India, and Investment Potential in India

for The Center For American and International Law

By : Gautam Mahajan President - Inter-Link Services Pvt. Ltd. June 13, 2006
Inter-Link Services Pvt. Ltd. Tel: 011-26922006, 26831226; Fax: 011-26929055; E-mail: inter_link@vsnl.com / mahajan@interlinkindia.net Website: www.interlinkindia.net

DISCUSSION POINTS 1. 2. General Business Tips India, and Investment Potential in India Foreign Lawyers and Legal Services in India: Frequently Asked Questions

3.

DISCUSSION POINTS
1. General Business Tips
General Business Tips American Companies in India Legal Opportunities

2.

India, and Investment Potential in India Foreign Lawyers and Legal Services India: Frequently Asked Questions in

3.

General Business Tips

From the American Business Experience in India: Lessons from successful American companies:
Know the rules and the law and follow them Conduct rigid due diligence Do not get guided by quick methods or short-cuts Avoid un-ethical practices Hire a good knowledgeable consultant on India

American Companies in India

Top 5 American employers in India 2 years ago:
General Electric: Hewlett-Packard IBM American Express Dell : 17,800 employees : 11,000 employees : 6,000 employees : 4,000 employees : 3,800 employees (today 10,000, growing to 20,000)

   

General Electric (GE) with $80 Million invested in India employs 16,000 staff, 1,600 R&D staff who are qualified with PhDs and Masters degrees. The number of patents filed in USA by the Indian entities of some of the MNCs (upto September, 2002) are as follows: Texas Instruments - 225, Intel - 125, Cisco Systems - 120, IBM - 120, Phillips - 102, GE - 95. Staff at the offices of Intel (India) has gone up from 10 to 1,000 in 4 years, and will reach 2000 staff by 2006. GE's R&D centre in Bangalore is the company's largest research outfit outside the United States. The centre also devotes 20% of its resources on 5 to 10 year fundamental research in areas such as nanotechnology, hydrogen energy, photonics, and advanced propulsion. It is estimated that there are 150,000 IT professionals in Bangalore as against 120,000 in Silicon Valley.

Legal Opportunities
Help Indian companies wishing to enter USA, China etc. Help Indian companies and lawyers in collaborative projects with American companies outside India Buy legal and paralegal services from India at low rates.. Example is GE Send lawyers to India acceptable to the Indian bar rules or willing to pass the Indian bar exam

"There are lots of opportunities to use [foreign] lawyers in place of outside counsel or other lawyers at a lower cost structure," says Suzanne Hawkins, senior counsel at General Electric Co. For two GE businesses -- GE Plastics and GE Consumer Finance -- savings from those lower rates are adding up. GE began adding lawyers and paralegals to its office in Gurgaon, India, in late 2001. It now has eight lawyers and nine paralegals there and has saved more than $2 million in legal fees that would otherwise have been spent on outside counsel, according to Hawkins. Jennifer Fried
The Recorder August 25, 2004

DISCUSSION POINTS 1. 2.

General Business Tips India, and Investment Potential in India

Foreign Direct Investment in India An overview of Indian Economy Investing in India Entry Routes Foreign Direct Investment: Policy Indias Competitive Advantage Investment Opportunities

3.

Foreign Lawyers and Legal Services in India: Frequently Asked Questions

Foreign Direct Investment in India

Fourth largest Economy (PPP) - A safe place to do business Largest democracy political stability & consensus on reforms

Largest reservoir of skilled manpower

Liberal & transparent investment policies

Long-term sustainable Competitive advantage - High growth rate economy

An overview of Indian Economy

Economic Performance Foreign Trade Investment Mature Capital Markets A well developed banking system

An overview of Indian Economy

Economic Performance
o Sustained economic growth
o o o o Average last 10 years 6.5% 2004-05 6.9% Forecast up to 2006-07 >7.0% Forecast till 2050 Goldman Sachs 5 % p.a.

o Services share in GDP over 50% (52.4% share in GDP in 2004-05) o Manufacturing sector grew at 8.8% in 2004-05 (17.4% share in GDP in 2004-05)

An overview of Indian Economy

Foreign Trade
o Merchandise exports grew by 25% in 2004-05, now US$80 billion o Imports grew by 36%, now US$106 billion

Investment
o Foreign Investment over US$14 billion in 2004-05 (FDI US$5.5 billion, FII US$8.9 billion)

Mature Capital Markets

o NSE third largest, BSE fifth largest in terms of number of trades

Goldman Sachs Report of 1 October, 2003

"Dreaming with BRICs: The path to 2050" India's GDP will reach $ 1 trillion by 2011, $ 2 trillion by 2020, $ 3 trillion by 2025, $ 6 trillion by 2032, $ 10 trillion by 2038, and $ 27 trillion by 2050, becoming the 3rd largest economy after USA and China. In terms of GDP, India will overtake Italy by the year 2016, France by 2019, UK by 2022, Germany by 2023, and Japan by 2032.

Economic Reforms - Fiscal

Rationalization of tax structure both direct and indirect Progressive reduction in peak rates o Peak Customs duty reduced to 15% o Corporate Tax reduced to 30% o Customs duties to be aligned with ASEAN levels Value Added Tax introduced from 1st April 2005o only 6 states left Fiscal Responsibility & Budget Management Act, 2003 o Revenue deficit to be brought to zero by 2008

Economic Reforms - Liberalisation of Investment & Trade Policies

Industrial Licensing
o

Progressive movement towards delicensing and deregulation

Licensing limited to only 5 sectors (security, public health & safety considerations)

Foreign Investment
o o o

Progressive opening of economy to FDI Portfolio investment regime liberalised Liberal policy on technology collaboration Most items on Open General License, Quantitative Restrictions lifted

Trade Policy
o

Foreign Trade Policy seeks to double Indias share in global merchandise trade in 5 years

Economic Reforms - Exchange Control & Taxation

Exchange Control
All investments are on repatriation basis Original investment, profits and dividend can be freely repatriated Foreign investor can acquire immovable property incidental to or required for their activity Rupee made fully convertible on current account

Taxation
Companies incorporated in India treated as Indian companies for taxation Convention on Avoidance of Double Taxation with 65 countries

Manufacturing Competitiveness Made in India

Second most attractive destination for manufacturing
o

AT Kearneys FDI Confidence Index 2004

Indian industry globally competitive in a wide range of manufacturing skill-intensive products:

o

Apparels, electrical and electronics components; speciality chemicals; pharmaceuticals; etc.

Automotive components: Major MNCs & their OEMs sourcing high-quality components from India
o

Volvo, GM, GE, Chrysler, Ford, Toyota, Unilever, Cliariant, Cummins, Delphi

Indian companies now having manufacturing presence in many countries

o

Over 55% of approved outward investment by India companies in manufacturing activities

Evolution of FDI Policy

2000-05 2000 More sectors opened ; Equity caps raised in many other sectors Procedures simplified Up to 100% under Automatic Route in all sectors except a small negative list Up to 74/51/50% in 112 sectors under the Automatic Route 100% in some sectors FDI up to 51% allowed under the Automatic route in 35 Priority sectors

1997

1991

Pre 1991 Allowed selectively up to 40% FDI Policy Liberalization

Investing in India Entry Routes

Investing in India

Automatic Route

Prior Permission (FIPB) By Exception Prior Government Approval needed. Decision generally within 4-6 weeks

General Rule No prior permission required Inform Reserve Bank within 30 days of inflow/issue of shares

FDI Policy Initiatives : 2000-2004

New sectors opened to FDI
o o o

to 26% divestment in 5 years Defence production, Insurance, print media - up to 26% Development of integrated townships up to 100% e-commerce, ISP with out gateway, voice mail, electronic mail, tea plantation -100% subject

FDI equity limits raised

o o o o

Private sector banks raised from 49% to 74% Drugs and pharmaceuticals from 74% to 100% Advertising from 74% to 100% Private sector refineries, Petroleum product marketing, exploration , petroleum product pipelines 74% to 100%

Procedural simplification
o

Issue of shares against royalty payable allowed

Recent Initiatives : June 2004 onward

FDI in domestic airlines increased from 40% to 49%. Automatic route allowed FDI up to 100% allowed under the automatic route in development of townships, housing, built up infrastructure and construction development projects Foreign investment limit in Telecom services increased to 74% FDI and portfolio investment up to 20% allowed in FM Broadcasting. Hitherto only Portfolio investment was allowed. Transfer of shares allowed on automatic route in most cases Fresh guidelines for investment with previous joint ventures A WTO (TRIPs) IPR regime compliant in position since 2005 Patents Act amended to provide for product patent in pharma and agro-chemicals also.

Policy on FDI
FDI up to 100% allowed under the Automatic Route in all activities except for
Sectors attracting compulsory licensing o Transfer of shares to non-residents (foreign investors)
o
o o

In Financial Services, or Where the SEBI Takeovers Regulation is attracted

Investor having existing venture in same field o Sector specific equity/route limit prescribed under sectoral policy
o

Investments made by foreign investors are given treatment similar to domestic investors

Main Sectors with FDI Equity/Route Limit

FDI equity limitAutomatic route
Insurance 26% Domestic airlines 49% Telecom services- Foreign equity 74% Private sector banks- 74% Mining of diamonds and precious stones- 74% Exploration and mining of coal and lignite for captive consumption- 74%

FDI requiring prior approval

Defence production 26% FM Broadcasting - foreign equity 20% News and current affairs- 26% Broadcasting- cable, DTH, uplinking foreign equity 49% Trading- wholesale cash and carry, export trading, etc., 100% Tea plantation 100% Development of airports- 100% Courier services- 100%

Corrected as of December 05

Foreign Technology Collaboration Policy

Foreign technology agreements also allowed under Automatic route:
o o

Lump-sum fees not exceeding US$2 Million Royalty @ 5% on domestic sales and 8% on exports, net of taxes Royalty up to 2% on exports and 1% also permitted for use of Trade Marks and Brand name, without any technology transfer

Wholly owned subsidiaries can also pay royalty to their parent company Payment of royalty without any restriction on the duration allowed.

India: FDI Outlook

2nd most attractive investment destination among the Transnational Corporations (TNCs) UNCTADs World Investment Report, 2005 3rd most attractive investment destination AT Kearney Business Confidence Index, 2004
o o

Up from 6th most attractive destination in 2003 and 15th in 2002 2nd Most attractive destination for manufacturing

Among the top 3 investment hot spots next 4 years

o

for the

UNCTAD & Corporate Location April 2004

Most preferred destination for services - AT Kearneys 2005 Global Services Location Index (previously Offshore Location Attractiveness Index)

Indias Competitive Advantage Human Capital

Indias competitive edge - its highly-skilled manpower and entrepreneurial expertise
o o o o o o

Over 380 universities (11,200 colleges) 1500 research institutions Over 200,000 engineering graduates Over 300,000 post graduates from non-engineering colleges 2,100,000 other graduates Around 9,000 PhDs

Knowledge workers in software industry increased from 56,000 in 1990-91 to over 1 million by 2004-05; 54% of Indias population under 25 years of age India would continue to be surplus in working population for a long-time
o

Would contribute 25% to the additional working population globally over the next 5 years.

Indias Competitive Strengths HRD Contd. Rank out of 102 countries

Availability of scientist and engineers Quality of management schools Quality of scientific research institutions Quality of educational system 3 8 20 36

IT Advantages

IT- ITE S E x ports In U S $ illion

20 18 16 14 12 10 10 8 8 6 .2 6 4 2 0
2 0 0 0 -0 1 2 0 0 1 -0 2 2 0 0 2 -0 3 2 0 0 3 -0 4 2 0 0 4 -0 5

IT ITES Industry
o

1 7 .2

Exports US$17.2 billion in 200405, growth of 34% over previous year 2008 exports target : US$60 billion, to be 35% of Indias total exports

1 2 .8

High quality standards

o

76 SEI/CMM level 5 companies, two third of worlds total, are Indian Over 250 of the Fortune 500 companies are clients of Indian firms R&D base of over 100 FORTUNE 500 companies

Investment Opportunities
o o

Collaborative ICT research Joint Software development in a variety of applications

Recent Infrastructure Initiatives

National Highway Development Programme to develop over 24,000 km of highways
o o o

Golden Quadrilateral NSEW Corridor Links to ports and State capitals Metro and other airports

Modernisation of airports
o

Development of ports with private sector The Electricity Act, 2003 provides the framework for development of power sector Bharat Nirman Programme to develop rural infrastructure at an estimated cost of Rs. 1,74,000 crore (~US$40 billion) Jawhar Lal Nehru Urban Renewal Mission Rs. 100,000 crore (US$22 billion) Country wide rural connectivity programme to link all unconnected village having population of 500 with fair weather road undertaken

Telecommunications
8

Among the fastest growing telecom markets o 550,000 km of optical fibre cable laid 2 million Cellular phones added every month o Among the lowest mobile tariff in the world Share of private sector 50% Tele-density of 10.66, expected to be 20 in next three years New Broad Band Policy announced: o 690,000 connections since April 2005 o Internet subscribers 6 million (March 05) Investment Opportunities o Setting up manufacturing facilities; o Supply of hand sets and equipments o Telecom & Value added service.

o in m illion

77

87 8

u to ct

Roads
Policy
o

FDI up to 100% is permitted for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels Ten year tax holiday for road and highway projects Existing road network of 3.3 million kilometers 24,000 km of Highways being developed under National Highway Development Programme
o o o

Recent Initiatives
o o

billion envisaged Golden Quadrilateral : 5846 kms- 5000 kms completed NSEW Corridor: 7300 kms 784 kms completed, 3691 kms under implementation Investment US$20 billion

Investment Opportunities
o o

Projects for 12,000 km would be on offer Many more opportunities in the States

Power
Policy & Incentive
o

Shar e of Installed Capacity

FDI up to 100% is permitted on the automatic route in all segments except atomic power Ten-year tax holiday for generation and distribution or transmission and distribution of power The Electricity Act 2003 allows trading in power and provides for further deregulation; Independent Regulator in most states Additional capacity required 100,000 MW till 2012 Investment US$120 billion needed Financial closure of over 6000 MW capacity achieved in last one year

Nuclear 2%

Hydro+W ind 22%

Institutional Reforms
o

Thermal 76%

Investment Opportunities
o

o o

Ports
Policy & Incentives
o o

FDI up to 100% permitted for construction and maintenance of ports and harbors. Ten year tax holiday

Public-private partnership
o o

12 major ports, 185 minor ports 14 private/ captive projects with investment of US$ 600 million completed 24 projects with investment of US$1.6 billion under implementation/award

Investment requirement of US$22 billion to develop maritime sector

o o

Ports & Shipping Inland waterways

Special Economic Zones

Policy o Duty free zones, deemed foreign
territories

New Law on SEZ enacted

o FDI up to 100% permitted in

almost all manufacturing activities

o Transfer of goods from DTA to

SEZ treated as exports,

Incentives o For developer: Income tax exemption

for a block of 10 years in 15 years

o Units to be net foreign exchange

earner within 5 years. No export commitments

o For units: 100% Income Tax

exemption for first 5 years, 50% for next 5 years and 50% of the ploughed back export profits for next 5 years

o No limits on DTA sales o Can be set up in the public,

private or joint sector

o Exemption from indirect taxes; excise,

sales, services tax, etc.

o Freedom to raise ECB with out any

maturity restrictions

o Single Window Clearance

Cont

Special Economic Zones

11 Special Economic Zones are functional
o

SEEPZ Mumbai, Kandla, Cochin, Chennai, Visakhapatnam, Falta, NOIDA, Surat, Salt Lake, Indore and Jaipur Over 800 functional units employing over 100,000 persons Exports of US$4 billion in 2004-05

42 new Special Economic Zones have been approved and are under establishment
o

Many have participation with State Governments and Private Sector Gems & Jewellery, Electronics & Hardware, Software, Textile & Garment, Engineering Goods, Sports Goods, Leather Products, Chemicals & Allied Products

Major Industries in Special Economic Zones

o

Public Private Partnership

Infrastructure projects might not be financially viable on their own; Public Private Partnership to bring in private sector resources and techno-managerial capabilities; Viability Gap Funding for
o o o o

Roads, railways, seaports, airports; Power Water supply, sewerage, solid waste disposal in urban areas; International convention centres.

Funding in the form of capital grant, Operation & Management support, interest subsidy, etc. Support linked with predefined milestones.

Food Processing
Third largest producer of food items
o o o

Largest milk producer Largest livestock population; 2nd largest in fruits & vegetables 50% of household income spent on food items With increasing income levels and urbanisation fast growth in demand of processed food expected; over 250 million strong middle class Low levels of value addition in food sector: only 7%

Opportunities in food processing sector

o o

New Integrated Food Law being enacted Investment of US$ 28 billion required to raise food processing from 2% to 8-10%. Investment opportunities in
o o

Processing of fruit & vegetable, meat, fish & poultry, milk products, packaged food & drinks. Establishing infrastructure, cold chain, etc.

Incentives for the Development of Industrially Backward Areas

A special package of incentives to promote industrialization of industrially backward regions
o

North Eastern states, Skim, Jammu & Kashmir, Uttaranchal and Himachal Pradesh

Incentives
o o o

100% Income Tax Exemptions for 10 years Excise Duty Exemptions for 10 years Transport Subsidy for transportation of raw material and finished products, Investment Subsidy (50-90%)

Governance and Regulatory System

Central, State and Local levels of Government with their specified powers and responsibilities seen as complicated in regulatory administration by investors 11.9% of Senior Managements time spent in dealing with Government agencies
(Source: World Banks Report - India Investment Climate Assessment, 2004)

World Banks Report Doing Business in 2006

o

o o

71 days required to set up a Company and start business Incorporation of Company and PAN/TAN allotment taking most time Paying taxes: 59 transactions taking 264 hours in a year Closing a business: time taken 10 years

Governance - Initiatives
Major e-governance initiatives undertaken at Central and State level National e-Governance Action Plan
o o o

Projects being taken up in Mission mode at Central and State level. Integrated services projects for services across Departments. MCA-21 - Ministry of Company Affairs, to cover all Registrar of Companies by June 2006 To set up a web enabled portal to provide for the services at the Central, State and Local level during the entire life cycle of business To begin with a pilot project covering 25 services in four states Project capable of rapid upscaling to cover other services and extend to other areas

e-Biz project being taken up by the Department of IPP

o

o o

Right to Information Act for greater transparency in public administration

Investment Opportunities
Development and management of infrastructure Food processing, including logistic and support services, development of cold chain Manufacturing relocation into India R&D leveraging on abundant skilled manpower IT & ITES, Software as well as hardware

DISCUSSION POINTS 1. General Business Tips 2. India, and Investment Potential in India 3. Foreign Lawyers and Legal Services in India:
o Frequently Asked Questions o Judgment of Bombay High Court

Foreign Lawyers and Legal Services in India: Frequently Asked Questions

1.Can I give advice on USA legal issues to Indian companies?
No. (see below)

2.Can I give advice to Indian companies in India on Indian issues?

No. Please refer to the attached extract of a Bombay High Court Judgment attached

3.If I have an associate law firm in India, what can my partners do or not do when they come to India?
They can only provide inputs to the Indian firm. They can be employed by an Indian firm. They can (if qualified) enroll but that is a difficult process requiring eligibility, qualifications and Cont reciprocity.

Foreign Lawyers and Legal Services in India: Frequently Asked Questions

4. Can I set up a rep. office in India? If yes, What am I allowed to do and not do?
Yes, but not much at all. Liaison and no commercial business (same judgment).

5. Is my legal degree recognised in India?

No. In most cases of US degrees. Some may be recognised (like Oxford degree) but youll need to check with the Bar Council of Delhi which ones are covered (if any) from the U.S.

6. What do I have to do be a solicitor in India?

This is a complex question. Probably not allowed.
Cont

Foreign Lawyers and Legal Services in India: Frequently Asked Questions 7. What do I have to do if I wish to appear in an Indian court?
Enroll as an advocate.

8. How is the law on the above likely to change and when?

Some change and a minor easing is likely in this year or over the next years but it is likely to be cosmetic.

Extract of a Bombay High Court Judgment

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORIGINAL SIDE WRIT PETITION NO. 1526 OF 1995

Lawyers Collective Versus Bar Council of India & Ors.

OCTOBER 4 & 9, 1995

Petitioner

"In our view, considering the aforesaid quotations from the New York Judiciary Law and Halsburys Laws of England, it is apparent that the phrase to practicethe profession of law would be wide enough which would include not only appearance before the Court but also to carry on such activities which are specifically provided in the aforesaid paragraphs which provide for restrictions on unqualified persons against drawing or preparing any instrument, agreement, power of attorney or such other things. If that was not so, there was no necessity of restricting it by specific regulations."
Cont

Extract of a Bombay High Court Judgment

The Court quoted with approval: "As there is no direct decision on the question involved, the learned Counsel appearing for the Petitioner has brought to our notice a decision rendered by the Court of Appeals of New York. In the Matter of New York County Lawyers Association v. Lorenzo J. Roel, (165 N. Y. S. 2d 31, page 14,) wherein the Court has interpreted Section 270 of the Penal Law which, inter alia, provides as under:It shall be unlawful for any natural person to practice as an attorney-at-law or to hold himself out to the public as being entitled to practice law as aforesaid, or in any other manner, or advertise the title of lawyer in such manner or advertise the title of lawyer in such manner as to convey the impression that he conducts or maintains a law office without having first been duly and regularly licensed and admitted to practice law in the courts of record of this state, and without having taken the constitutional oath.

Cont

Extract of a Bombay High Court Judgment

In that case it was contended by the appellant that his practice is restricted to Mexican law and he does not practice law in New York since he only gives advice and prepares instruments based on Mexican law and Mexican law is not law in New York. Therefore he is not covered by Section 270 of the Penal Law. The Court negatived the said contention by holding that whether a person gives advice as to New York law. Federal law, the law of a sister State, or the law of a foreign country, he is giving legal advice. It was further held that when legal documents are prepared for a layman by a person in the business of preparing such documents, that person is practicing law whether the documents be prepared in conformity with the law of New York or any other law. The Court further observed that to hold otherwise would be to state that a member of the New York Bar only practices law when he deals with local law. It was further observed: A foreign lawyer who is familiar with the law of the country in which he is a lawyer is in a similar position. He is a specialist in a particular field of the law, but is nevertheless a layman in this state when he is not a member of the Bar here. The Court held that protection of the members of the lay public of State, when they seek legal advice and that was what defendant purported to furnish was the basis of the requirements of licensing of attorneys by the State.
Cont

Extract of a Bombay High Court Judgment

From the aforesaid discussion, the submissions made before this Court and the affidavit in reply filed on behalf of Respondent Nos. 12, 13 and 14, prima facie, it appears that the activities mentioned above carried on by Respondent Nos. 12 to 14 would amount to practising the profession of law. As stated above, Respondent Nos. 12 to 14 have established liaison offices in this country; they are carrying on work of drafting documents, reviewing and providing comments on documents, conducting negotiations and advising clients on international standards and customary practice relating to clients transactions; gathering information from prospective clients in India and conducting market research to assess the feasibility of providing legal services in India. If, therefore, the said activities are held to be not covered by the phrase to practice the profession of law, then the whole objects of the Advocates Act would be frustrated, in the sense that there would not be any disciplinary control nor these activities can be controlled by any method. " [End of quote]

We gratefully acknowledge the help given by the Department of Industrial Policy and Promotion - Ministry of Commerce, Government of India, New Delhi

THANK YOU

For further Information, Contact: Gautam Mahajan President - Inter-Link Services Pvt. Ltd. K-185 Sarai Jullena New Delhi, India 110025 Tel: +91-11-26922006, 26831226; Fax: +91-11-26929055; E-mail: inter_link@vsnl.com / mahajan@interlinkindia.net Website: www.interlinkindia.net