India: Infrastructure Laws in India

Last Updated: 26 July 2004
Article by Rajkumar Dubey

Infrastructure is the foundation on which the fort of economic success is built. It is like mother to any economy which not only ensures the evolution of it but also ensures consistency in its growth. India, which has risen to the "economic realities" recently, is trying to attain "economic nirvana" through consistent focus on Infrastructure growth. India is posed to embark on new journey of economic liberalization and revolutionary growth. The back-bone of economic development, i.e. Infrastructure, has been put in to focus and the aggressiveness of Government to attain the best of it is evident from its committed efforts in this direction. Attribution of exclusive position in the list of top economies of the world in recently published "Goldman Sachs Report: Dreaming with BRICs’: The path to 2050", the expectations and aspirations both are touching new high in India.

The infrastructure sector in India has witnessed major reforms brought forth with the aim of achieving planned and consistent economic development. There has been a gradual shift from a controlled to an open market economy where private players including foreign investors have assumed an imminent role.

The infrastructure sector, consisting of various sectors, is governed by specific Statutes for these sectors. These Statutes clearly provide the modes and means of private participation. Generally private participation is allowed through grant of licenses to the private developer or through contractual relationship. The scope and extent of private participation is determined by the concerned State Government and can be of varying degrees for instance on a Build Own and Operate (BOO) or Build Operate and Transfer (BOT) or Build Lease and Transfer (BLT) basis, to name a few of popular modes.

The legal framework within which the infrastructure sectors operate has been illustrated, in brief, hereunder:

Power

India has taken radical steps towards the restructuring of its Power Sector. The entire legal framework governing this sector has undergone change with the passing of the Electricity Act, 2003 on June 10, 2003. The new Act replaced the prevailing legislations namely, Indian Electricity Act, 1910, Electricity (Supply) Act, 1948 and Electricity Regulatory Commission Act, 1998.

The Act has laid a foundation for rapid development of electricity industry, promotes competition, less regulatory approvals, uniform licensing for undertaking electricity distribution, transmission and trading, rationalization of electricity tariff, transparent policies regarding subsidies and provides statutory basis for restructuring of State Electricity Boards.

Private participation has been allowed in Generating Companies and Captive Generating Plants without any license. However, activities pertaining to transmission, distribution and trading of electrical energy is allowed subject to obtaining license from the appropriate Electricity Regulatory Commission (ERC). The License could be procured subject to fulfillment of certain terms and conditions and is valid for 25 years.

The regulatory functions have been delegated to Central Electricity Regulatory Commission, State Electricity Regulatory Commission, Joint Commission and Appellate Tribunal constituted under the Act. There are also monitoring agencies and agencies for governing operational aspects of electricity system.

100% Foreign Direct Investment (FDI) is permitted for hydro electric power plants, coal/lignite based thermal power plants and oil/gas based thermal power plants projects.

Fiscal incentives like 100% tax holiday to new power projects in any block of 10 years within the first 15 years of operations, tax exemption for interest/dividend, long term capital gains, concessional rates of import duties and deemed export benefits are available.

Airports

The Government’s Policy on Airport Infrastructure, 1997 contemplates preparation of detailed master plans for the development and upgradation of all selected airports by the operating agency in conformation with the standards and recommended practices of the International Civil Aviation Organization. Greenfield Airports projects may be permitted in the public or private sector or as a joint venture without the prior approval of the Government. However in case of other categories of airports run by private operators, the approval of Director General of Civil Aviation (DGCA) is required.

The policy recognizes the importance of private participation for a sustained development of airport infrastructure. It seeks to achieve it by way of corporatisation of the airports with an aim to divest the government holding in the future. The airports could be owned by the Central/State Governments, Public Sector Units, Urban Local bodies, private companies and individuals or through joint ventures. The management of airports or parts of airports could be on BOT, BOLT, BOO, LDO, joint venture, management contract or wrap around addition basis.

Establishment of private airports and leasing out of airports to private entities is now permitted subject to prior approval of Central Government.FDI in joint ventures relating to airport infrastructure is permitted up to 74% under automatic route and up to 100% with prior approval. The equity participation could also be made by foreign airport authorities.

Airports are governed by Airports Authority of India Act, 1994, the Aircraft Act, 1934 and the Aircraft Rules, 1937. The above legislations allow private participation through issuance of license for an airport other than owned by the Central Government and formation of joint venture with the Airports Authority of India.

Fiscal incentives like 100% deduction in profits for first 5 years followed by 30% deduction for next 5 years, full deduction to run for continuous ten out of twenty fiscal years of the assessees’ choice, and deduction of 40% of the profit to financial institutions from long-term financing of infrastructure projects is available.

Roads

National Highways are governed by the National Highways Act 1956 and the National Highways Authority of India Act, 1988. The functions relating to development, maintenance and management of National Highways are carried out by National Highways Authority of India.

FDI up to 100% (with total foreign equity up to 1500 crore) is permitted in construction and maintenance of roads, highways, toll roads, vehicular tunnels, rail beds, non-vehicular bridges, non-vehicular tunnels, pipelines, ropeways and runways.

Fiscal incentives include duty free imports, 10 years of corporate tax holiday within 20 years of commissioning the project, exemption on profits of financing institutions, exemption on long-term capital gains of investors, concession period up to 30 years and toll rates indexed to wholesale Price Index.

Water

The Government of India has massive plans to utilize its large rivers for providing less expensive, pollution free and relatively more efficient method of transportation. The National Water Policy, 2002 encourages private sector participation in planning, development and management of water resources projects for diverse uses, wherever feasible. With ambitious plan to connect rivers within the Country, this sector offers major investment opportunity to Investors.

Railways

Railways are the principal mode of transport in India. Railway transport is covered in the list of industries reserved for the Public Sector and is therefore not exempted from industrial licensing requirements. However, several railway components have been delicensed. FDI in the railway sector has been allowed with sectoral caps. FDI up to 51% is permitted for manufacture of railway containers used in container traffic. FDI up to 74% is permitted in construction and maintenance of railbeds, bridges and tunnels under automatic route.

Ports

Both the Central and State Governments have taken several incentives to encourage private investment in this sector through open competitive bidding.

Ports are governed by Major Ports Trusts Act, 1963 and amendments thereof. FDI up to 100% is allowed. Tax holiday for first 5 years followed by 30% rebate on the earnings in the next 5 years may be availed within 12 years of the commissioning of the Project.

Oil and Natural Gas

Natural gas is projected to be a critical component of India’s energy market in the near future. In exploration and production, Indian oil and gas fields are open to the private sector and for foreign participation up to the prescribed limit under production sharing contracts. In refining sector 100% FDI is allowed under the automatic route in the private sector. However, FDI up to 26% is permitted where the joint venture is with public sector undertaking. FDI up to 51% is permitted for petroleum products and pipeline sector.

Fiscal incentives like corporate tax deductions and allowances, seven-year tax holiday and deduction of expenses are allowed. Divestment of Government holding in the Oil Sector has further enhanced the scope in the sector.

Besides, the above-mentioned key infrastructure sectors, Telecom has also been accorded the status of infrastructure by the Government of India. The New Telecom Policy of the Government has brought a revolution in the telecom industry.

The reforms backed by a large statistics of projects go on to confirm that infrastructure sector is presently booming in India. A phenomenal growth has been projected making it an opportune time to invest in this sector. The irreversible process of economic liberalization has entered into third and most critical phase. There could hardly be scope for doubt, when the world has started swearing by the economic development in India.

The Leader is laying foundation; everybody eligible is cordially invited to join. The spiritual leader of the world is evolving itself, this time economically; undeterred faith shall be rewarded, this time with attainment of "economic nirvana".

Actual resolution of legal issues depends upon many factors, including variations of fact and laws of the land. Though we have taken utmost care in the preparation of this Article, the information contained herein is not intended to constitute any legal advice and we cannot accept any responsibility towards those who rely solely on the contents of this article without taking further specialist advice. The reader should always consult with legal counsel before taking action on matters covered by this article.

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