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India Entry OptionsGlobal Conf. Germany

Nitin Potdar, Partner M&A

J. Sagar AssociatesAdvocates & Solicitors

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Outline

• India today & views.

• Indian Regulatory Regime for foreign investment.

• Preferred process.

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FDI Confidence Index For the first time post 1998, India

has replaced United States as the 2nd most attractive future FDI Location, up from 3rd place in 2004 and reaching its highest ranking ever.

Whilst China has attracted investment in capital intensive industries, India attracts more technology-oriented FDI.

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Views on India…… “India has the potential to deliver the

fastest growth over the next 50 years & average rate of more than 5% p.a for the entire period.”

-Dominic WilsonSr. Global Economist & VP

Goldman Sachs

“The dynamism shown by India in the last 15 years is phenomenal.”

- Paul Wolfowitz President World Bank.

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Contd..

“India has a fantastic pool of software professionals. The world needs to benefit from this.”

- Bill Gates

“India’s large pool of educated and skilled English – Speaking workers make it an attractive partner.”

-Sajjad KarimUK Member of the

European Parliament

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Contd.. “The courageous reforms have led to

enormous economic growth in India.” - Gerhard Schroeder

- Chancellor, Germany

“Because of the dynamism of the Indian Economy, there is a very optimistic view of the direction of the COuntry.”

- Lee Howell,- World Economic Forum

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Contd..

“It’s fairly easy to start an operation in India. The English language, the legal system, investigative reporting of the free press, the professional analysis of private banks, rating agencies, information bureaus and a system of local chamber of commerce, associations and federations, very similar to the established German System.”

- Bernhard Steinrucke, Director General,

Indo-German Chamber of Commerce

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Regulatory Regime for FDI New Industrial Policy announced in 1991

allows 100% foreign direct investment in most of the industrial sectors on what is known as “automatic route”, i.e., without any prior permission.

New Foreign Exchange Management Act (“FEMA”) enacted in 1999 to deal with changing economic needs of the Country.

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Technical fees/ royalties• It is permissible under automatic route

to pay a lump sum of USD 2 million for technical fees and a royalty of 8% on exports and 5% on domestic sales on products manufactured in India, without any duration of royalty payments.

• It is also permissible to pay a running royalty of 2% on exports and 1% on domestic sales for use of trademarks and brand names without technology transfer.

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Capital and profits repatriable

• All foreign investments and profits earned are freely repatriable. Shares of listed companies can be freely sold on Indian stock exchanges. Sale of shares through private arrangement is also under automatic route and needs no prior approval.

• Dividend earned also can be freely repatriable without any approval and is classified as capital account transactions.

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Sector specific FDI is limits

• Banking – Private sector ..74%• Broadcasting (Radio) ..20%• Up-linking News & Current affairs..26%• Single brand retail ..51%• Insurance ..26%• Print Media (News Paper/books) ..26%• Telecommunications ..74%• ISP with gateways/radio paging ..74%• Petroleum & Natural Gas ..26%

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100% FDI permitted

• Most engineering & manufacturing • Roads & Highways, Ports and Harbours,• Industrial model towns/industrial parks,• Hotels & Tourism,• Pollution Control and Management,• Advertising & Film industry,• Power generation (hydro-electric,

coal/lignite, oil or gas based),• Information Technology including e-

commerce.

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FDI strictly prohibited

• Retail Trading (except single brand)

• Agriculture (including plantation)• Automic Energy• Lottery Business• Gambling & Betting.

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Entry Options

• A limited liability company under the Companies Act, 1956.• Two types of Share capital (Equity &

Preference)• Board Composition (any foreign national

can be director & appoint alternate)• Board Meetings can be held in Germany,

Shareholders Meetings has to be in India.• Branch Office (can earn profits)• Liaison Office (cannot earn in India)• Project Office (can earn profits)

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Indian laws based on UK laws

• The Indian Companies Act, 1956 is based on the Companies Act of UK. Complete freedom to write the Articles of Association.

• Parties may choose Arbitration and applicable laws.

• Non-compete agreements enforceable.

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Corporate Tax

The Indian JV or 100% subsidiary would be paying a 33.66% tax on its taxable income i.e. (30% + surcharge of 10% on income tax + additional surcharge on income tax and surcharge viz. education cess of 2%).

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Dividend Income

Whilst the recipient pays no tax on dividend, the Indian JV or 100% subsidiary would be liable to pay tax at the rate of 12.5% on the amount declared, distributed or paid by it as dividend (to be increased by a surcharge of 10% and education cess of 2% i.e. the effective rate of tax being 14.03%).

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Green field versus Joint Venture

Whether a foreign company should start a green field or enter through a joint venture is a commercial decision and would depend upon the following:

• Objectives,• Skill sets of the local partners,• Reputation & standing of the Local Partner,• Competition,• Capital commitment, & • Long term perspective.

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Acquisition of existing company

• Acquisition of Unlisted Company is possible through:• Stock purchase, or• Acquisition of Undertaking

• Acquisition of Listed Company is also possible through a Stock Purchase, provided the same is followed by an open offer to acquire atleast 20% from the public shareholders.

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Process

• Conduct Legal, Financial & Technical Due-diligence,

• Understand the regulatory regime,• Decide on entry option of whether JV or

wholly owned subsidiary,• Negotiate and execute a Term Sheet,• Prepare Definitive Documents,

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Dealing with authorities

• No one-stop approval,• May not get all answers in writing,

but the approach of the authorities is open and responsive,

• Lot depends upon the industry and local competition.

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Dealing with local partners

• Reputation & goodwill plays an important

• Due-diligence must,• Clearly set out objectives,• Term Sheet /MoU to capture all

important commercial points.• Definitive Documents.

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Thank you

Atithi devo bhava!(guest is akin to God)

nitin@jsalaw.com+91 22 43418500