2013 Investment Climate Statement
Bureau of Economic and Business Affairs
February 2013
Report

Openness to, and Restrictions Upon, Foreign Investment

India’s sizeable and rapidly growing domestic market, well-regulated and growing financial markets, large English-speaking population, and its stable democratic government make it an attractive place for investors. However, India underperforms its vast potential. Major areas of concern include rampant corruption, complex and lengthy investment and business approval processes, antiquated land acquisition and labor laws, and poor contract enforcement. India’s historical preference for economic self-sufficiency informs current and proposed industrial and trade policies that protect domestic manufacturing, agriculture, and other sectors. In 2012, the World Bank’s International Finance Corporation ranks India 132 among 183 world economies in its ease of doing business survey and the Organization for Economic Co-operation and Development ranks India high as a closed economy in its Foreign Direct Investment Restrictiveness Index. Furthermore, India’s GDP growth slow-down in the past year, its large fiscal and current account deficits, and persistent inflation raise concerns about its economic outlook. In recent months, the government has taken some steps to ease Foreign Direct Investment (FDI) restrictions in certain sectors and to improve corporate governance laws. However, further policy reforms have been hung up in a stalemated parliament giving rise to uncertainty about the pace and efficacy of additional measures for improving the investment climate.

Power and decision-making is decentralized in India, therefore investors should be prepared to face varying business and economic conditions across India’s 28 states and 7 union territories. There are differences at the state-level in political leadership, quality of governance, regulations, taxation, labor relations, and education levels. Although India prides itself on its rule of law, its courts have cases backlogged for years. By some accounts more than 30 million cases could be pending in various courts, including India’s high courts.

Nevertheless, companies have found ways to succeed in this difficult market. Indian conglomerates and high technology companies are by many measures equal in sophistication and prominence to their international counterparts. Certain industrial sectors, such as information technology, telecommunications, and engineering are globally recognized for their innovation and competitiveness. Foreign companies operating in India highlight that success requires a long-term planning horizon and a state-by-state strategy to adapt to the complexity and diversity of India’s markets.

Business Environment Indices:

-- Transparency International Corruption Index (TI): India's ranking remained in the lower third tier of countries. http://cpi.transparency.org/cpi2012/results/#myAnchor1

-- Heritage Economic Freedom: The marginal change in India’s score reflects some improvements in labor freedom that were offset by declining scores in business freedom, freedom from corruption, government spending, and monetary freedom. http://www.heritage.org/index/country/india

-- World Bank/IFC “Doing Business 2013:” India’s overall ranking has remained fairly consistent over the last four years. India’s ranking has worsened in the areas of ‘starting a business’ (173rd), ‘dealing with construction permits’ (182nd), ‘protecting investors’ (49th), ‘trading across borders’ (127th), ‘enforcing contracts’ (184th) and ‘paying taxes’ (152nd). India ranked as the world’s sixth slowest country in terms of the number of days it takes to resolve a commercial investment dispute. (http://www.doingbusiness.org/~/media/GIAWB/Doing%20Business/Documents/Annual-Reports/English/DB13-full-report.pdf

-- Legatum Index: This global study of the factors that drive and restrain national prosperity, reflects a consistent decline in India’s ranking since 2009. India's failure to maintain and improve healthcare (104th), education and literacy rates (100th), safety and security (114th), and social capital (138th) are a few examples that explain the country's decline in the rankings.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Measure

Year

Index/Ranking

TI Corruption Index

2012

94/176

Heritage Economic Freedom

2012

123/170

World Bank Doing Business

2013

132/185

Legatum Index

2012

110/142

MCC Gov’t Effectiveness

2013

98%

MCC Rule of Law

2013

98%

MCC Control of Corruption

2013

73%

MCC Fiscal Policy

2013

4%

MCC Trade Policy

2013

35%

MCC Regulatory Quality

2013

84%

MCC Business Start Up

2013

47%

MCC Land Rights Access

2013

61%

MCC Natural Resource Mgmt

2013

35%

There are two channels for foreign investment: the “automatic route” and the “government route.” Investments entering via the “automatic route,” are not required to seek an overall approval from the central government. The investor is expected to notify the Reserve Bank of India (RBI) of its investment using the FC form within 30 days of inward receipts and the issuance of shares (www.rbi.org.in/scripts/BS_ViewForms.aspx). The title “automatic route” is somewhat of a misnomer in that investments in most sectors will still require some interaction with the Indian government at the state, or national levels or both.

Investments requiring government approval, also known as the “government route,” are subject to seeking required authorization from the principal ministry and/or from the Foreign Investment Promotion Board (FIPB). The rules regulating government approval for investments vary from industry to industry and the approving government entity varies depending on the applicant and the product. For example the Ministry of Commerce and Industry (MOCI) Department of Industrial Policy and Promotion (DIPP) oversees single-brand product retailing investment proposals, as well as proposals made by Non-Resident Indians (NRIs), and Overseas Corporate Bodies (OCBs). An OCB is a company, partnership firm, or other corporate entity that is at least 60% owned, directly or indirectly, by NRIs, including overseas trusts. MOCI’s Department of Commerce approves investment proposals from export-oriented units (i.e., industrial companies that intend to export their entire production of goods and services from India abroad). The jointly-led Ministry of Finance and MOCI Foreign Investment Promotion Board approves most other investment applications.

All new investments require a number of industrial approvals and clearances from different authorities such as Pollution Control Board, Chief Inspector of Factories, Electricity Board, and Municipal Corporation (locally elected entities), among others. To fast track the approval process for investments greater than USD 200 million, the Government of India in December 2012 established the Cabinet Committee on Investment (CCI). CCI is led by the Prime Minister and is expected to fast track large new investment proposals.

Sector-Specific Guidelines for FDI in key industries

-- Banking: Aggregate foreign investment from all sources in all private banks is capped at 74%. For state-owned banks, the foreign ownership limit is 20%. According to the 2011 road map for foreign bank entry, there are three distinct ways to enter the Indian banking sector. The first is by establishing a branch in India. The second is to establish a wholly owned subsidiary, although it is important to note that foreign banks are permitted to have either branches or subsidiaries, but not both. The third is to establish a subsidiary with total foreign investment of up to 74%. Foreign investors are also allowed to acquire an ailing bank. Although the RBI has never authorized this type of transaction, FII is limited to 10% of the total paid-up capital and 5% in cases where the investment is from a foreign bank/bank group. Voting rights in private banks and state-owned banks are currently capped at 10% and 1%, respectively, and are not considered ownership. The Banking Regulation (Amendment) Bill, which would align voting rights in private banks with shareholding, remains in a Parliamentary committee and has yet to be introduced.

-- Manufacturing: 100% FDI is allowed in most sub-categories of the manufacturing sector. However, the government maintains set asides for MSEs (Micro and Small Enterprises). The Government of India definition for ‘MSE’ is a company with less than USD 1 million in plant and machinery. Any investment in manufacturing that would not qualify as an MSE and manufactures items reserved for the MSE sector must enter via the Government route for FDI greater than 24%. Since 1997, the government has steadily decreased the number of sectors it protects under the national small-scale industry (SSI) policy. At its peak in the late 1990s, more than 800 categories were protected. The list is publicly available here: http://www.dcmsme.gov.in/publications/reserveditems/reserved2010.pdf. The 2011 National Manufacturing Policy (NMP) provides the framework for India’s local manufacturing requirements in various sectors including in the Information and Communications Technology (ICT) and clean energy sectors.

-- Non-Banking Financial Companies (NBFC): 100% FDI is allowed via the automatic route. NBFCs include: merchant banking, underwriting, portfolio management, financial consulting, stock-brokerage, asset management, venture capital, credit rating agencies, housing finance, leasing and finance, credit card businesses, foreign exchange brokerages, money changers, factoring and custodial services, investment advisory services, and micro and rural credit. All investments are subject to the following minimum capitalization norms: USD 500,000 upfront for investments with up to 51% foreign ownership; USD 5 million upfront for investments with 51% to 74.9% ownership; USD 50 million total, with USD 7.5 million required up-front and the remaining balance within 24 months, for investments with more than 75% ownership. 100% foreign-owned NBFCs, with a minimum capitalization of USD 50 million, are allowed to set up unlimited numbers of subsidiaries for specific NBFC activities and are not required to bring in additional capital.

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Sector

% FDI

Route

Note

Advertising and Film

100%

Automatic

Includes film production, exhibition, distribution, and related services and products

Agriculture (Farming)

None

Agriculture-related Activities

100%

Automatic

Seed industry, floriculture, horticulture, animal husbandry, aquaculture, fish farming, and cultivation of vegetables and mushrooms

100%

Government

Tea plantations. Five years after making the initial investment in a tea plantation, foreign investors are required divest ownership to allow for at least 26% Indian ownership.

Airline Carriers (air transport services)

49%

Government

Scheduled and non-scheduled airline carriers also (NRIs may own 100% of a domestic airline.)

The decision was announced in September, 2012, by the Cabinet Committee on Economic Affairs. Investments are required to follow relevant SEBI regulations that include the Issue of Capital and Disclosure Requirements (ICDR) Regulations and the Substantial Acquisition of Shares and Takeovers (SAST) Regulations. (http://pib.nic.in/newsite/PrintRelease.aspx?relid=87785)

74%

Automatic

Non-scheduled, chartered, and/or cargo airlines.

100%

Automatic

Investments in helicopter and seaplane services. Investors are required to seek approval from the Directorate General of Civil Aviation.

Airport Infrastructure

100%

Automatic

Green-field projects

74%

Automatic

Existing projects. FDI greater than 74% requires FIPB approval

49%

Automatic

Ground-handling businesses at airports.
(NRIs are allowed 100%).

49-74%

Government

100%

Automatic

Maintenance and repair operations, flight training institutes, and technical training institutes.

Alcoholic Distillation and Brewing

100%

Automatic

Requires a license from DIPP under the provisions of the Industries (Development and Regulation) Act, 1951.

Asset Reconstruction Companies

49%

Government

(FII is not allowed)Where any individual investment exceeds 10% of the equity, investors are required to seek approval as delineated in the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.

Automobiles

100%

Automatic

Local content requirements and/or export obligations apply.

Broadcasting

26%

Government

(FDI, NRI, persons of Indian origin, and portfolio investment) frequency modulation terrestrial broadcasting.
Subject to guidelines issued by the Ministry of Information and Broadcasting

49%

Automatic

Direct-to-home broadcasting and mobile TV. TV channels, irrespective of ownership or management control, have to up-link from India and comply with the broadcast code issued by the Ministry of Information and Broadcasting.

74%

Government

26%

Government

News and current affairs channels with up-linking from India, including portfolio investment

100%

Government

Entertainment and general interest channels

49%

Government

Establishing up-linking hub/teleports (http://pib.nic.in/newsite/PrintRelease.aspx?relid=87787)

Business Services

100%

Automatic

Data processing, software development, and computer consultancy services. One hundred% FDI is allowed for call centers and business processing outsourcing (BPO) organizations, subject to certain conditions.

Cable Network

49%

Approval is required, as articulated in the Cable Television Networks Rules, 1994

Coal/Lignite

100%

Setting up or operating power projects and coal mines for captive consumption.

100%

Automatic

Coal processing plants, so long as the equity recipient does not sell processed coal in the open market.

100

Automatic

Mining of coal or lignite for captive consumption

Coffee and Rubber Processing and Warehousing

100%

Automatic

Commodity Exchanges

23% (FII) 26% (FDI)

Government

FII purchases shall be restricted to secondary markets only and no single foreign investor/entity can hold more than 5% of the total paid-up capital. (www.dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf)

Construction Development Projects

100%

Automatic

Permitted in the construction and maintenance of roads, highways, vehicular bridges, tunnels, ports and harbors, townships, housing, commercial buildings, resorts, educational institutions, and infrastructure. (Non-resident Indians are not authorized to own land.)
Subject to certain minimum capitalization and minimum area-of-development requirements.
Since 2010, the minimum capitalization requirement has been USD 10 million for wholly owned subsidiaries and USD 5 million for joint ventures with Indian partners. In the case of serviced housing plots, a minimum of 10 hectares (25 acres) must be developed, while in the case of construction-development projects, the minimum built-up area must be 50,000 square meters (approx. 538,000 square feet). At least 50% of the project must be developed within five years from the date of obtaining all statutory clearances.

Credit Information Companies

49% (FDI)

Government

Requires FIPB and RBI approval

24% (FII)

No single investor/entity can own shares worth more than 10% of the total paid-up capital. Furthermore, any acquisition in excess of 1% requires mandatory reporting to RBI.

Courier Services (Other Than Distribution of Letters)

100%

Government

Defense and Strategic Industries

26%

Subject to a DIPP license in consultation with the Defense Ministry. Production of arms and ammunition is subject to additional FDI guidelines. Purchase and price preferences may be given to Public Sector Enterprises as per Department of Public Enterprise guidelines. The licensee must establish adequate safety and security procedures once the authorization is granted and production begins.

Drug/Pharmaceuticals

100%

Automatic

Greenfield investments

100%

Government

Brown-field investments

E-commerce

100%

Business-to-business e-commerce under the government approval route. No FDI is allowed in retail e-commerce.

Education Services

100%

Automatic

In practical terms restrictions limit investments to education service providers rather than educational institutions. The Foreign Educational Institutions (Regulation of Entry and Operations, Maintenance of Quality and Prevention of Commercialization) Bill pending in Parliament would, if passed, allow foreign universities to establish campuses independently without working with an Indian partner institution, but with conditions attached.

Food Processing

100%

Automatic

For fruit and vegetable processing, dairy products, meat and poultry products, fishing and fish processing, grains, confections, consumer and convenience foods, soft bottling, food parks, cold chain, and warehousing. The exception is for alcoholic beverages and beer, where a license is required.

100%

Automatic

For cold storage facilities.

Hazardous chemicals

100%

Automatic

A DIPP license is required under the provisions of the Industries (Development and Regulation) Act, 1951.

Health Services

100%

Automatic

Hotels, Tourism, and Restaurants

100%

Automatic

Housing/Real Estate

None

NRIs who obtain “Overseas Citizenship of India” status are allowed to own property and invest in India as if they were citizens. NRIs may invest up to 100% FDI with prior government approval in the real estate sector and in integrated townships including housing, commercial premises, resorts, and hotels, as well as in projects such as the manufacture of building materials.

Industrial explosives

100%

Automatic

Manufacturers of explosives or materials deemed by the Indian authorities as explosives are required to obtain a license to set up factory operations from the state government’s industry commissioner.

Industrial Parks

100%

Automatic

The industrial park must include at least ten units with no single unit occupying more than 50% of the area, and at least 66% of the area is made available for industrial activity.

Information Technology

100%

Automatic

For software and electronics development. However no FDI is allowed in companies that develop software for the aerospace and defense sectors.

Insurance

26%

Automatic

Investors must obtain a license from the Insurance Regulatory and Development Authority (IRDA). In October 2012, the Cabinet cleared an amendment to raise the cap on foreign investment to 49%. The bill is pending in the Parliament.

Infrastructure Companies in the Securities Market (i.e., stock exchanges, depositories, and clearing corporations)

26%

Government

Over and above the FDI limit, FII’s are allowed to buy shares through the secondary markets up to 23% of the paid up capital through the automatic route. FIIs are only allowed to invest via secondary markets.

Legal services

None

In March 2010, a Chennai-based attorney, on behalf of the Association of Indian Lawyers, filed a writ of petition in the Madras High Court against 31 foreign law firms, the Bar Council of India, and the Ministry of External Affairs in order to prevent foreign law firms from practicing in India. The Madras High Court has repeatedly delayed a decision in order to give the court more time to consult with foreign firms. The outcome of the case remains unresolved and the future of foreign law firms practicing in India remains uncertain. The petitioner in the Madras case and other opponents to allowing foreign investment in legal services, with a particular focus on U.S. attorneys, insist foreign firms should be barred from practicing law in India until there is reciprocity in the U.S. market. Law firms from the UK and other countries have found alternatives to the ban on FDI.

Lottery, Gambling, and Betting

None

Mining

100%

Automatic

For diamonds and precious stones, gold/silver, and other mineral mining and exploration.

100%

Government

For mining and mineral separation of titanium minerals and ores.

Pensions

None

The Parliament is currently considering a law that would establish India’s Pension Fund Development and Regulatory Authority and lift the ban on FDI. It is unclear when the draft legislation will become law.

Petroleum

100%

Automatic (tax incentives, production sharing, and other terms and conditions apply)

Discovered small fields

Refining with domestic private company

Petroleum product/pipeline

Petrol/diesel retail outlets

LNG Pipeline

Exploration

Investment Financing

Market study and formulation

Refining by public sector company, disinvestment is prohibited

49%

Government

For equipment manufacture, consulting, and management services.

Pollution Control

100%

Automatic

Ports and harbors

100%

Automatic

For construction and manufacturing of ports and harbors. Security clearances from the Ministry of Defense are required for all bidders on port projects, and only the bids of cleared bidders will be considered.

Power

100%

Automatic

For the power sector (except atomic energy) which includes generation, transmission, and distribution of electricity, and power trading. FDI up to 49% is permitted in power exchanges; such foreign investment would be subject to an FDI limit of 26% and an FII limit of 23% of the paid-up capital. For power exchanges, FII investment would be permitted under the automatic route and FDI would be permitted under the government approval route.

Print Media

26%

Government

Newspapers and news periodicals.

100%

Government

Printing science and technology magazines/journals.

100%

Government

Publication of facsimile editions of foreign newspapers.

Professional services

100%

Automatic

For most consulting and professional services, including accounting services.

Research and Development Services

100%

Automatic

Railways

None

Train operations

100%

Government

Auxiliary areas such as rail track construction, ownership of rolling stock, provisioning of container services, and container depots.

100%

Government

Building of “fixed railway infrastructure” including railway lines for the purpose of increasing port connectivity with industrial and logistical parks, mines, and other parts of the country.

Retailing (single brand)

100%

Government

Investors are required to meet a 30% local content requirement sourced from domestic SMEs. (http://pib.nic.in/newsite/PrintRelease.aspx?relid=87766).

Retailing (multi-brand)

51%

state-by-state basis

Investment is conditioned on 1) state government opening of the retail sector 2) investment in cities with a population greater than a million residents, 3) invest a minimum of 50% in developing backend infrastructure, and 4) source 30% of the total value of the products sold from Indian SMEs.

Roads

100%

Automatic

Including Highways, and Mass Rapid Transport Systems

Satellites

74%

Government

For the establishment and operation of satellites.

Security Agencies

49%

Government

Shipping

74%

Automatic

Storage and Warehouse Services

100%

Automatic

Including for cold storage warehousing of agricultural products.

Telecommunications

74%

Government

This sector is considered to be ‘sensitive’ by the GOI and therefore foreign investment is carefully scrutinized and monitored. FDI in the telecom services sector can be made directly or indirectly in the operating company or through a holding company, subject to licensing and security requirements.

49%

Automatic

In telecom services such as basic, cellular, access services, national/international long distance, V-Sat, public mobile radio trunked services, global mobile, unified personal communication services, ISP gateways, radio-paging, and end-to-end services.

74%

Government

Equipment manufacturing. Note: Some telecommunications investments require 26% divestment within the first five years of the investment.

49%

Automatic

100%

Government

Internet service providers (ISP) with and without international gateways, including those for satellite and marine cables.

49%

Automatic

100%

Fiber-optic, right-of-way, duct space, voice mail, and email. Note: Some telecommunications investments require 26% divestment within the first five years of the investment.

Trading/Wholesale

100%

Automatic

For exporting, bulk imports with export warehouse sales, and cash-and-carry wholesale trading. A wholesaler/cash-and-carry trader cannot open a retail shop to sell directly to consumers.

Conversion and Transfer Policies

The Indian Rupee is fully convertible for current account transactions, which are regulated under the Foreign Exchange Management Rules, 2000. Prior RBI approval is required for acquiring foreign currency above certain limits for specific purposes (e.g., foreign travel, consulting services, and foreign studies). Capital account transactions are open for foreign investors and subject to various clearances. In recent years, with growing foreign exchange reserves, the Indian government has taken additional steps to relax foreign exchange and capital account controls for Indian companies and individuals. For example, since 2007, individuals are permitted to transfer up to USD 200,000 per year abroad for any purpose without approval. On December 31, 2012, the exchange rate was Rupees 55/$, compared to Rupees 53.2/$ and 44.8/$ at the end of 2011 and 2010, respectively. The slow economic recovery in many of India’s trading partners coupled with domestic inflationary pressure has contributed to the Rupee decline visa vie other hard currencies. Other conversion restrictions include:

-- NRI investment in real estate may be subject to a “lock-in” period.

-- Profits and dividend remittances, as current account transactions, are permitted without RBI approval but income tax payment clearance is required. There are generally no transfer delays beyond 60 days.

-- RBI approval is needed to remit the proceeds of sales of assets.

-- Foreign partners may sell their shares to resident Indian investors without RBI approval, provided the shares were eligible to be repatriated out of India.

-- Global Depository Receipts and American Depository Receipts proceeds from abroad may be retained without restrictions except for an end-use ban on investment in real estate and stock markets. FIPB approval is required in some cases. Up to USD 1 million per year may be remitted for transfer of assets into India.

-- Foreign institutional investors (FII) may transfer funds from Rupee to foreign currency accounts and vice-versa at the market exchange rate. They may also repatriate capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, without RBI approval. The RBI authorizes automatic approval to Indian industries for the payment associated with foreign collaboration agreements, royalty, and lump sum fees for transfer of technology and payments for the use of trademark and brand names with no limits. Royalties and lump sum payments are taxed at 10%.

-- Foreign banks may remit profits and surpluses to their headquarters, subject to the banks’ compliance with the Banking Regulation Act, 1949. Banks are permitted to offer foreign currency-Rupee swaps without limits to enable customers to hedge their foreign currency liabilities. They may also offer forward cover to non-resident entities on FDI deployed after 1993.

Expropriation and Compensation

India's image as an investment destination was tarnished in 2010 and 2011 by high profile graft cases in the construction and telecom sectors, exacerbating existing private sector concerns about the government of India’s uneven application of its policies. In October 2012, India's Supreme Court cancelled 122 telecom licenses and the authorized spectrum held by eight operators under what came to be known as the 2G scandal. Some of the operators affected by this cancellation stated in media reporting that they may exit India rather than wait for new market rules to be issued. The U.S. Government continues to urge the Government of India to foster an attractive and reliable investment climate by reducing barriers to investment and minimizing bureaucratic hurdles for businesses. India and its political subdivisions would benefit from providing a secure legal and regulatory framework for the private sector, as well as institutionalized dispute resolution mechanisms that expedite commercial disagreements.

Dispute Settlement

Foreign investors frequently complain about a lack of “sanctity of contracts.” According to the World Bank, India continues to be the sixth slowest country in the world in terms of the total number of days it takes to resolve a dispute. Indian courts are reported to be understaffed and lacking the technology needed to resolve the current backlog of unsettled cases. Media reports estimate that India has between 30 and 40 million backlogged legal cases countrywide. Former Indian Law Minister Salman Khurshid acknowledged the need to modernize the country’s antiquated legal system to support economic growth. According to a 2012 PRS Legislative survey, a local research center and think tank, India has seen an increase of pending cases by 30% over the last decade. In an attempt to align its adjudication of commercial contract disputes with the rest of the world, in 1996, India enacted the Arbitration and Conciliation Act based on the UNCITRAL (United Nations Commission on International Trade Law) model. Foreign awards are enforceable under multilateral conventions like the Geneva Convention. The Indian government established the International Center for Alternative Dispute Resolution (ICADR) as an autonomous organization under the Ministry of Law and Justice to promote the settlement of domestic and international disputes through alternate dispute resolution. The World Bank funded ICADR to conduct training for mediators in commercial disputes settlement.

India is a member of the New York Convention of 1958 on the recognition and enforcement of foreign arbitral awards. Despite having signed this agreement, the Embassy is aware of several cases in which Indian firms have filed spurious cases with Indian courts to delay paying the awards granted in arbitration to the U.S. party. India has yet to become a member of the International Center for the Settlement of Investment Disputes. The Permanent Court of Arbitration (PCA, The Hague) and the Indian Law Ministry agreed, in 2007, to establish a regional PCA office in New Delhi to provide an arbitration forum to match the facilities offered at The Hague at a far lower cost. Since then, no further progress has been made in establishing the office. In November 2009, the Department of Revenue’s Central Board of Direct Taxes established eight dispute resolution panels (DRPs) across the country to settle the transfer-pricing tax disputes of domestic and foreign companies in a faster and more cost-effective manner.

Performance Requirements and Incentives

The government is currently pursuing local content requirements in specific areas including ICT, electronics, and clean energy to increase the manufacturing sector’s contribution to GDP. Foreign investors in India express concern about these policies and the negative impact they may have on India’s investment climate, especially if the GOI applies local content requirements to the private sector. The GOI has already issued finalized notifications on local content requirements for ICT equipment in government procurement. http://commerce.nic.in/whatsnew/National_Manfacturring_Policy2011.pdf

Companies are free to select the location of their industrial projects. Foreign investors complain that antiquated land acquisition laws and uneven zoning regulations prevent them from establishing factories in their preferred location. The Ministry of Commerce and Industry, in recognition of the trouble foreign and domestic investors experience in acquiring land, has set aside land for 14 integrated industrial townships called National Investment and Manufacturing Zones (NIMZs). NIMZs offer investors a one-stop-approval process for investment; state-of-the-art infrastructure; pre-zoned land for industrial use; and other tax benefits. Seven basic NOC’s (No Objection Certificate’s) are required for almost all investments and projects:

  1. Tree Authority
  2. Storm Water and Drain Department
  3. Sewerage Department
  4. Hydraulic Department
  5. Environmental Department (concerned with debris management)
  6. Traffic and Coordination Department
  7. CFO (fire department clearance)

Visa Regulations

Foreign nationals executing projects and/or contracts in India are required to obtain an “employment” visa. All foreigners (including foreigners of Indian origin) visiting India for more than 180 days -- Student Visa, Medical Visa, Research Visa and Employment Visa -- are required to register with the Foreigners Regional Registration Officer (FRRO) in Delhi or the Foreigners Registration Officer (FRO) in their jurisdiction within 14 days of their arrival.

The employment of foreigners for periods longer than 12 months requires the approval of the Ministry of Home Affairs (MHA). Recently, MHA eased the rule requiring foreign nationals traveling to India on a multiple-entry Indian tourist visa to wait a minimum of two months between visits to India, eliminating it entirely for most travelers.

The Department of Telecommunications under the Ministry of Communications and Information Technology closely monitors the employment of foreign nationals in the telecom sector. Senior leadership and managers of the security operations, among others, are required to be citizens of India or obtain a security clearance from the Ministry of Home Affairs (MHA). More details regarding this and related rules are available on the MHA website: http://mha.nic.in/foreigDiv/pdfs/TourVISA-Schm.pdf.

Taxes

The GOI provides a 10-year tax holiday for knowledge-based start-ups. Many states use local tax incentives to attract investment, and these benefits vary by state and by sector. Recent Government of India efforts to strengthen general anti-avoidance rules (GAAR) and expand tax authorities’ purview to collect taxes retrospectively on the indirect transfer of shares have created concerns and uncertainties for foreign investors. A coordinated international effort to dissuade the government from implementing these laws in 2012 resulted in a one-year reprieve that may be extended to 2016. Private industry remains hopeful the Government of India will follow through with promises to overhaul India’s direct and indirect tax regime. In 2009, the Government of India announced its intention to implement a Goods and Services Tax (GST) and streamline its Direct Tax Code (DTC). GST seeks to standardize taxes levied at all points in the supply chain concurrently by both the central and state governments. A GST would replace and harmonize India under one tax regime by eliminating national and state Value-Added Taxes (VATs), central excise taxes, and a number of other state-level taxes. Parliamentary gridlock and uneven support from the state governments have stalled progress. GST is considered by many economists to be one of the most critical reforms the government could undertake. Some economists estimate that moving to GST could increase India’s GDP growth by 2%.

Exports: In August 2009, MOCI released its foreign trade policy for fiscal years 2009-14, which highlighted various incentives for exporters with a particular emphasis on labor intensive sectors such as textiles, processed foods, leather, gems and jewelry, tea, and handloom-made items. The duty credit extended to exporters under this scheme is 3% of the free-on-board (FOB) export value. Exporters are also allowed to import machinery and capital goods duty free. More information can be found here: http://dgft.gov.in/

Right to Private Ownership and Establishment

Foreign and domestic private entities are allowed to establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices, and liaison offices, subject to certain sector-specific restrictions. The Government of India does not permit investment in real estate by foreign investors, except for company property used to do business and for the development of most types of new commercial and residential properties. FIIs can now invest in Initial Public Offerings (IPOs) of companies engaged in real estate. They can also participate in pre-IPO placements undertaken by such real estate companies without regard to FDI stipulations.

To establish a business, various government approvals and clearances are required including incorporation of the company and registration under the State Sales Tax Act and Central and State Excise Acts’ zoned area; obtain environmental site approval; seek authorization for electricity and financing; and obtain appropriate approvals for construction plans from the respective state and municipal authorities. Promoters also need to obtain industry-specific environmental approvals in compliance with the Water and Air Pollution Control Acts. Petrochemical complexes, petroleum refineries, cement thermal power plants, bulk drug makers, and manufacturers of fertilizers, dyes, and paper, among others, must obtain clearance from the Ministry of Environment and Forests.

Protection of Property Rights

The Foreign Exchange Management Regulations and the Foreign Exchange Management Act set forth the rules that allow foreign entities to own immoveable property in India and convert foreign currencies for the purposes of investing in India. These regulations can be found (http://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=175) and (http://www.rbi.org.in/scripts/fema.aspx). A foreign investment via the automatic route is allowed the same rights as a citizen for the purchase of immovable property in India in connection with an approved business activity.

India has adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. India is a party to the Berne Convention, UNESCO, and the World Intellectual Property Organization (WIPO). In 2012, India amended its copyright laws and signed WIPO’s Beijing Treaty on the Protection of Audiovisual Performances. However, the copyright law still contains several broad exceptions for personal use and “fair dealing,” weak protection against unlawful circumvention of technological protection measures, and lacks an effective notice and take-down system for online infringing materials.

India updated its trademark law in recent years to bring it closer to international standards for filing and granting trademarks. India’s Intellectual Property Office plans to implement trademark application filing under the Madrid Protocol in 2013. This means that a single application can be used to register a trademark in any of the 84 member countries of the Madrid Protocol.

Pharmaceutical and agro-chemical products can be patented in India. Plant varieties are protected by the Plant Varieties and Farmers’ Rights Act. Software embedded in hardware may also be patented. However, the interpretation and application of the patent law lacks clarity, especially with regard to several important areas such as: compulsory license, pre-grant opposition provisions, and defining the scope of patentable inventions (e.g., whether patents are limited to new chemical entities rather than incremental innovation). In 2012, India issued its first compulsory license for a patented pharmaceutical. In the case of Natco vs. Bayer, an Indian generics company called Natco sought and was granted a compulsory license under India’s laws to make a generic version of Bayer’s kidney drug, Nexavar. Indian law does not protect against the unfair commercial use of test data or other data submitted to the government during the application for market approval of pharmaceutical or agro-chemical products. The Pesticides Management Bill (2008), which would allow data protection of agricultural chemical provisions, is stalled in Parliament.

Indian law provides no statutory protection of trade secrets. The Designs Act meets India’s obligations under TRIPS (Trade-Related Aspects of Intellectual Property Rights) for industrial designs. The Designs Rules, which detail classification of design, conform to the international system and are intended to take care of the proliferation of design-related activities in various fields. India’s Semiconductor Integrated Circuits Layout Designs Act is based on standards developed by WIPO; however, this law remains inactive due to the lack of implementing regulations.

Transparency of the Regulatory System

Despite progress, the Indian economy is still constrained by excessive rules and an overly complex bureaucratic system that has broad discretionary powers. India has a decentralized federal system of government in which states possess extensive regulatory powers. Regulatory decisions governing important issues such as zoning, land-use, and the environment vary between states. Opposition from labor unions and political constituencies slows the pace of reform in land acquisition, environmental clearances, investment policy, and labor rights.

The Central government has been successful in establishing independent and effective regulators in telecommunications, securities, insurance, and pensions. The Competition Commission of India (CCI), India's antitrust body, has started using its enforcement powers and is now taking cases against cartelization and abuse of dominance, as well as conducting capacity-building programs. In December 2012, the Government of India introduced amendments to the Competition Act 2002 that would empower CCI to order search and seizure operations. Currently the commission’s investigation wing is required to seek the approval of the local chief metropolitan magistrate for a search and seizure operation. In June 2011, the government enacted rules governing mergers and acquisitions. The Securities and Exchange Bureau of India (SEBI) enforces corporate governance and is well regarded by foreign institutional investors.

In December 2012, the Lok Sabha (Lower House of Parliament) approved the Companies Bill 2011, which replaces the Companies Act 1956. The Bill brings India’s corporate governance rules in line with international standards. One aspect of the Bill that concerns foreign investors is a new mandatory rotation of audit partners. The Bill is pending approval from India’s Rajya Sabha (Upper House of Parliament) and a pro-forma authorization from the President before it will be in force.

Efficiency of Capital Markets and Portfolio Investment

Indian capital markets are growing. The combined market capitalizations of the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) surpassed USD 2.4 trillion in mid-November 2012. Lower than expected GDP growth in India is often linked to the decline in the Indian benchmark index Sensex that is trading nearly 30% lower than its peak in January 2008. Together, the NSE and BSE account for 100% of total Indian stock market turnover. According to the World Federation of Exchanges, both the BSE and NSE rank among the top 10 bourses in the Asia-Pacific region in terms of market capitalization of the companies listed on their platforms. Spot prices for index stocks are usually market-driven and settlement mechanisms are in line with international standards. India’s debt and currency markets lag behind its equity markets. Although private placements of corporate debt have been increasing, daily trading volume remains low.

Foreign portfolio investment and activities in India’s capital markets are regulated by a complex and onerous foreign institutional investor (FII) regime, analogous to China’s Qualified Foreign Institutional Investor regime. The FII regime sets caps on investment and the scope of business. It reflects India’ relatively closed capital account, the lack of market access for foreign firms, and the strict regulation of the financial sector.

FIIs investing in India’s capital markets must register with SEBI, India’s Securities and Exchange Commission (SEC) equivalent. They are divided into two categories: regular FIIs, which invest in both equity and debt; and 100% debt-fund FIIs. The list of eligible FIIs includes pension funds, mutual funds, banks, foreign central banks, sovereign wealth funds, endowment and university funds, foundations, charitable trusts and societies, insurance companies, re-insurance companies, foreign government agencies, international or multilateral organizations, broad-based funds, asset management companies, investment managers and hedge funds. FIIs must be registered and regulated by a recognized authority in their home country, meaning many US-based hedge funds cannot register as FIIs. FII registration can be made either as an investor or investor on behalf of its “accounts.” “Sub-account” means any person residing outside India on whose behalf investments are made within India by an FII. As of March 2012, there are a total of 1,765 FIIs registered in India and 6,322 sub-accounts.

FIIs invested about USD 140 billion in India in 2011-12. While FIIs are allowed to invest in all securities traded on India’s primary and secondary markets, unlisted domestic debt securities, and commercial paper issued by Indian companies, the Government of India imposes some restrictions based on investment type. As of November 2012, the allowed limit for FII investment in domestic debt instruments is USD 65 billion. Of this, USD 45 billion is earmarked for investment in corporate bonds and the remaining USD 20 billion is earmarked for investment in government securities. On November 30, the Finance Minister announced an increase in FII limits in government securities and corporate bonds by $5 billion each, taking the total investment limit in domestic debt to USD 75 billion. The RBI is expected to release detailed guidelines soon. In the equities market, FII and sub-accounts can own up to 10% and 5%, respectively, of the paid-up equity capital of any Indian company. Aggregate investment in any Indian company by all FIIs and sub-accounts is also capped at 24%, unless specifically authorized by that company’s board of directors. “Naked short selling” is not permitted. FIIs are not permitted to participate in the new currency futures markets. Foreign firms and persons are prohibited from trading in commodities. SEBI allows foreign brokers to work on behalf of registered FIIs. FIIs can also bypass brokers and deal directly with companies in open offers. FII bank deposits are fully convertible and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, may be repatriated without prior approval. NRIs are subject to separate investment limitations. They can repatriate dividends, rents, and interest earned in India and their specially designated bank deposits are fully convertible.

Qualified Foreign Investors (QFIs) are allowed to invest in the equity and debt schemes of mutual funds and equities. QFIs are defined as individuals, groups, or associations that reside in a Financial Action Task Force (FATF)-compliant foreign country, a country that is a signatory to the International Organization of Securities Commissions’ (IOSCO) multilateral Memorandum of Understanding, or a signatory of a bilateral MoU with SEBI. Limits on individual and aggregate investment for QFIs are 5% and 10% of the company’s paid-up capital, respectively. These limits are over and above the cap earmarked for foreign institutional investors (FIIs) and non-resident individuals (NRIs), who can invest directly in the Indian equity market.

Foreign Venture Capital Investors (FVCIs) need to register with SEBI to invest in Indian firms. They can also set up a domestic asset management company to manage the fund. All such investments are allowed under the automatic route, subject to SEBI and RBI regulations and FDI policy. FVCIs can invest in many sectors including software business, information technology, pharmaceutical and drugs, bio-technology, nano-technology, biofuels, agriculture, and infrastructure.

Companies incorporated outside India can raise capital in India’s capital market through the issuance of Indian Depository Receipts (IDRs). These transactions are subject to SEBI monitoring per the following conditions: www.rbi.org.in/Scripts/NotificationUser.aspx?Id=5185&Mode=0. Companies are required to have pre-issued, paid-up capital and have free reserves of least USD 100 million, as well as an average turnover of USD 500 million during the three financial years preceding the issuance. In addition, the company must have been profitable for at least five years preceding the issuance, declaring dividends of not less than 10% each year and maintaining a pre-issue debt-equity ratio of not more than 2:1. Standard Chartered Bank, a British bank which was the first foreign entity to list in India in June 2010, is the only firm to have issued IDRs. In July 2011, a SEBI directive placed restrictions on conversion of actively traded IDRs in shares. The new SEBI directive describes illiquidity as an annualized turnover for the previous six months that is less than 5% of the total numbers of IDRs issued.

External Commercial Borrowing (ECB or direct lending to Indian entities by foreign institutions and non-banking finance companies) is allowed if the funds will be used for outward FDI or domestically for investment in industry, infrastructure, hotels, hospitals, or software. ECBs may not be used for on-lending, working capital, financial assets, or acquiring real estate or a domestic firm. In December 2012, the RBI allowed developers/builders for low cost affordable housing projects and housing finance companies who finance owners of low cost housing units, and micro finance institutions and non-government organizations engaged in micro finance activities to avail themselves of ECBs. As of December 2012, the all-in-costs ceilings for ECBs with an average maturity period of three to five years was capped at 350 basis points over six month LIBOR and 500 points for loans maturing after five years. As the cost of credit is significantly less in overseas markets, Indian companies have borrowed close to USD 27.8 billion in foreign currency through ECBs and FCCBs in the January-October 2012 period, of which USD 17 billion was via the automatic route. Takeover regulations require disclosure upon acquisition of shares exceeding 5% of total capitalization. SEBI regulations require that any acquisition of 15% or more of the voting rights in a listed company will trigger a public offer. The public offer made by the acquiring entity (i.e., an individual, company, or other legal entity) must be for at least 20% of the company’s voting rights. Since October 2008, an owner holding between 55% and 75% of voting rights can acquire additional voting rights of up to 5% without making a public offer (i.e., creeping acquisition). However, the buyer can make a creeping acquisition only by open market purchases and not through bulk/block/negotiated deals or preferential allotment. Furthermore, subsequent to this acquisition, the buyer’s total shares should not cross the 75% threshold. RBI and FIPB clearances are required to assume a controlling stake in an Indian company. Cross shareholding and stable shareholding are not prevalent in the Indian market. SEBI regulates hostile takeovers.

Competition from State-Owned Enterprises (SOEs)

India’s public sector enterprises (PSEs), both at the central and state levels, play an important role in the country’s industrialization. As of 31st May 2012, there were as many as 249 CPSEs (excluding 7 insurance companies). The number of profit making Central Public Sector Enterprises (CPSEs) increased steadily from 143 CPSEs in 2004-05 to 160 CPSEs in 2010-11. The manufacturing sector constitutes the largest component of investment in CPSEs (45%) followed by services (35%), electricity (12%), and mining (8%). Foreigners are allowed to invest in these sectors. The Ministry of Heavy Industries and Public Enterprises’ Department of Public Enterprises oversees CPSEs. CPSEs have a Board of Directors, wherein at least one third of the directors should be externally appointed without being promoters or relatives of promoters. The chairman, managing director, and directors are appointed independently. Companies can appoint private consultants, senior retired officers, and politically affiliated individuals to their boards. A detailed CPSE guideline on corporate governance is listed in this website: dpe.nic.in/newsite/gcgcpse2010.pdf.

As of 2011, the government had granted five CPSEs - Indian Oil Corporation, NTPC Limited, Oil and Natural Gas Corporation, Coal India Limited (CIL) and Steel Authority of India - “Maharatna” status, which allows the management greater financial and operational freedom to expand the CPSE’s operations. Maharatna-designated CPSEs are allowed to invest up to USD 1.1 billion without government approval. The government plans to continue divesting itself of CPSEs, but intends to retain at least 51% ownership. Foreign investors are allowed to buy equity stakes in Maharatna and Navratna status companies via IPOs.

Although there do not appear to be systemic advantages, CPSEs in some sectors enjoy pricing and bidding advantages over their private sector and foreign competitors. Over the last few years the government has increased the pace of reducing its equity ownership in CPSEs, although there are no plans to sell majority shares of CPSEs to the private sector or to list more than 50% of the shares on any of the Indian stock exchanges.

Corporate Social Responsibility (CSR)

The passage of the Companies Bill will mark a dramatic change in corporate social responsibility because the law includes a minimum requirement of spending on CSR activities companies are expected to meet. Once passed, the new legislation encourages publicly-held companies to spend 2% of annual their profits on CSR-related activities. In the proposed contribution guidelines that accompany the Bill, companies generating USD 200 million or more in sales, with a net worth greater than USD 100 million, and that have earned annual profits greater than USD 1 million for three consecutive years must report their CSR expenditures or provide an explanation of why the company did not meet the minimum-voluntary CSR spending recommendation. Companies that do not report could be subject to penalties. New guidelines following the passage of the Companies Bill passage have not yet been released on the Ministry’s website and CSR activities are not defined in the draft legislation. While there is wide-spread support for encouraging more CSR activities in India, some companies have expressed concern about the lack of clarity and enforcement of the rules proposed in the Bill.

Foreign companies operating in India should verify if they are subject to the Ministry of Corporate Affairs’ “National Voluntary Guidelines on Social, Environmental & Economic Responsibilities of Business,” which encourages large companies to voluntarily spend 2% of their profits on corporate social responsibility (CSR) activities. The guidelines also require companies to disclose details regarding their CSR-related expenditures: www.mca.gov.in/Ministry/latestnews/National_Voluntary_Guidelines_2011_12jul2011.pdf

In 2012, Microsoft India was a semifinalist in the annual Secretary of State’s Award for Corporate Excellence because of its significant contributions to improving environmental awareness in India.

NGO’s working in India on CSR includes:

TII sponsors the Advocacy and Legal Action Center, which runs an Anti-Corruption Hotline and provides training sessions on corporate governance and CSR.

Political Violence

There were no reported politically motivated attacks on U.S. companies operating in India in 2012.

In Andhra Pradesh, protests, strikes, and violence related to the creation of a separate Telangana state continued and seem likely to continue into the foreseeable future. Local groups lodged complaints and threatened protests against U.S. companies, such as Google and Facebook, following the release of the YouTube Innocence of Muslims video but no violence occurred. Communal tensions and violence in Hyderabad’s Old City disrupted tourism and business in that area, but no U.S. companies were reported in the media to have been affected. Although the violence is restricted to certain areas and U.S. companies are generally not affected, city-wide strikes have the ability to interfere with operations.

There continue to be outbursts of violence related to insurgent movements in Jammu and Kashmir and similar events in some northeastern states. Maoist/Naxalite insurgent groups remain active in some eastern and central Indian states, including the rural areas of Bihar, Jharkhand, Chhattisgarh, West Bengal, and Orissa. Travelers to India are invited to visit the Department of State travel advisory website at: travel.state.gov/travel/cis_pa_tw/cis/cis_1139.html for the latest information and travel resources.

Corruption

While India’s struggle with fighting corruption has heavily influenced Parliamentary sessions, media, and the public debate over the last year, little concrete action has been taken to curb the problem. Anti-corruption activist Arvind Kejriwal launched a series of corruption allegations against some of India’s richest and most high-profile individuals, including a senior cabinet minister, family members of the ruling party’s leader, and the president of the leading opposition party. U.S. firms continue to point to corruption as the single greatest disincentive to doing business in India. In private conversations, foreign firms note the lack of transparency in the rules of governance, extremely cumbersome official procedures, and excessive and unregulated discretionary powers afforded to politicians and lower-level bureaucrats as major obstacles to investing in India.

India’s ranked 94 out of 174 countries surveyed in Transparency International’s Corruption Perception Index in 2012. India’s ranking, despite the national attention on the issue of combating corruption, was nearly identical to the previous year's ranking of 95 out of 183 countries. The legal framework for fighting corruption is addressed by the following laws: the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Companies Act, 1956; the Indian Contract Act, 1872; and the Prevention of Money Laundering Act, 2002. Anti-corruption laws amended since 2004, granted additional powers to vigilance departments in government ministries at the central and state levels and raised India’s Central Vigilance Commission (CVC) to be a statutory body. In May 2011, the GOI ratified the United Nations Convention against Corruption. In 2011, the Prime Minister had set an ambitious Parliamentary agenda to pass legislation intended to curb corruption. His arsenal of Bills aimed at reducing corruption included laws to create a national anti-corruption ombudsman, protect whistleblowers, eliminate corruption in government procurement, punish bribery of foreign public officials, address grievances against poor or corrupt delivery of government services and amendments to the Prevention of Money Laundering Act designed to expand the definition of money laundering. Most of these bills, however, remain stalled in Parliament.

The national Right to Information Act, 2005, and equivalent state acts function similarly to the U.S. Freedom of Information Act, requiring government officials to furnish information requested by citizens or face punitive action. The increased computerization of services, coupled with central and state government efforts to establish vigilance commissions, is opening up avenues to seek redress for grievances.

Bilateral Investment Agreements

As of July 2012, India had concluded 82 bilateral investment agreements, including with the United Kingdom, France, Germany, Switzerland, Malaysia, and Mauritius. Of these, 72 are already in force. The complete list of agreements can be found at: http://www.finmin.nic.in/bipa/bipa_index.asp. In early 2012, media reported that Coal India lost in arbitration against an Australian firm. The Australian firm reportedly won its case based on more favorable treaty language from a third country investment treaty. Since this ruling, several more cases are rumored to be in process. In February 2011, India signed Comprehensive Economic Cooperation Agreements (CEPAs)s with Japan and Malaysia. In 2009, India concluded a CEPA with ASEAN and a free trade agreement (FTA) in goods, services, and investment with South Korea. FTA negotiations with the EU and Canada are still under way and India is negotiating a CEPA with Thailand.

In June 2012, the U.S. and India held the fourth round of Bilateral Investment Treaty (BIT) negotiations. India continues to seek social security totalization agreement with the United States. India recently concluded a totalization agreement with Canada. India has totalization agreements with Belgium, France, Germany, Switzerland, the Netherlands, Hungary, the Czech Republic, Denmark, and Luxembourg. The U.S. Department of Commerce’s International Trade Administration’s “Invest in America” program and “Invest India,” a joint venture between DIPP and the Federation of Indian Chambers of Commerce and Industry, signed a Memorandum of Intent in November 2009, to facilitate FDI in both countries. India and the United States have a double taxation avoidance treaty.

OPIC and Other Investment Insurance Programs

The United States and India signed an Investment Incentive Agreement in 1987, which covers Overseas Private Investment Corporate (OPIC) programs. OPIC is currently operating in India in the areas of renewable energy and power, telecommunications, manufacturing, housing, services, education, clean water and logistics in infrastructure, and could support an additional USD 200 million or more in 2013, in clean energy and other projects in India. OPIC’s total exposure in India is approximately USD 1.69 billion.

Labor

Although there are more than 20 million unionized workers in India, unions represent less 5% of the total work force. Most unions are linked to political parties. According to provisional figures from the Ministry of Labor, 2 million work-days were lost to strikes and lockouts during the first nine months of 2012, as opposed to 10 million work-days lost in 2011, and 20 million in 2010, a marked improvement.

Labor unrest occurs throughout India, though the reasons and affected sectors vary widely. India's largest car manufacturer Maruti Suzuki experienced violent strikes in 2012. The company was forced to shut down for a month leading to estimated losses around USD 300 million. In 2011, foreign companies in the manufacturing sector, such as General Motors, experienced labor problems in Gujarat, while others in the same sector report excellent labor relations. Some labor problems are the result of workplace disagreements over pay, working conditions, and union representation. Sometimes unrest is related to local political conditions beyond the companies’ control. The states of Gujarat, Kerala, Andhra Pradesh, Karnataka, and Rajasthan experience the most strikes and lockouts, according to government statistics. Sectors with the most labor unrest include banks, excluding insurance and pension, and the automobile industry.

India’s labor regulations are among the world’s most stringent and complex, and limit the growth of the formal manufacturing sector. The rules governing the payment of wages and salaries are set forth in the Payment of Wages Act, 1936, and the Minimum Wages Act, 1948. Industrial wages vary by state, ranging from about USD 3.50 per day for unskilled workers to over USD 200 per month for skilled production workers. Retrenchment, closure, and layoffs are governed by the Industrial Disputes Act, 1947, which requires prior government permission to lay off workers or close businesses employing more than 100 people. Permission is not easily obtained, resulting in a high use of contract workers in the manufacturing sector to circumvent the law. Private firms successfully downsize through voluntary retirement schemes. Foreign banks also require RBI approval to close branches.

In August 2010, Parliament passed the Industrial Disputes (Amendment) Bill, 2010, which contains several provisions that: increase the wage ceiling prescribed for supervisors; bring disputes between contractors and contracted labor under the purview of the Ministry of Labor in consultation with relevant state or central government offices; provide direct access for workers to labor courts or tribunals in case of disputes; seek more qualified officers to preside over labor courts or tribunals; establish a grievance process; and empower industrial tribunals-cum-courts to enforce decrees.

Foreign Trade Zones/Free Trade Zones

The GOI established several foreign trade zone schemes to encourage export-oriented production. These include Special Economic Zones (SEZ), Export Processing Zones (EPZ), Software Technology Parks (STP), and Export Oriented Units (EOU). The newest category is the National Industrial and Manufacturing Zones, of which there are 14 being established across India. These schemes are governed by separate rules and granted different benefits, details of which can be found at: www.sezindia.nic.in; www.stpi.in; and www.eouindia.gov.in/handbook_procedures.htm .

SEZs are treated like foreign territory and therefore, businesses operating in SEZs are not subject to customs regulations, are not bound by FDI equity caps, receive exemptions from industrial licensing requirements, and enjoy tax holidays and other tax breaks. EPZs are industrial parks with incentives for foreign investors in export-oriented businesses. STPs are special zones with similar incentives for software exports. Export Oriented Units (EOUs) are industrial companies established anywhere in India that export their entire production and are granted: duty-free import of intermediate goods; income tax holidays; exemption from excise tax on capital goods, components, and raw materials; and a waiver of sales taxes.

As part of its new industrial policy, the Government of India has started to establish National Investment and Manufacturing Zones (NIMZ). Nine NIMZs are already in the planning stages and will be established as green-field integrated industrial townships with a minimum area of 5000 hectares. The NIMZ will be managed by a special purpose vehicle, headed by a government official. The available information about NIMZ suggests that foreign and domestic companies that establish their operations in a NIMZ will be able to seek government authorizations via a single approval ‘window’ for all clearances.

Foreign Direct Investment Statistics

Table A: Inflow of FDI by top 5 countries (USD million) [FY is April 1 to March 31]

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Year

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13*

TOTAL

24,581

27,331

25,888

21,383

35,121

14,788

Mauritius

11,096

11,229

10,376

6,987

9,942

6,757

Singapore

3,073

3,454

2,379

1,705

5,257

1,248

U.S.A.

1,089

1,802

1,943

1,170

1,115

323

U.K.

1,176

864

657

2711

7,874

611

Netherlands

695

883

899

1,213

1409

1,058

FDI/GDP(%)

2.4

3.2

3.7

1.6

2

GDP is taken at factor cost.

* indicates FDI inflows for April 2012- October 2012 only.

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table B: Inflow of FDI by top 5 countries (Rs billion) [FY is April 1 to March 31]

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Year

2007-08

2008-09

2009-10

2010-11

2011-12

2012-13*

TOTAL

987

1230

1231

973

1,651

804

Mauritius

445

508

497

318

467

367

Singapore

123

157

113

77

247

68

U.S.A.

44

80

92

53

53

17

U.K.

47

38

31

122

364

32

Netherlands

28

39

43

55

66

57

FDI/GDP(%)

2.4

3.2

3.7

1.6

2

GDP is taken at factor cost

* indicates FDI inflows for April 2012- October 2011 only.

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table C: FDI Inflows by Sector - Top 5 (USD millions)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Sector

April 2000 - October 2012

2012-13*

All Services (fin and non-fin)

35,952

3600

Computers/Software

11,456

251

Telecommunication

12,601

48

Construction - Development - townships, housing and built-up infrastructure including roads

21,430

691

* indicates data is for April - October 2012 only (FY is April 1 to March 31)

Source: Secretariat for Industrial Assistance, Ministry of Commerce and Industry, GOI

Table D: FDI Inflows by Sector - Top 5 (Rps billion)

If a scroll bar appears below the following table, swipe the table to move left/right of the dashed line.

Sector

April 2000 - October 2012

2012-13*

All Services (fin and non-fin)

1,653

195

Computers/Software

514

13

Telecommunication

573

2

Construction - Development - townships, housing and built-up infrastructure including roads

975

37

* indicates data is for April – October 2012 only (FY is April 1 to March 31)

Source: Secretariat for Industrial Assistance

[This is a mobile copy of India]