This article was first produced in September 2006, and the information it contains is correct as of that date.
Here are some facts that the average Westerner may not know about India.
It now offers some of the largest software and systems developers in the world - TCS and Infosys, for example, turnover more than US$2 billion in revenue. India is the second fastest-growing economy in the world, according to the British High Commission. And despite the clichés, India is not a monoculture – with more than 1.1 billion in population, it is as useless to generalise the behaviour of an Indian as it is to assume that Germans, the English and the French all act the same way.
But despite that, Westerners still persist with stereotypes. In the past, the average guide to India might have offered its own set of generalisations about how to interact with Indians. This guide, however, tries to restrict itself to advice on how to navigate the Indian business world.
But there are still culturally offensive behaviours you should avoid. First, if you're in favour of high-pressure sales, you may find the Indian business decision-making environment difficult to understand. As it is considered rude to say "no", sensitivity is required to determine whether an offer has been rejected outright or simply cannot be agreed upon at this time. And it is often not possible to reach instant agreement, as a surprising number of bosses and even sometimes family members must be bought into decision making before an offer can be signed off.
There will also be a lot of questions not just about your offer but also about your personal life. This is a crucial part of relationship building within business, a process that in addition will probably involve more physical contact than northern Europeans expect. (Europeans may also be confused when Indians shake their head to mean "yes" as the movement always means the opposite of the European "no".)
Closeness and relationships are as important as if not more important than making a strong case that you are a worthwhile business partner, so expect to spend time getting to know your local contacts and their families and bosses. If you are a man, however, be sensible about physical contact with women; shaking hands is fine in cities but can be seen as too intrusive outside big urban areas. Again, don't rely on generalisations in dealing with Indian businesspeople, as each will expect to be treated as an individual. The country has been underestimated by the West in the past but bear this statistic in mind; it took 34 years for software company TCS to make its first billion but it took only 24 months to turn over its second. The Indian approach to business can outpace the West, and as with other fast-developing economies like China, India is a region that can't be ignored.
We hope this guide helps you take your business to the region. The rest of the manual gives an introduction to India - its regions, the business framework, the legal framework, visas and help with the process of working itself. But it's only ever going to be a beginning. If further assistance is required, Osborne Clarke is always happy to help. Our India experts are James Mullock and Ulrich Bäumer; they would be very pleased to hear from you.
India's Major Commercial Centres
New Delhi - Capital of India.
Mumbai (formerly Bombay) - Largest city in India and main financial and commercial centre.
Kolkata - Historically one of the most best-known commercial regions, offering considerable tax advantages in certain areas.
Ahmedabad - An up-and-coming second-tier city for investment with a particular focus on pharmaceuticals, IT and retail investment opportunities.
Bangalore - Known as the Silicon Valley of India, several major Indian and international companies in IT and telecommunications are based here.
Hyderabad - Nicknamed the second Silicon Valley, its IT exports were estimated to have hit the $1 billion mark in 2004.
Chennai (formerly Madras) - Area popular with IT companies and manufacturing.
Hindi is the official language of India, but English is the second most spoken language with all legislation enacted in English. Businesses generally operate in English.
Visas And Work Permits
A business visa must be obtained for foreign nationals wishing to work in India. This can be obtained from an Indian embassy or Indian foreign consulate. A visa may last for anything up to five years (10 years in some instances) and also may contain a multiple entry provision, usually providing for a cumulative stay of not more than 180 days. It is usually possible to renew or extend business visas when a foreign national is in India.
Foreign nationals who wish to work in India need to obtain a residential permit from a foreigners' regional register office. These offices are present in all major cities. A foreign national holding a non-tourist visa that is valid for a period exceeding 180 days must register with a foreigners' regional register office within 15 days of arrival in India.
Foreign nationals who intend to work in India must also obtain an employment visa or work permit. They are issued by Indian missions in the majority of foreign countries. The visas are issued for a period of one year, and may be extended once the individual is in India for the period of a contract of employment.
Income Tax Clearance Certificate
A person not resident in India who intends to stay for more than 120 days must produce an Income tax clearance certificate, which certifies his or her stay in India was self-financed.
The Indian legal system affords a degree of protection to the workforce. Employee rights and relations, as well as obligations placed on employers, are all regulated. In addition, Indian employment law makes a distinction between the rights of blue collar and white collar workers. (The first perform non-managerial, administrative or supervisory functions, e.g. factory workers, while the second perform managerial, administrative or supervisory functions.)
Generally speaking, blue collar workers are protected by a series of legislative acts which provide for minimum wage, dispute settlement procedures, work conditions, health and safety, industrial relations, maternity rights and so on.
White collar workers are regarded as being in a bargaining position that allows individual negotiation of contract terms. Legislative protections offered to blue collar workers are not generally afforded to white collar workers.
Various acts cover health and safety and a general minimum standard of working conditions for blue collar workers. Their hours of employment and pay levels are also regulated.
Certain workers on extremely low wages are potentially protected. There are also additional minimum wage and supplemented pension provisions affecting pay.
When injury occurs in the course of employment then certain payments have to be made by the employer. Sickness, time off due to employment related injuries and maternity leave all also require compensation from the employer.
Finally, foreign investors should be aware of the following act since it potentially creates high costs for a foreign investor.
Industrial Disputes Act 1947
This act regulates industrial relations, and specifically regulates the ability of industrial establishments with 50 or more staff to institute redundancies. If a company of this size wishes to make general staff redundancies it must seek prior Governmental approval. Generally such Government approval is not perceived to be forthcoming.
THE BUSINESS ENVIRONMENT
It is important to undertake background checks on trading history, financial details, goodwill and ability before considering appointing a particular company or individual as your initial representative. It may also be necessary to appoint several different representatives to cover different regions.
Foreign companies wishing to do business or establish a presence in India have a number of options.
Sales Representative Or Distributorship Arrangement
Foreign companies may wish to gauge Indian market potential in their industry so they can appoint a locally based sales representative or distributor.
Most Indian retailers operate regionally rather than nationally. It is important to undertake background checks on trading history, financial details, goodwill and ability before considering an appointment. It may also be necessary to appoint different representatives to cover different regions.
A foreign company that wishes to institute a franchise arrangement needs to be aware of Indian contract, intellectual property, competition and consumer protection laws. Various franchising agreements are available such as:
- direct franchising;
- franchising through a subsidiary or branch office;
- franchising through an area development agreement. Here a developer is given the right to open a number of franchised units under a predetermined schedule, within a given area;
- master franchising arrangements; and
- franchising though joint ventures.
Foreign Direct Investment (FDI)
Direct investment is totally prohibited in certain sectors and Government approval is required for other sectors. Approval in the majority of sectors is automatic subject to the equity cap applicable to the sector as well as company notification requirements.
Investment beyond the sector-specific caps may be permissible in certain circumstances, but it requires prior approval of appropriate authorities.
Which Sectors Are Problematic?
As an example, sectors which in the past have been made subject to foreign investment prohibitions include agriculture, housing and real estate, lottery businesses, gambling and betting, print media and atomic energy.
In some cases, where specific approval for investment is technically feasible, in practice Government policy has been to withhold approval. The telecommunications sector is a good example. Restrictions have over time been officially reduced but this is an area where local advice should be taken to ascertain the current position.
Foreign direct investment in the equity of an Indian company has, in the past, been permitted in most sectors under the 'automatic route' of the foreign investment promotion board. But exceptions exist which require either sector-specific approval or are prohibited completely.
Under the 'automatic route' foreign companies have been permitted to acquire shares in existing Indian companies without obtaining prior Governmental approval, provided they comply with the relevant equity cap for that sector. The Indian company that receives investment has traditionally been required to notify a regional office of the Reserve Bank of India (RBI) within 30 days of receiving funds. It has also been required to file certain documentation with the RBI regional office within 30 days of the issue of shares to the foreign investor.
Advice should be taken as to the specific caps direct investment with which foreign investors should comply.
Where the automatic route is not available and direct investment is intended, clearance from the Indian Government is required prior to investment. Applications can, depending on the sector and nature of the investment, be made to a number of bodies including the foreign investment promotions board and the RBI. In addition an application to the Secretariat for Industrial Assistance is sometimes required.
Investment is likely to require approval when it is made in the following instances:
- industries such as tobacco or alcohol where an industrial licence is required under the Industries (Development and Regulation) Act 1951;
- significant foreign investment in the manufacture of items reserved for small-scale industry;
- all items which require an industrial licence under the Government's new industrial policy of 1991;
- where the investor has an existing investment, collaboration or licence in India in the 'same or allied' field with the exception of the IT sector and international financial institutions;
- the development of integrated townships, where ownership by a foreign company may be allowed but is subject to approval;
- a level of investment in domestic airlines may be permitted provided no direct or indirect equity participation by foreign airlines occurs;
- proposed acquisitions of shares from an Indian resident (as opposed to an issue of new shares by the company in which the shares are being acquired); and
- sectors for which the Government has specified FDI are not permitted, or not permitted under the automatic route beyond the specified sectoral caps.
This list is not intended to be exhaustive. It is a guide to common scenarios requiring prior Governmental approval.
Where it is permitted, a foreign company may decide to set up its own wholly-owned subsidiary. These subsidiaries will be subject to Indian company law requirements and may also be the subject of further restrictions and caps depending on the economic sector in which they operate. An Indian company must, by law, register at the Indian register of companies.
As with wholly owned subsidiaries, foreign companies are permitted to incorporate a company locally in India as a joint venture company with an Indian partner or other shareholders. It can be either a private limited company or a public limited company. Equity ownership caps apply to the majority of industry sectors.
Foreign Institutional Investment
This includes investment in such institutions as pension funds, investment trusts, asset management companies, portfolio managers, nominees companies and mutual funds. Such investment is regulated by the Securities and Exchanges Board of India and includes securities such as shares, debentures warrants and units in mutual funds. Equity, debt and futures/options are all therefore potentially available to a foreign investor.
Foreign companies looking to establish an initial presence in India will often set up a representative office. The RBI generally has to grant approval prior to such an office being established.
These offices usually promote exports or imports or encourage technical or financial collaboration between the parent company and companies in India. Representative offices are not permitted to engage in any direct commercial activities which earn income within India. As a result, they may not charge commission for the benefit of any consulting services they provide to Indian customers. The representative office is initially granted permission to operate within India for three years, although this may be extended.
A foreign company may open a branch office for the purpose of common scenarios requiring prior Governmental approval such as:
- engaging in import and export activities;
- rendering professional or consultancy services;
- carrying out research work in which the parent company is engaged;
- promoting technical and financial collaboration between Indian companies and the parent company;
- representing the parent company in India and acting as its agent;
- providing services in information technology and software development in India; and
- providing technical support for products supplied by the parent/group companies.
The RBI must approve any new branch offices.
A foreign company may decide to undertake a specific project of limited duration in India. It may then want to establish a project office which will close on completion or termination of a project.
Such offices can only be established with Regional Bank of India approval. This approval is generally more likely to be granted where the office has received prior approval from the Industry-specific body. Approval is also generally more likely if the establishment of a project office is financed by Indian financial institutions or involves a multilateral/bilateral international financial institution.
PROTECTING YOUR INTELLECTUAL PROPERTY RIGHTS
Intellectual property legislation in India typically conforms with international standards on legislation. India is a signatory to the World Trade Organisation agreement on Trade Related Aspects of International Property Rights (TRIPS) and to the Patent Co-operation Treaty.
Protection is available for the four standard elements of intellectual property. Geographical indications and layout designs for circuits are also protected via local legislation.
Information on the Indian patent and trade mark office is available at http://www.patentoffice.nic.in.
The Patents Act 1970 has been amended by the Patent (Amendment) Act 2002, which provides for the grant of a patent for an invention. An invention is defined as a new product or process involving an inventive step which is capable of industrial application. Patents are durable for 20 years from the filing date of the patent application and benefit from protection from infringement in much the same way as they are protected internationally.
Protection of Trade Marks in India is governed by the Trade Marks Act 1999, which is substantially in the form that the TRIPS treaty requires.
The definition of Trade Mark includes graphical representations and allows the registration of the shape of goods, their packaging and combinations of colours. Registration is durable for 10 years, with renewal for a further 10 years an automatic right.
The Copyright Act 1957 protects copyright in India. It provides for copyright in all original literary, dramatic, musical and artistic works, cinematographic films and sound recording (this covers computer software).
Transfer, assignment and licensing of copyright is well recognised and protected under Indian law as a legitimate exploitation of copyright.
There is a system for the registration of copyright in existence in India, which distinguishes it from many other significant jurisdictions worldwide.
Foreign authors' works are granted reciprocal protection once a piece of work capable of copyright protection is disseminated in India. (India is a signatory to the Berne convention for the international protection of literary and artistic works).
Indian law protects designs via the Designs Act 2000. This act specifically addresses industrial designs and protects the aesthetic value of a product. The holder of a registered design has the right to take action against anyone who reproduces an industrial design. Registration is durable for an initial period of 10 years, after which registration may be extended for a further five years.
The Geographical Indications of Goods (Registration and Protection) Act 1999 provides for the registration and protection of Geographical Indications, an indication that a particular good originated in a particular territory to which a reputation can be associated.
Semiconductor Integrated Circuits Layout-Design
The Semiconductor Integrated Circuits Layout-Design Act 2000 provides for the protection of semiconductor circuit layout design for a period of 10 years from registration.
India does not have specific legislation dealing with trade secrets in India. Contract law in India does, however, provide recourse for breach of trade secrets if contractual terms bind a third party not to disclose trade secrets or other confidential information.
INDIAN COMPETITION LAW
Competition Law in India is currently in a transitory stage. As at September 2006 The Competition Act 2002 has been enacted but not yet brought into force. This means that the range of legislation governing competition issues can stretch back to 1950s. And there is no date as yet for the implementation of the provisions of the Competition Act 2002 relating to anticompetitive behaviour and merger control. This is partly due to some provisions of the Competition Act being challenged before the Supreme Court of India. Until these challenges have been resolved, competition issues will still be determined under the old law.
However, the Competition Act of 2002 asked for the establishment of a Competition Commission in India. This has existed since 2003 and is currently involved with preparatory and infrastructure work for the implementation of the new legislation. When fully in place, the Competition Commission rather than Central Government will be responsible for determining whether proposed mergers should go ahead. It will also investigate anti-competitive agreements or abuse of a dominant position, and it will introduce an asset - and turnover-based regulatory regime similar to that of Europe.
The relevant legislation relating to mergers can currently be found in the Companies Act 1956 with some supplemental information in the Monopolies and Restrictive Trade Practices Act 1969. At present, the prior permission of the Central Indian Government is required for mergers where:
- equity shares are acquired in a public company or a private company that is a subsidiary of a public company. If the acquisition results in an acquiring company holding a significant percentage of the total paid-up capital of the target company;
- there is a transfer of equity shares by a body corporate which has even a relatively small stake in the equity shares in another company; and/or
- there is a transfer of equity shares from a body corporate to an Indian citizen or company registered in India, where the body corporate owns even a relatively small percentage of equity capital of a foreign company.
Parties to a merger must notify the Central Government before conducting the merger. The Central Government then has 60 days to object to the proposed transaction. If the parties failed to notify, they face penalties of up to three years imprisonment, or a fine of up to 50,000 rupees or both.
Until the new Competition Act is in place, the Monopolies and Restrictive Trade Practices Act 1969 remains the primary piece of legislation dealing with anti-competitive behaviour.
An investigation by the Commission can result from a complaint by an individual or a reference by the Government, or the Commission can initiate an investigation on its own behalf. The types of practice that the Commission will investigate include agreements tying the supply of one product to the supply of another product, predatory pricing or agreements restricting the people to whom goods can be sold. If the Commission finds that the practice infringes the Act, it can order the practice to stop and make any agreement relating to the practice void.
The Commission also keeps a register of restrictive trade practices that contains the details of parties to the agreement and full details of the agreement itself. The parties to these agreements have an obligation to notify the Commission should the agreement be amended after registration.
OTHER LEGAL ISSUES
Indian law provides a procedure for accepting contractual proposals with a timescale for those proposals to be executed. Like European law it typically requires a consideration to change hands for contracts to be enforceable. There are laws to potentially invalidate contracts for fraud, undue influence, public policy reasons, restraint of trade clauses, reasonableness of contracts, misrepresentation and mistake.
Penal damages are not generally recognised in India. Damages for breach of contract are usually calculated by determining reasonable compensation for a contractual loss. Indemnities and guarantees are recognised under Indian contract law.
Consumer Protection Law
Indian consumers have legislative protection for goods that they purchase. By way of example, goods must be appropriate for the purpose they are intended for, in good condition, delivered within a reasonable timescale and correspond with the description given of a product.
For some time, the Indian Government has had sustained legislative development underway within environmental regulation.
Companies operating in India must obtain statutory pollution and environmental approvals before establishing certain types of industry. The Environmental Protection Act 1986 lists a number of industries requiring Ministry for the Environment approval. These include oil refineries and cement, petrochemicals, dye and paper products. There are also prescribed guidelines on the quality standards of air, water and soil for different areas, with maximum levels of emissions to which industries must adhere.
Companies operating in a foreign territory should consider if arbitration is the most appropriate method for resolving disputes. India's Arbitration and Conciliation Act 1996 is based on the United Nations Commission on International Trade Law.
Arbitral awards are as enforceable as court decrees. International companies have obtained favourable decisions in India, although enforcement of a successful decision can be a slow process.
This is regulated by the RBI under the Foreign Exchange Management Act 1999. It governs transactions between Indian residents and non-residents, including companies. A non-resident must obtain prior RBI approval for conducting business in India. The rupee is regarded as convertible on the current account and non-convertible on the capital account.
The Foreign Trade (Development & Regulation) Act 1992 governs the majority of elements of foreign trade. Under this act the Indian Government has framed a foreign trade policy which classifies imports and exports into the following categories:
- goods which can be freely imported and exported under an open general licence;
- restricted items for which a restricted import/export licence, permission or a Government approval certificate must be obtained prior to the import/export;
- canalised items which may only be imported/exported by state trading enterprises; and
- prohibited items which cannot be imported or exported.
Indian law on customs is incorporated into the export/import policy via a series of customs laws.
Customs are levied against goods contained in one of the Schedules to the Customs Act 1975 as specified in the appropriate schedule. Indian rates are aligned with international customs rates.
External Commercial Borrowings
An Indian company may raise funding from recognised offshore lenders if they raise such funds in compliance with all Indian Government guidelines and restrictions. No prior regulatory approval is required unless there will be a failure to comply with Government restrictions. In that case, prior specific approval of a transaction is required from the appropriate Government body.
Over the past decade, the Indian Government has had a modernisation policy that aims to reduce Government stakes in the public sector. There have been a variety of sales of Indian Government interest in the public sector, from relatively small stakes to significant sales in petrochemicals and car production. This is an ongoing process that should create additional investment opportunities.
The Indian banking sector is state institution dominated. Relatively new private banks emerged in the early 1990s which allowed the state to manage a smaller share of banking systems assets than it had historically.
The newly emerged privatised banking institutions offer significantly more sophisticated and commercially viable banking service - the reason foreign investors are advised to develop banking relationships in the private sector.
The Indian Government has recently permitted foreign banks to set up wholly owned subsidiaries in India and has raised FDI limits on a foreign investors' equity stake in private banks. Foreign institutional investors can now own large shares of private banks provided their investment does not cause total foreign investment to exceed an overall foreign investment ceiling.
GOVERNMENT INITIATIVES AND INCENTIVES
Special Economic Zones
The Indian Government has put in place a series of schemes designed to provide incentives to businesses which establish Special Economic Zones. These zones offer potential 100% foreign investment opportunities in key sectors, accelerated Government approval of investment, customs duty exemption provisions, licensed imports and exports and potentially no excise duty.
In addition, Indian states have areas classified by the Indian Government as A, B or C. A "C" would be least developed with the least economic productivity and infrastructure.
There are business incentives for investment in specific sectors which are not prevalent in certain geographic areas. And the Indian Government provides incentives to businesses, foreign or domestic that choose to establish operations in less advanced areas.
The Indian tax year runs from 1 April to 31 March in the following year.
Before any company profits are repatriated, the Indian Income Tax department must be satisfied that all taxes owed are paid and that they have not issued an objection certificate. Foreign companies will need a certificate from an accountant stating that all Indian tax obligations have been satisfied.
Individuals may repatriate net earnings for the maintenance of close relatives with permission from the RBI.
Advanced rulings are available from the Indian authorities on any issue which a company or individual suspects may arise in the determination of their tax liability. Such rulings bind the Indian tax authorities, and can therefore offer a degree of advanced comfort on potentially key tax issues.
Value-added tax is not in place in India, although it is the subject of legislative reform at present. The existing sales tax covers only point-of-sale tax.
A company incorporated in India or having its management and control function within India is treated as a corporate resident of India for tax purposes. Such a resident is then taxed in India based on worldwide turnover rather than simply income generated in India. Such a company is classified as domestic.
A foreign company which is not incorporated under Indian law or does not have its management and control functions centred in India is deemed to not be a corporate resident in India. Such a resident is taxed at a slightly higher rate of corporate taxation, but only income received or deemed to be received from India or that foreign company's Indian operations is taxed at that rate. Such a company is classified as foreign.
Income tax in India is taken from several sources including direct income from salary, income from property, profits of one's business or profession, capital gains, dividends and interest on loans.
Resident and non-resident individuals are charged income tax at the same rates.
This is a tax payable on interest, employee salaries, professional fees, commission, gaming wins and contractor payments.
Capital Gains Tax
Capital gain on capital assets situated in India is taxable at the point of sale. Indian tax laws make a distinction between short-term gains and long-term gains on the capital value of an asset.
Assets held for over three years are taxed at higher rates for individuals, domestic companies and foreign companies, and a lower rate for foreign institutional investors. There are exceptions to the three year rule, most notably when it comes to shares and certain other securities, for which one year is defined as long term.
Short-term capital gains (i.e. less than three years) are taxed at normal income tax rates, with a standard rate for foreign investors.
There are further potential exemptions to this tax for long-term capital gains in listed shares.
Scientific research and development costs can potentially be deducted from an Indian tax bill. Also, there are tax incentives for foreign exchange earnings at hotels and construction sites.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.