The ‘Make In India’ campaign is going full throttle with the Government initiating key changes to its foreign direct investment policy and the finance budget providing further fillip with slew of regulatory reforms. Further, there is fresh hope for entry of foreign law firms.
Foreign Direct Investment (FDI) – India’s FDI Policy has been ever evolving and some significant changes in the last 3-4 months are discussed below.
As you may be aware FDI in India is permitted through automatic or approval routes. Further, there are sector specific investment limits which permit FDI upto a certain percentage of equity contribution either automatically or subject to certain minimum conditions. Beyond the specified limit, FDI requires Government approval.
Insurance: One of protected sectors has finally been opened up. The existing FDI cap of 26% under the automatic route was increased beyond 25% to 49% under the Government route.
Medical Devices: FDI in medical devices has been carved out of the pharmaceuticals sector and FDI upto 100% under the automatic route is permitted for manufacture of medical devices. Consequently, the conditions applicable to the pharmaceutical sector will not apply.
Construction Development: FDI upto 100% is permitted in the construction development sector subject to certain conditions, which were recently amended. The important amended conditions are:
- Minimum capitalization – reduction from USD 10m in WOS & USD 5m for JVs to USD 5m for all cases
- Minimum area to be developed – reduction from 10 hectares for serviced plots and 50,000 sq. mts. in construction development to no minimum requirements and 20,000 sq. mts. respectively.
- Exit from project – changed from 3 years from completion of minimum capitalisation or from the date of receipt of each installment/ tranche of FDI, whichever is later, to completion of the project or after development of trunk infrastructure i.e. roads, water supply, street lighting, drainage and sewerage.
- Low cost affordable housing – conditions of minimum area restriction and minimum capitalization will not apply to investee/joint venture companies committing 30% of the project cost towards low cost affordable housing.
Annual Finance Budget – The annual Indian finance budget was announced by the Finance Minister in Parliament on February 28, 2015. All budget proposals are subject to Indian central legislative approval. The following are some key highlights of the proposed changes applicable to foreign subsidiary companies (treated as domestic companies) in India:
- Reduction in the rate of Corporate Tax from 30% to 25% over the next 4 years.
- Surcharge for domestic companies having income (i) between INR 10m & upto INR 100m and (i) exceeding INR 100m to be levied @ (i) 7% and (ii) 12% respectively.
- Reduction in rate of income tax on royalty and fees for technical services from 25% to 10%
- Indian entity obligated to furnish information relating to offshore transactions having the effect of directly or indirectly modifying its ownership structure or control.
- Distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments, done away with and replaced with composite caps.
- Foreign investments in Alternate Investment Funds allowed.
- Concerns regarding applicability of indirect transfer provisions to dividends paid by foreign companies to their shareholders will be addressed by the Central Board of Direct Taxes through a clarificatory circular.
- Government to appoint an expert committee to examine the possibility and prepare a draft legislation where the need for multiple prior permissions for commencing business can be replaced with a pre-existing regulatory mechanism.
Entry of Foreign Law Firms – A news report in The Hindu BusinessLine, quoted an unnamed Commerce Ministry official saying that the Ministry was working on a proposal for a phased opening up of the legal sector in non-litigious services and international arbitration. A couple of weeks later, Business Standard published an article written by Mr. Lalit Bhasin, eminent lawyer and president of Society of Indian Law Firms, wherein he suggested a phased sequential approach for entry of foreign legal consultants and law firms into India over a period of five to seven years. Mr. Bhasin has been a staunch opponent of entry of foreign law firms and actively supported the Bar Council of India in this regard, including proceeding against practicing foreign law firms, a matter which is now pending in the Hon’ble Supreme Court of India. This change of stand is being seen as a first positive step to sow the seed for possible entry of foreign law firms in future.
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