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NEW ECONOMIC
OPPORTUNITIES FOR BUSINESS
IN INDIA
& ROLE OF CAs
a presentation forICAI BIKANER CHAPTER
DR. T.K. JAIN
AFTERSCHO OL
DEVELOPING CHANGE MAKERSCENTRE FOR SOCIAL ENTREPRENEURSHIP
PGPSE PROGRAMME World Most Comprehensive programme in social entrepreneurship & spiritual entrepreneurship
OPEN FOR ALL FREE FOR ALL
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Phases of Indian Economy
1947-1980
Command and Control Economy
Allocation of resources by the Government (budgetary grants)
Government took active part in setting priorities for the economy
Self-Reliance was the buzz word
Nationalisation of Banks
Limited scope for private participation
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Phases of Indian Economy
1991-2000
Liberalization and Globalization of Indian Economy
Increased emphasis on private sector participation
Limited extent of FDI participation
Gradual improvement in the enabling environment
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Phases of Indian Economy
post 2000
Political Coalitions have started providing stable governments
Government to get out of owning and managing businesses: DisinvestmentPolicy
Gradual relaxation in the FDI Policy
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Progressive Liberalisation
Many new sectors opened to FDI; viz., insurance (26%), integrated townships(100%), mass rapid transit systems (100%), defence industry (26%), teaplantations (100%), print media (26%).
Sectoral caps in many other sectors relaxed;
BJP coalition government: pursued reforms vigorously and initiated second
generation reforms.
Post 2000
All sectors placed on the Automatic Route for FDI except for a small negative list
BJP coalition government:(coalition of Left and Right wing parties) was traditionally
seen as opposed to FDI, but continued with economic reforms.
2000
Automatic Route expanded to 111 high priority industry groups up to 100%/ 74%/51%/50%
United Front Government: Inclusive of left parties, was perceived as traditionally
opposed to FDI, but continued with the reforms.
1997
35 high priority industry groups were placed on the Automatic Route for FDI up to51%
Minority Congress government: Initiated economic reforms in a big way
1991
FDI was allowed selectively up to 40% under FERA
This period was dominated by the Congress party
Pre-1991
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Consensus on Economic Liberalisation
Change in perception
Indian Business Houses
Government
Legal Framework: shift from a Positive List to a Negative List (FERA FEMA)
Gradually all sectors moving to Choice and Competition (Multiple Player
Model)
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Present Picture
India: Fourth largest economy in terms ofPurchasing Power Parity
Tenth most industrialized economy
GDP growth rate of 8.1% - Second highest in theworld. Considerable improvement in FDI inflows FII inflows:
For the period, July 2003 Jan 2004 FII inflow hasexceeded USD 7 bn, which is more than the cumulativeFII inflow in the last five years.
Still a big gap between India and China
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The Industrial Policy
Industrial Licensing All Industrial undertakings exempt from obtaining an
industrial license to manufacture, except for: Industries reserved for the Public Sector Industries retained under compulsory licensing Items of manufacture reserved for the Small Scale
Sector
If the proposal attracts locational restriction Industrial Entrepreneur Memorandum
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The Industrial Policy
Industries reserved for the Public Sector: (1) AtomicEnergy and (2) Railway Transport
Compulsory licensing needed in the following
industries: Distillation and brewing of alcoholic drinks
Cigars and cigarettes and manufactured tobacco substitutes
Electronic aerospace and defence equipment of all types
Industrial explosives including detonating fuses, safety fuses,gun powder, nitrocellulose and matches
Certain hazardous chemicals
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The Industrial Policy
Locational Policy Industrial undertakings are free to select the location Location to be 25 km away from any city with a
million strong population Exceptions:
When located in an area designated as an IndustrialArea before the 25th July, 1991.
Electronics, Computer Software and Printing (and anyother industry which may be notified in future as nonpolluting industry).
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The Industrial Policy
Small Scale Industries Suitable for Foreign Investment? Cap on Investment in fixed assets (plant and machinery) is Rs.
10 million (approx. SGD 3,70,000) Not more than 24 per cent of total equity can be held by
any industrial undertaking either foreign or domestic Upon such equity exceeding 24% the SSI status is lost.
Carry-on-Business (COB) Licence required. Various items reserved exclusively for SSIs.
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The Entry Process: Automatic Route
All items/activities for FDI investment up to 100% fallunder the Automatic Route except the following:
All proposals that require an Industrial Licence.
All proposals in which the foreign collaborator has aprevious venture/ tie up in India.
All proposals relating to acquisition of existing shares in
an existing Indian Company by a foreign investor.
All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
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The Entry Process: Government
Approval
FIPB ApprovalFor all activities, which are not covered
under the Automatic RouteComposite approvals involving foreign
investment/ foreign technical collaborationPublished Transparent Guidelines vs.
Earlier Case by Case ApproachDownstream Investment
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Subsequent Investment in the same
or allied field
Press Note 18 No Automatic Route for FDI and/or technology collaboration
for those who have or had any previous jointventure/technology transfer/ trade mark agreement in the
sameor allied field. Same field :Four digit NIC 1987 Code Allied field :Three digit NIC 1987 Code.
IT Sector & International Financial Institutions exempted.
New Trend: FIPB examines objections by the earlierpartner objectively.
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Acquisition of shares in a
Listed Company
Takeover Code Acquisition of more than specified equity stakes would entail public offer
Pricing: Average of 26 weeks or 2 weeks, whichever is higher
No takeover of management before completion of Takeover Code formalities
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Other modes of Foreign Direct
Investment
GDR, ADR, FCCB
Indian Companies allowed to raise equity
capital in the international marketthrough the issue of GDRs/ ADRs/FCCBs.
No ceiling on investment
O h d f F i Di
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Other modes of Foreign Direct
Investment
GDR, ADR, FCCB (Contd.)
No end-use restrictions on GDR/ ADR/ FCCB issueproceeds Except Investment in real estate Stock markets.
Government clearance required when sectoral cap is
exceeded, or for a project not falling under AutomaticRoute. 25% of the FCCB proceeds can be used for general
corporate restructuring.
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Foreign Technology Collaboration
Foreign technology collaborations are permitted eitherthrough the automatic route or by the Government.
Policy for Automatic Approval To all industries for foreign technology collaboration
agreements, irrespective of the extent of foreign equity in theshareholding, subject to: The lump sum payments not exceeding US $ 2 Million;
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Foreign Technology Collaboration
Policy for Automatic approval(contd.) Royalty payable being limited to 5 per cent for domestic sales and 8 per cent for
exports, subject to a total payment of 8 per cent on sales
No restriction on the duration of the royalty payments The aforesaid royalty limits are net of taxes and are calculated according to standard
conditions.
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Foreign Technology Collaboration
Policy for Automatic approval(contd.) Payment of royalty up to 2% for exports and 1% for domestic sales is allowed under
automatic route on use of trademarks and brand name of the foreign collaborator
without technology transfer.
Registration of FC Agreement with RBI.
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ROUTES FOR MNCs
Forms in which Business can be conducted in
India
Wholly owned subsidiary Joint Venture Company
Branch Office
Project Office
India Presence: Liaison Office
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Joint Venture
Advantages Limited liability
Market Penetration
Local Partners Expertise and Experience
Vital Considerations Choice of Joint Venture Partner
Due Diligence
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Joint Venture
Vital Considerations(Contd.) Clearly defined agreement
Terms of the Shareholders Agreement should be reflected in the Articles of
the Company.
Share Transfer Restriction in a Public Limited Company Disproportionate voting Rights: Veto
Non-compete
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Joint Venture
Vital Considerations(Contd.) Agreement for future issue of share capital
Dispute Resolution
Non-disclosure of confidential information post termination
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Branch Office
Purpose/Viability of a Branch Office Represent the business interest of foreign company
For the purpose of execution of the Project
Project Office is in the nature of a BranchOffice set up for a particular project.
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Facilitating FDI in India
Emergence of Independent Regulators
Regulators under consideration: Petroleum, Railways, Information and Broadcasting
Regulator to curb Anti-Competitive Practices
Government Directives
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Labour laws changes
Move towards: hire and fire Progressive use of discretionary executive powers Permissions granted for closure of unviable units Inspections only upon workers grievances
Voluntary Retirement Schemes EPZs, SEZs etc may be exempted from application of certain
labour laws Amendment to Industrial Disputes Act under consideration Amendment to Contract Labour (Regulation & Abolition) Act, 1970
under consideration.
Incentives for investment in Telecom
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Incentives for investment in Telecom
Sector
Movement towards technology neutral Unified LicensingRegime
Permission for Inter-Circle & Intra-Circle Mergers Exemplary growth in teledensity, subscriber base etc. Companies commencing operations before 31st March,
2004, would enjoy tax benefits: 100% deduction for first five years 30% deduction for next five years
Exemption from tax on interest income and long term capitalgains in certain cases
Import duty rates have been reduced for various telecomequipment
Investment Incentive for
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Investment Incentive for
IT Industry
Software companies have a ten year tax holiday on their export income
In 1998 the Government set up a new Ministry of Information Technology
The Information Technology Act, 2000 was passed to tackle cyber crimes and facilitatee-commerce
Incentives for Investment in
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Incentives for Investment in
Power Sector
New Legal Regime: Electricity Act, 2003 The Act provides for: Multiple Buyer Model,
Independent Regulatory Body, Open Access,
Power Trading as an independent business,delicensing of generation
100% FDI Automatic Route in: Hydro-electric power plants; Coal/lignite based thermal power plants; Oil/gas based thermal power plants.
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Incentives for Investment in
Power Sector
Other investment incentives: New Power Projects eligible for 100% tax holiday in
any block of ten years, within first fifteen years ofoperation.
The Deadline for income tax exemption for newpower projects extended from 2006 to 2012.
Various indirect tax incentives: Concessional rate of import duties Special project import scheme Deemed export benefit for certain categories of power
projects.
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Reforms in Financial Sector
FIIs allowed in Capital Market, can invest both in Debt and Equity
FDI cap in private sector banks raised to 74%
10% cap on voting rights
The Mutual Fund market is also open now to foreign players.
Equity issue pricing is market determined
FDI i R l E P li & I
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FDI in Real Estate: Policy & Issues
Press Note 4 (2002 Series) 100% FDI under Automatic Route PERMITTED FOR Integrated Townships,subject to following conditions: Foreign company to be registered as Indian company under Companies Act, 1956 Core Business - Integrated Township Development with a successful track record.
Minimum area of development: 100 acres as per local bylaws/rules. In absence ofsuch by laws/rules, minimum of 2000 dwelling houses for about 10,000 populationto be developed by the investor.
Conditions post acceptance of FDI proposal
Minimum capitalization norms Upfront payment
Minimum lock-in period Time bound completion of project
FDI in Hotel and Tourism:Policy
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FDI in Hotel and Tourism:Policy
and Issues
100% FDI under Automatic Route Hotel includes Restaurant, beach resorts and other tourist
complexes providing accommodation and/or Catering
Tourism related industries includes travel agencies, touroperating agencies, units providing facilities for cultural,adventure and wild life experience to tourists; surface, airand water transport facilities to tourists; leisure,entertainment, amusement, sports and health units for
tourists and Convention/ Seminar units and organizations. Automatic approval for Technical, Consultancy, Marketing,
Publicity, Managerial services subject to specified limits.
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CHANGING ROLE OF CAs
Greater caution in audit
IT and system Audit
Greater scope of consultancy business
Build climate for corporate governance, ethical management
Scope for best practices
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Thank You