Kochhar & Co. Advocates and Legal Consultants Doing Business in India An Overview of the Business...

Kochhar & Co.Kochhar & Co.Advocates and Legal Consultants

Doing Business in India

An Overview of the Business Process Outsourcing Sector in India

Antony J. Alex


India - a Brief Introduction

28 states and 7 union territories Legal system - based on English common law; limited judicial

review of legislative acts; accepts compulsory ICJ jurisdiction, with reservations.

Economy - traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of support services.

Total population – 1.1 billion - more than 60% of this falling in the productive age group of 20 to 45.

85% of this bracket are literate and living in the metros, cities and towns of India.

English is the most important language for national, political, and commercial communication – Approximately 225 million can read, write and speak English.


Why Do Business In India

Strategic location having access to the vast domestic and South Asian market.

One of the largest pools of skilled English speaking manpower i.e. scientists, engineers, technicians and managers in the world available at highly competitive costs.

Policy environment that provides freedom of entry, investment, location, choice of technology, production, import and export.

A long history of stable parliamentary democracy. A large and rapidly growing consumer market.


A gateway into India


Foreign investors can directly set up operation in India through the following routes:

Liaison office / Representative office Project office Branch office By Establishing an Indian entity

Wholly Owned Subsidiary Joint Venture with an Indian Company

Other routes

Establishing a Business Presence In India


Liaison/Representative Office - Scope of Activities

Testing the waters without committing major resources. Developing trade relations. Collecting market information. Inspection & coordination of purchases for export to parent

company.

Regulatory / legal framework Office expenses to be met through foreign exchange remittance

from Head Office abroad. No business activity permitted. Prior RBI approval required. Liaison office not taxed. Regular filings with Registrar of Companies (ROC).


Project Office - Scope of Activities

Office for undertaking a specific project. Approvals granted for both Government approved and private

sector projects.

Regulatory / legal framework

Specific approval to be obtained from RBI’s regional office. Regular ROC filings to be made.


Branch Office - Scope of Activities

Scope of activities larger than that of a liaison office. Represent parent or other foreign company as buying/selling agent. Research in the sector in which the parent company is involved. Render professional or consultancy services. Undertake export/import trading activities.

Regulatory / legal framework

Prior RBI approval to be obtained. Regular filings to be made with the ROC. Own manufacturing activities not permitted. Taxed @ 42% (including surcharge) of profits of Indian branch.


Foreign Investment Guidelines

Automatic Approval Route No government or RBI approval required for investment within

specified sectoral caps.

FIPB Approval Route Sector specific requirements Previous joint venture or technology transfer / trademark

agreement in India


Incorporation of an Indian company –private or public Specific FIPB approval to be sought if investment does not qualify

for automatic approval. Corporate tax @ 35%.

Specifics to keep in mind while deciding the nature of the company

Private company to have minimum 2 members and a minimum paid up capital of Rs. 1,00,000/- (approx USD 2000)

Public company to have minimum 7 members and a minimum paid up capital of Rs. 5,00,000/-. (approx USD 10,000)

Setting up a wholly owned subsidiary


Setting up a Joint Venture Company

Approval requirement depending on sector in which investment is made.

Taxation as applicable to an Indian company. Both the principal investment and the income are allowed to be

repatriated outside India without restrictions. Dividend taxable in the hands of the shareholder.


Running of the Indian company set up through a joint venture or as a wholly owned subsidiary

Meetings ROC filings Labour And Employment Taxation

Taxation of foreign personnel in India Tax treaties


Other Routes to invest in India

Technical Collaboration Investing in an existing Indian company

Fresh issue of shares by an Indian company Purchase of Existing Shares in an Indian company by way of transfer

Foreign Institutional Investor


BPO

Business Process Outsourcing (BPO) is the delegation of one or more IT-intensive business processes to an external provider that in turn owns, administers and manages.

The selected process based on defined and measurable performance criteria. Business Process Outsourcing (BPO) is one of the fastest growing segments of the Information Technology Enabled Services (ITES) industry.


BPO Value proposition

Allows the parent company to focus on core competencies Converting fixed costs to variable Allows the parent company to take advantage of a proven, shared

infrastructure Enables efficient enterprise / process management Helps in the development of profitable customer relationships &

results in coverage of wider markets Significant reduction in transaction overheads Provides end-to-end business solutions Allows entry into specialized, business intelligence & knowledge

based solutions Maximize ROI using web enabling services In long term results in substantial bottom line benefits


Why Outsource to India?

Apart from the robust communication infrastructure, large English-speaking workforce, low labor costs and overheads, appropriate time-zone difference with the West, India has the following advantages to offer:

The brand equity built by the software services sector in India which exports software to 95 countries around the world.

Faster adoption of well-defined business processes resulting in higher productivity gains

India has state-of-the-art technologies for total solutions: outsource turnkey projects

India has a stable government and is one of the world's 10 fastest-growing economies


Outsourcing to India is now more about high quality rather than cost. Indian companies are fast scaling up to match or surpass international quality standards and are ensuring that they stay ahead through stable quality systems and continuous quality improvement


What’s Happening Today

Deals are getting bigger and more complex First mover advantages have helped earlier players to capture a

larger share by expanding. Banks and Financial Institutions looking at India Diversity of BPO services being provided Investments in captive call centers Service companies must have an India strategy


Outsourcing & India

From Software to BPO Indian software companies have higher margins Call Centers and BPO are the focus now India to become back-office of the world

Activities Software development & maintenance Call Centers Document processing Financial analysis Legal support


Legal Considerations

Outsourcing through Ownership Model Owning the Intellectual Property Enforcing the Contract Protecting Trade Secrets and IP Liability Tax Considerations Employment Issues Conclusions


Outsourcing through Ownership Model

Large requirements, IP related work Tax Advantages

Income Tax Holiday till 2009 Customs, excise waivers

Export requirements not onerous US$ 250,000 over 5 years 10% net foreign exchange inflow

Good HR infrastructure - easy to hire people Hybrid structures leverage benefits and reduce risks


Owning the Intellectual Property

Indian copyright law may apply Presumptions to be overcome

Contractor owns the IP 5 year & territorial rule Non use rule Identification rule

Standard “works for hire” clause may not work Patent protection unlikely Some concerns on fair use provisions for pre-existing IP


Enforcing the Contract

Customers want home jurisdiction and governing law Arbitration v. Court - from an enforcement perspective Execute an onshore contract with the subsidiary Avoiding Indian courts other than for injunctive relief Very few disputes have arisen


Protecting Trade Secrets & IP

India’s piracy rate is misleading No specific statute for data protection and privacy Common law remedies and jurisprudence applicable Indian service companies follow safe harbor provisions Injunctive & equitable relief reasonably easy Need for forum shopping for IP friendly court Not easy to enforce employee restrictions Criminal remedies are an option


Liability Issues

Indirect & Consequential damages very unlikely No damages culture in Indian courts Liquidated damages possible if reasonable Enforcement of SLA type penalties can be a challenge Exchange control laws may prevent payment


Tax Considerations

Some structures may fall foul of tax considerations Export requirement Receipt in foreign exchange

Change in tax regime could alter pricing marginally Will the income tax holiday go away? New service tax on BPO companies

PE issues arising from supervision and equipment Investment structuring for outsourcing to subsidiary Transfer pricing regime yet to stabilize


Employment Issues

Requirements for lay off of employees onerous Messy employment requirements rarely followed BPO Co’s may be affected

Government policies on women working at night Government policies on flexible hours, holidays, etc;

Stock options - restrictions on purchase of foreign stock Recent skirmishes on IP related employee movement Not easy to restrict employees Some visa & immigration problems both ways


Conclusions

Ownership model is very attractive IP ownership issues should not be overlooked Set a high legal compliance standard Very few legal problems practically Huge opportunity due to supply, diversity of services


Thank You

Kochhar & Co. Advocates and Legal Consultants Doing Business in India An Overview of the Business...

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