Foreign
Investment Policy:
The Ministry of Industry has expanded the list of industries
eligible for automatic approval of foreign investments and, in
certain cases, raised the upper level of foreign ownership from 51
percent to 74 percent and further in certain cases to 100 percent.
In January 1998, the RBI announced simplified procedures for
automatic FDI approvals. The announcement further provided that
Indian companies will no longer require prior clearances from the
RBI for inward remittances of foreign exchange or for the issuance
of shares to foreign investors.
Facilitating foreign investment
In the recent budget, the finance minister announced the
government's commitment to a 90-day period for approving all foreign
investments. Government officers will be assigned to larger foreign
investment proposals and will facilitate Central and State
clearances in a time-bound manner. Unlisted companies with a good 3
year track record, have been permitted to raise funds in
international markets through the issue of Global Depository
Receipts (GDRs) and American Depository Receipts (ADRs).
A number of recent policy changes have reduced the
discriminatory bias against foreign firms.
- The government has amended
exchange control regulations previously applicable to companies
with significant foreign participation.
- The ban against using foreign
brand names/trademarks has been lifted.
- The FY 1994/95 budget reduced
the corporate tax rate for foreign companies from 65 percent to
55 percent. The tax rate for domestic companies was lowered to
40 percent.
- The long-term capital gains
rate for foreign companies was lowered to 20 percent; a 30
percent rate applies to domestic companies.
- The Indian Income Tax Act
exempts export earnings from corporate income tax for both
Indian and foreign firms.
Other policy changes
have been introduced to encourage foreign direct and foreign
institutional investment.
For instance, the Securities and Exchange Board of India (SEBI)
recently formulated guidelines to facilitate the operations of
foreign brokers in India on behalf of registered Foreign
Institutional Investors (FII's). These brokers can now open foreign
currency-denominated or rupee accounts for crediting inward
remittances, commissions and brokerage fees.
Relaxation
The condition of dividend balancing (offsetting the outflow of
foreign exchange for dividend payments against export earnings) has
been eliminated for all but 22 consumer goods industries. A 5-year
tax holiday is extended to enterprises engaged in development of
infrastructural facilities. Even without a registered office in
India, foreign companies are allowed to start multimodal transport
services in India.
The Reserve Bank of India (RBI) now permits 100 percent foreign
investment in the construction of roads/bridges. The peak custom
duty rate was reduced to 50 percent from 65 percent in the March
1995 budget. Import regime changes included enhancement of the scope
of Special Import License (SIL) programs, and the expansion of
freely importable items on the Open General License (OGL) list to
include some consumer goods.
Dispute Settlement
Currently, there are no investment disputes over expropriation or
nationalization. Government demands for penalty payments for alleged
overcharging by pharmaceutical companies during the 1980's could
lead to de-facto expropriation of some foreign drug companies'
assets in India.
In pharmaceutical sector
A committee has been named to study these longstanding disputes,
but the failure of successive governments to produce a swift and
transparent resolution has led to a virtual standstill in foreign
investment in India's pharmaceutical sector. Indian courts provide
adequate safeguards for the enforcement of property and contractual
rights.
Case backlogs
However, case backlogs frequently lead to long procedural delays.
India is not a member of the International Center for the Settlement
of Investment Disputes, nor of the New York Convention of 1958.
Commercial arbitration or other alternative dispute resolution (ADR)
methods are not yet popular ways of commercial dispute settlement in
India. The recent introduction in Parliament of a new Arbitration
Bill signals the importance now accorded to this matter by the GOI.
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