Copyright 2011, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin: Focus on India, June 2011
The Office of the Canadian Prime Minister announced the inaugural launch of the Year of India in Canada 2011 earlier this year. While this initiative is focused on cultural events, the Indian and Canadian governments have also emphasized the need for increased bilateral trade and investment. This bulletin highlights a few developments that illustrate continued opportunities for Canadian companies in India and for Indian companies in Canada.
Canada's India Engagement Strategy
In the first budget presented by the new Canadian majority government on June 6, Minister of Finance Jim Flaherty indicated the importance the Canadian government places on enhancing bilateral trade and investment with India by outlining the Canadian government's "India Engagement Strategy" to forge closer ties with India across different sectors.
As part of this strategy, the Canadian government intends to harness funding provided in recent budgets to enhance the Canada-India relationship through specific initiatives such as:
- high-level engagement and branding of Canada in India;
- promoting Canadian innovation, bilateral investment and closer business-to-business relationships; and
- strengthening academic networks between Canadian and Indian universities.
Canadian and Indian companies in science and technology fields and educational institutions are therefore particularly likely to receive encouragement and support from the Canadian government. Indeed, in relation to the education sector, the budget provides C$10-million over two years to develop an international education strategy to promote Canadian colleges and universities abroad with a focus on emerging economies, including India.
Mining and Agricultural MOUs with Saskatchewan
As part of a March 2011 trade mission led by the Premier of Saskatchewan to India, a number of mining and agricultural memorandums of understanding (MOUs) with Indian departments and entities were announced. In particular, the Province of Saskatchewan announced MOUs with Gujarat Minerals Development Corporation Ltd. (GMDC), the State of Gujarat, the Indian Ministry of Mines and the Indian Ministry of Agriculture.
Under the MOU with GMDC, the Government of Saskatchewan and GMDC agree to co-operate in investment related to mineral exploration and develop-ment activities, particularly in the areas of coal and coal-to-liquids technology, potash, diamonds, rare earth elements, oil and gas, and carbon capture technology.
The MOU with the State of Gujarat is intended to enhance long-term relations between the Province of Saskatchewan and Gujarat, including the establishment of a Saskatchewan-Gujarat Forum for Cooperation.
The MOU with the Indian Ministry of Agriculture is aimed at exchanging professional knowledge and expertise in crop production, food processing and agribusiness development and management.
Finally, the MOU with the Indian Ministry of Mines is intended to promote investment in mining and mining-related activities, mineral exploration and development, including encouraging joint ventures in India and Saskatchewan.
In July 2010, the Indian Ministry of Mines also signed an MOU with Ontario's Ministry of Northern Development, Mines and Forestry. That MOU was intended to promote opportunities for mineral development and investment between the two jurisdictions and provide for co‑operation on a broad range of mining sector activities including geoscience development, mineral exploration and mine development.
Each of these MOUs indicates opportunities for Canadian companies particularly in the areas of mining and mineral exploration and development, oil and gas exploration and development and agribusiness.
Other Developments of Note in India
A part from the above-mentioned opportunities that are particularly relevant as a result of initiatives of the Canadian federal and provincial governments, there have been other recent developments in India that indicate India's continuing efforts to encourage and attract investment into India and to encourage and facilitate Indian companies to invest abroad.
Foreign DIrect investment in LLPs
Limited liability partnerships (LLPs) are a relatively new structure for doing business in India, introduced in April 2009 through the LLP Act. Until now, foreign direct investment (FDI) in LLPs in India was not addressed. In May 2011, India's Cabinet Committee on Economic Affairs approved a proposal to allow FDI in LLPs, albeit with some restrictions. This opens up the possibility for foreign investors to use LLPs as a structure for their business and operations in India, with attendant corporate and tax advantages that may accrue.
Among the restrictions on FDI in LLPs is that FDI will only be permitted in sectors which are otherwise already open to 100% FDI and accordingly will be prohibited in sectors such as agriculture, print media and real estate. Furthermore, LLPs with FDI will not be permitted to invest in other entities or obtain financing from outside India, nor will foreign institutional investors or foreign venture capital funds be allowed to invest in LLPs. Indian corporations with FDI may be converted into an LLP if certain conditions are met and prior approval of the Foreign Investment Promotion Board is obtained.
Liberalization of Overseas Direct Investment Rules
In May 2011, the Reserve Bank of India (RBI) introduced some changes to its Overseas Direct Investment Regulations that provide additional operational flexibility to Indian companies that have investments and operations abroad.
For instance, the RBI will now consider only 50% of performance guarantees issued by an Indian party towards computing the "financial commitment" to its joint ventures/wholly owned subsidiaries outside of India. This is relevant because, under the current rules, an Indian party can make financial commitments to overseas joint ventures/wholly owned subsidiaries of only up to 400% of the Indian party's net worth. Another aspect of liberalization is that Indian parties may now extend corporate guarantees to second and subsequent step-down operating subsidiaries, subject to certain conditions, while it was previously not permitted to do so.
The initiatives outlined above by the Canadian government in its recent budget and the MOUs entered into with various Indian departments and entities indicate opportunities for Canadian companies in the mining, oil and gas, education and agribusiness sectors, whether by investment in India or collaboration with Indian companies for operations and investment in Canada.
Further, recent initiatives by the Indian government, such as permitting FDI in LLPs and liberalization of rules for overseas investment by Indian parties illustrate India's continuing efforts to encourage inbound investment into India and outbound investment by Indian entities.
Together, these initiatives and efforts indicate continuing opportunities for Canadian and Indian companies for bilateral trade and investment in both jurisdictions.
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