately three centuries old. As such, the historical background of TNCs
in India can be traced back to as early as 1600s whereby the British capital came to dominate
the Indian scene through their Multinational Corporation known as East India Company in
the colonial era.
II. HISTORICAL BACKGROUND
II.I. INDIAN POLICY FRAMEWORK CONCERNING TNCS DURING PRE AND
POST INDEPENDENCE ERA
To discuss the historical background and policy framework for the TNCs, the analysis has
been divided into two periods i.e. pre and post-independence era:
(a) Pre Independence Era Policy
The period from 1900s-1918 can be called as the first phase of FDI in India when there were
no restrictions on the nature as well as type of FDI pouring into India. Majority of these
investments at those times were exploitative in nature and were just concentrating in the
sectors such as mining and extractive industries to suit the general British economic interest.
It is a noticeable fact that even in the post-independence era, a major pie of the FDI source of
India continued to come from the same source. It is interesting to note that despite of
allowance of this free flow of FDI, no other country was interested in investing in India other
than U.K. and all FDI coming to India during that period were sourced through the Managing
Agents from U.K.
1 http://www.worldbank.org/oed/trade/report.html

However, the period from 1919-1947 is considered to be more important when the FDI
actually originated in India. This phase can be called as second phase of pre-independence
FDI history in India. Import duties were introduced during this period to stimulate various
British companies to invest in the" manufacturing sector in order to protect their businesses in
India. Though some Japanese companies also enhanced their trade share with India, yet U.K.
maintained its position as most dominant investor in India during this period.
(b) Post Independence Era Policy
The Indian government was quite comfortable with the "laissez faire" policy adopted by
British government earlier; therefore, India was not having its own foreign policy. However,
after independence, various issues relating to foreign capital and its accompanying expertise
sought attention of the policy makers. Therefore, the government of India had to allow the
operations of the TNCs on such terms that best suited to national interests during postindependence era. The following were the major objectives of policy concerning FDI:
(i) To treat foreign direct investment as a medium to acquire modern advanced technology;
and
(ii) To mobilize resources, especially in terms of foreign exchange.
With the changing times, the policy of Indian governments kept on changing as per economic
and political exigencies prevailing at those times. Accordingly, it can be spilt into four
phases. Whereas in 1960s, these policies were quite liberal, yet these became very stringent in
1970s. However, these were again liberalized in 1980s and real liberalization occurred in
1990s. The main four phases for" Indian policy framework concerning TNCs can be
classified hereunder:

Phase I--1948-1966: The Period of "Cautious Welcome Policy"

Re first and unique foreign policy of India to deal with incoming FDI was pronounced by the
then Prime Minister Pandit Jawahar Lal Nehru at the very dawn of independence as on 6th
April, 1947. Despite of many critics of his world-wide view, a wide national consensus had
emerged for his ideas on independent foreign policy of independent India. Nehru statement in
parliament considered foreign investment as "necessary" not only to supplement domestic
capital but also to secure scientific, technical and industrial knowledge and capital equipment.
Therefore, following mutually advantageous promises were made to the TNCs:
* All undertakings, whether Indian or foreign will have to conform with the general
requirements of the government's overall industrial policy;
* No discrimination would be made by Indian policy makers between the foreign and the
domestic undertakings;

* As far as remittances of profits and repatriation of capital was concerned, reasonable

facilities would be granted to foreign investors as permitted by foreign exchange position at
prevailing time;
* In case a particular industry has to be nationalized; a fair and equitable compensation would
be granted to the foreign investors having a stake in that undertaking; and
* By rule, major interest, ownership and effective control of the undertaking should be in
Indian hands (Indian Investment Centre, 1985).
After carrying out industrialization in India to a satisfactory extent, new industrial policy
resolution of April, 1956 made various private domestic as well as foreign companies a part
of India's public sector. As a result of new policy, TRANSNATIONAL COMPANYs had to
venture through technical collaborations during that period in India. However, during the
tenure of second five year plan (1956-61), government faced two severe crisis in the form of
foreign exchange and financial resource mobilization. To deal with this crisis, government
liberalized its attitude towards TNCs and foreign investment in two ways:
(i) A more frequent equity participation was allowed to foreign enterprises; and
(ii) In lieu of royalties and fees, equity capital was accepted in technical collaborations.
Further, a number of other incentives such as tax concessions, simplification of licensing
procedures, double taxation avoidance agreements with certain countries and extension of
Agency for International Development (AID) Investment guarantee to cover US private
investment in India were also given to lure foreign companies. This led to "ambitious"
investments by many companies from countries such as UK and USA.
In order to further combat foreign exchange crisis, government further de-reserved some
industries such as drugs, aluminium, heavy electrical equipment, fertilizers, synthetic rubber
etc. in 1961. Further, the Finance Act of 1965 also made provision for certain additional tax
concessions.
Phase II--1967-1979: The Period of "Selective and Restrictive Policy"
The liberal attitude adopted in second five year plan had to be changed in the early seventies
due to significant outflow of foreign exchange in the form of remittances of dividends,
profits, royalties and technical less in this period. Therefore, to put an end to this
phenomenon, policy of government became highly restrictive as far as foreign exchange, type
of FDI and ownership of foreign companies was concerned. Government also set up a new
agency called "foreign investment board" and classified industries in order to regulate flow of
foreign capital in these sectors.
A new regulation called Foreign Exchange Regulation Act (FERA) was also enacted in order
to tighten the scope of FDI regime in India. With the operation of FERA, all existing
companies came under the direct control of the Reserve Bank of India. FERA resulted in

dilution of share of large number of companies as nearly 84 companies had disinvested from
India during that period.
In order to review the extent of technology brought in by these TRANSNATIONAL
COMPANYs, a committee called "technical evaluation committee" was formed and foreign
investment proposals were now discussed with the council of scientific and industrial
research (CSIR) and department of science and technology (DST). It was also specified to
assign primary role to Indian consultant in case of engagement of a foreign consultant.
Phase III--1980-1990: The Period of "Partial Liberalization"
In this phase, a new direction was given to the history of FDI in India, especially in the mideighties. This happened due to two reasons i.e. Second oil crisis and Failure of India to give
boost to its manufactured exports. As a result of this development, the balance of payment
position situation was further deteriorated. Therefore, a number of policy measures were
taken by the government to encourage and maintain operations of Multinational Corporations
in India. The main highlights of the policy of government of India during this period were:
* Firstly, liberalization of imports of capital goods and technology in order to stress the
modernization of the plants and equipment;
* Second, gradual reduction in import restrictions and tariffs in order to expose the Indian
economy to competition; and
* Thirdly, to assign an .important role to multinational corporations for promotion of export
of manufactured goods on a big scale.
The Reserve Bank of India also simplified procedural formalities relating to exchange
control. Further, the list of items under Open General License (OGL) was also expanded for
allowing imports of raw materials and capital goods. In 1986, the tax rates on royalties were
also reduced from 40 to 30 per cent. The scope of the technical development fund was also
widened to include import of all kinds of capital equipment, technical know-how and
assistance, drawings and design and consultancy services. Although, the amount of FDI
augmented by over 13 times during this period, foreign companies invested 'cautiously'
during this period with an attitude of wait and watch.
Phase IV--1991-2001: The Period of "Liberalization and Open Door Policy"
In the early nineties, the balance of payments problem of India had turned quite severe. Along
with, a rapid increase in India's external debt and increasing political uncertainty made
international credit rating agencies to lower both short and long term borrowing rating of
India. Therefore, the new government headed by Mr. P. V. Narasimha Rao initiated a
programme of macro-economic stabilization and structural adjustment programme at the
behest of IMF and World Bank. This resulted into liberalization of Economic policies in order
to encourage investment and accelerate economic growth.

The scenario relating to foreign direct investment in India could also not remain unaltered by
these new policy developments as in order to stabilize India's external sector and to review
the declining credit rating of the country, the government gave a second thought to the
foreign investment policy of India.
A Foreign Investment Promotion Board (FIPB) was authorized to provide a single window
clearance system in the Prime Minister's office in order to invite and facilitate transnational
company investment in India. For the purpose of expansion in the priority industries, the
existing companies were also allowed to raise their foreign equity levels up to 51 per cent.
The use of foreign brand names for products manufactured in domestic industry (which was
earlier restricted) was also liberalized. India also became a signatory to the Convention of the
Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments.
The Foreign Exchange Regulation Act (FERA), 1973 was revised and earlier restrictions
placed on TNCs in FERA were lifted. Moreover, the companies having more than 40 per cent
of foreign equity were treated on par with fully Indian-owned companies. New sectors such
as mining, banking, telecommunications, highways construction and management were
thrown open to private as wen as foreign owned companies. Further, the international trade
policy regime was also considerably liberalized with lower tariffs on various importable
goods.
III. PRESENT LEGAL AND REGULATORY STATUS FOR THE ENTRY OF THE
TRANSNATIONAL COMPANYS IN INDIA
III.I. POLICY DEALING WITH ENTRY OPTIONS FOR TNCS IN INDIA
A foreign multinational corporation planning to set up its business operations in India can
enter through the following modes:
* As an Incorporated Entity: to become an incorporated entity, a TNC can opt for becoming
an incorporated entity under Companies Act, 1956 through:
(i) Joint ventures; or
(ii) A wholly owned subsidiaries.
Depending on the requirements of the investor and subject to any equity caps prescribed in
respect of the area of activities under the Foreign Direct Investment (FDI) policy, foreign
equity in such companies can be up to 100% of the total equity.
* As an Unincorporated Entity: alternatively, any foreign multinational company can enter
into business operations in India by opening a:
(i) Liaison Office/Representative Office;
(ii) Project Office; or
(iii) Branch Office.

Such offices of multinational corporations can undertake activities permitted under the
Foreign Exchange Management Regulations, 2000.
III.II. INVESTMENT ROUTES OF FOREIGN MULTINATIONAL CORPORATION
IN INDIA
(a) Automatic approval--by the Country's Central bank i.e. the Reserve Bank of India; or
(b) Through the Foreign Investment Promotion Board (FIPB).

III.III. LEGAL POLICY FRAMEWORK GOVERNING FOREIGN CAPITAL IN

INDIA
The policy framework in India has been almost same for Indian as well as foreign private
investment. As the motive to regulate FDI since post-independence era was to ensure
majority control to remain in Indian hands to the extent possible, therefore several legal rules
and regulations were implemented as a part of policy framework at that time that discouraged
foreign ownership in most industries for many years. Starting from Industrial Policy
Regulation, 1948, this framework further included Industrial (Development and Regulation)
Act, 1951 (IDRA).
Similarly, Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) was required to be
adopted due to the Directive Principles of State Policy as enshrined in the Constitution of
India. In addition, to give a boost to the principle of self-reliance, conservation of the limited
foreign exchange resources, and rational utilization of the same and to curb external liabilities
for the coming generations, the Foreign Exchange Regulation Act (FERA) was also adopted
in 1973. All these acts produced an array of rules and administrative norms that in turn led to
creation of a wide and complex system of controls and procedures involving extensive delays
and uncertainties in new investments.
IV. ISSUES AND STRATEGIES OF REGULATION
In the late 1960s, the United Nations reached the opinion that transnational corporations had
come to play a central role in the world economy and that their role, with its transnational
character, was not matched by a corresponding understanding or an international framework
covering their activities2 (UNCTC, 1990:3).
This appraisal is analogous to the early development of corporations and their regulation in
the United States. Initially individual states, not the federal government, were responsible for
franchising and regulating corporations. In fact, in the closing decades of the nineteenth
century, several states most notably, New Jersey and Delaware actually vied with each
other in the realm of charter mongering. Although incorporation still takes place at the state
level, regulation has increasingly devolved to federal authorities due to the fact that
corporations expanded their operations beyond state jurisdictions. State control, therefore,
became cumbersome, if not ineffective.
2 http://unctc.unctad.org/html/docmaster90.htm

In a similar vein, in 1972 the Secretary-General of the United Nations appointed a Group of
Eminent Persons with the following mandate:
to study the role of multinational corporations and their impact on the process of
development, especially that of developing countries, and also their implications for
international relations, to formulate conclusions which may possibly be used by Governments
in making their sovereign decisions regarding national policy in this respect, and to submit
recommendations for appropriate international action.
After conducting a series of hearings from representatives of government, business, trade
unions, academe, and other interest groups, the Group issued a report on The Impact of
Multinational Corporations on Development and on International Relations3. The report
concluded that at present, national and especially international institutions do not deal
adequately with the various ways in which multinational corporations can use their power in
a manner which may run counter to the needs of the societies in which they operate
IV.I. ISSUES BETWEEN TNCS AND HOST GOVERNMENTS
National Sovereignty
Host country values and traditions
Social and economic development objectives
National laws and standards
Governmental affairs
Environmental standards
Employment
Human rights and equality of opportunity and treatment
Wage levels and employee benefits
Working conditions
Training and promotion opportunities
Industrial relations
Industrial democracy
Technology
Technology transfer
Research and development
Trade-marks and patents
Competition and Trade
Impact on local markets
Business practices
Consumer protection
Domestic-export sales ratio
Fiscal Policy
Impact on balance-of-payments
Transfer pricing
Repatriation of capital
Taxation
3 unctc.unctad.org/data/e74iia6a.pdf

Financial reporting
General
Corporate-state consultation and negotiation
Corporate disclosure and accountability
Corporate responsibility
IV.II. TNCS AND TRANSFER PRICING ISSUES IN INDIA
Transfer price is the price at which divisions of a company transact with each other.
Transactions may include the trade of supplies or labour between departments. Transfer
prices are used when individual entities of a larger multi-entity firm are treated and measured
as separately run entities.
By virtue of their international spread TNCs can avail simultaneously of complex tax laws,
corporate structural and other organisational laws to achieve the overall goal of profit
maximisation. Taxation of foreign income provides a legal incentive to invest abroad and also
the proliferation of `unfair' transactions and financial manipulations.
Operationally the financial manipulations for transfer pricing take the form of false invoicing.
This practice is defined by the OECD Committee on Fiscal Affairs (1976)4, as `a transaction
intended to evade tax by putting taxable objects outside the reach of national tax authorities
by means of an invoice that does not accord with economic facts.' This objective is achieved
through both under and over invoicing (of imports and exports), often by the same company.
Rules and regulations affecting transfer pricing activities of any corporate entity are usually a
combination of preventive, penalisation and adjustment measures to minimise the impact of
such manipulations on the economy.
In India, provisions under the Companies Act, Customs Act, Income Tax Act, and FERA exist
to regulate such transactions. Sections 212, 594 and 615 of the Companies Act require
disclosure of information about operations and finances of subsidiaries of all units falling
under the purview of the Act. Section 14(1)(A) and 14(1)(B) of the Customs Act, the
Customs Valuation Rules and the Customs Valuation Act (1988), all provide for customs
valuation of transactions which are not arms length;
The taxation of various sources of income (viz. dividends, royalties, technical fees), of
foreign companies and non-residents falls under Section 115 A, of the Income Tax Act; while
section 44 D of the act and Rules 10, 11 (Income Tax Rules), relate to the computation of
this income. Sections 92, 93 deal with cases of tax avoidance in related party transactions
involving non-residents, and Section 173 with the recovery of these taxes.
The Foreign Exchange Regulation Act, covers foreign exchange violations of RBI
directives. Section 12 (1) requires exporters to declare the full value of goods to be exported.
Violation of this section is dealt with invoking Section 19, which gives powers of inspection
and Section 22, which penalises false statements; Section 23 (1A), punishes any
contravention to the provisions of the Act for which no penalty is expressly provided.
4 acts.oecd.org/Instruments/ShowInstrumentView.aspx?.

IV.III. CRITICAL ANALYSIS OF ISSUES CONCERNING TNCS IN INDIA

Although the early nineties free market reforms initiated were meant to spur the growth of
foreign investment in India, yet the objectives have not been fully realized due to some
hurdles in the way. Mr Amrit Kiran Singh, Chairman of The American Chamber of
Commerce in India (AMCHAM), while submitting a compendium of position papers on key
industries to the Ministries concerned pointed out "poor infrastructure, belligerent tax
administration, fragmented markets, and pragmatic labour laws" as hurdles to FDI.
Mr Singh opined that if these issues are resolved, multinational companies present in India
and those in waiting would surely expand operations. Therefore, based on the analysis of
above policy frameworks from time to time and keeping in mind the view of various
renowned scholars and experts as well as potential investors, it is suggested to undertake a
critical evaluation of existing impediments and remove these in order to pave the way for the
further development through the mutually advantageous existence of Multinational
Corporations in the country. These are:
Levels of Bureaucracy: Central versus State
It has been observed that sometimes the rules of centre and state are in conflict with each
other that lead to creation of a confusion among the foreign investors. For example, from
June 2007, in liquor business, all foreign direct investments (FDI) have been allowed by
Union government through the "automatic" route by abolition of the licenses earlier required
for most manufacturing businesses in the 1980s. However, in spite of this change in policy
measure, FDI failed to move in this sector. This happened due to continuance of the
prevailing "state" laws as these laws continued to require licensing as well as levying of a tax
in the form of excise duty. Therefore, foreign multinational corporations still prefer to enter
into this business through joint ventures, partnerships, manufacturing alliances, taking leases
from domestic companies, operating through "work contracts" or by acquiring domestic
companies already having licenses rather than acquiring licenses from government.
Exorbitantly High Tax Rate Structures
India has one of the highest corporate tax rate structures as compared to other countries in the
Asia-pacific region. India's tax rates are not only higher as compared to countries in the Asiapacific region but also as compared to other nations and economies of the World. In a review
of corporate tax rates at the beginning of 2007 in 92 countries, the average tax rate in the EU
was found to be 24.2%, compared with 27.8% in the OECD countries and 28% in Latin
America, whereas India's tax rate is still hovering around an exorbitantly high of above 40
per cent (KPMG, 2007)5.

5 http://www.kpmg.com/global/en/services/tax/tax-tools-andresources/pages/corporate-tax-rates-table.aspx

It implies that India direly needs to review its policy concerning taxes at an immediate
instance and by following Kelkar Committee recommendations 6; India should bring, down its
tax rates to compete with other nations attracting FDI in the priority sectors. Efforts should be
made to amend the tax laws by incorporating new provisions such as reduced tax rates on
profits, tax holidays, accounting rules allowing for accelerated depreciation and loss carry
forwards for tax purposes and reduced tariffs on imported equipment and raw materials etc.
Lack of Developed Infrastructure
Extensive and efficient infrastructure is an essential driver of competitiveness. It is critical for
ensuring the effective functioning of the economy, as it is an important factor determining the
location of economic activity and the kinds of activities or sectors that can develop in a
particular economy (Global Competitiveness Report, 2013)7. However, as far as India is
concerned, existence of the state-controlled physical infrastructure is often considered as the
weakest link as well as major impediment to TNCs entry, especially in the manufacturing
sector. In a survey conducted by FICCI8, roughly 43 per cent of the respondents regarded
India's ports and airport facilities as substandard as compared to international standards. In
addition, investors also remained concerned with the lack of improvement in other
infrastructural facilities such as transport, roads, power and water availability also. However,
infrastructural factor is an important decider in choice of TNCs for starting their operations at
state level. States such as Gujarat, Maharashtra, Karnataka, Tamil Naidu and Andhra Pradesh
etc. are receiving a major pie in the share of FDI (Department of Industrial Policy &
Promotion, 2008)9 as compared to other states that lag behind in infrastructural facilities.
Therefore, policy relating to infrastructure definitely requires an immediate attention of the
policy makers.
Corruption
A combination of legal hurdles, lack of institutional reforms, bureaucratic decision-making
and the allegations of corruption at the top level have dragged foreign investors away from
India. Foreign investors find it difficult to cut a path through the paper work of overlapping
government agencies. The humongous bureaucratic structure has created a fertile ground for
corruption. Moreover, most foreign investors have become apprehensive of the country's past
record of discrimination against foreign multinational companies and India's prior reputation
of a slow, difficult, bureaucracy ridden environment to do business. This is evidenced by the
facts of Transparency International10, a global civil society organization which ranked India at
a faraway position as compared to other Asia-Pacific countries
6 finmin.nic.in/reports/Kelkar_Committee_Report.pdf
7 http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2012-13.pdf
8 http://www.ficci.com/surveys.asp#
9 http://dipp.nic.in/English/Publications/Annual_Reports/Annual_report.aspx

Political Instability
The foreign investors perceive Indian political environment to be inharmonious and peevish
for creating an amicable atmosphere for foreign investment. Foreign investors hesitate to
invest in India due to the political instability that in turn results in to instable policies coming
in frequently and without expectations. Not only this, the multiplicity of regional political
parties results into a clears majority at the centre level forming shaky and insecure coalition
governments. For example, there were four general elections and six prime ministers during a
short span of time. In such an environment, the much required economic reforms turn out to
be sluggish as well as inadequate. Instead of opting for a clear and unshaken attitude towards
reforms easing foreign investment, governments are repeatedly concerned with diluting the
reforms in order to keep their coalition partners on board
Inflexible Labour Laws
Global Competitive Report, 2008-0911 ranked India much behind in terms of labour market
flexibility. The causes of such inflexibility are rooted in the laws and regulations prevailing in
India. Labour laws are considerably stringent in India as compared to other countries, TNC
employers are generally discouraged to give a boost to labour hiring due to the inflexibility
brought out by Indian laws and regulations during cyclical downturns. As a result, these
companies are abandoned from closing down their inefficient and unprofitable businesses.
Also some of the Indian labour laws are perceived to be extremely out-dated, rigid and
inadequate particularly Contract Labour (Regulation & Abolition) Act, 1948, Industrial
Disputes Act 1947, Minimum Wages Act 1948, Workmen's Compensation Act 1923,
Employees' Provident Funds and Miscellaneous Provisions Act 1952 and Factories Act, 1948.
The main problems identified in these acts include cumbersome exit procedures, maintenance
of on-site records and myriad inspections etc.
Government Ceiling on Foreign Ownership
United States companies represented by American Chamber of Commerce (AmCham) have
cited ceiling on foreign ownership by the policy makers as the major backdrop of Indian
policy. As per AmCham12, due to the barriers to FDI, India is able to attract only $5 billion
from the United States, whereas at the same tine China grabs about $60 billion (Business
Line, 2006). These companies wish that the policy makers should remove the limit on foreign
ownership that effectively prevents foreign control of Indian businesses.

10http://www.transparency.org/news/speech/20121207_perceptions_of_corruptio
n_in_emerging_economies_persist
11 http://www.weforum.org/reports/global-competitiveness-report-2008-2009
12 https://www.iaccindia.com/page.asp?pageid=96

V. CONCLUSION
The foregoing analysis leads to the conclusion that much remains to be implemented in order
to improve the consistency in policy making and executing, improving quality of governance
and overall regulatory framework as well. This is particularly imperative in the case of
foreign investments coming in sectors such as infrastructure that are evidently critical for
overall growth and development of India in the years to come. However, in spite of this, the
policy makers need to deal fairly with the decision to open up various sectors for TNCs in
India.
Also the expansion of non-market hierarchical influences have characterised the growth of
transnational corporate entities and their interaction with various economic agents. Such
influences have had their impact both on the functioning of the market and its regulation
through state intervention. The increasing irrelevance of the market in the operations of TNCs
has been accompanied by a proliferation of regulatory mechanisms to re-establish the
supremacy of the market in the interaction of economic agents, in many developed capitalist
economies. The imperfections of markets and problems with their functioning, especially in
less developed economies, have however also given rise to the need to move beyond attempts
to restore some traditional version of market relations, and establish means of strengthening
the bargaining position of the state vis-a-vis TNCs.