5:21 pm - Saturday July 21, 1381

Business Laws

Foreign Investments In India

Foreign Investments In India


Foreign Direct Investment (FDI) plays a fundamental role in the long-term economic development of a nation, not only as a source of capital but also for enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity & generating new employment opportunities. India has consistently been classified as among the most attractive investment destination by a various reputed international rating organizations. With its highly skilled & cost-effective manpower, it offers immense opportunities not only for Business Process Outsourcing but increasingly for the higher end of value chain in Knowledge Process Outsourcing & Engineering Process Outsourcing. A continuous review of the FDI policy & the associated procedures which includes, progressive simplification of procedures, dispensing with the need of multiple approvals from the regulatory authorities, extending the automatic route to more to more sectors, & allowing FDI in new sectors, is earnestly undertaken to create a more liberal, attractive & conducive investment climate.

Entry Strategy

As an Indian company A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956 through

  • Joint Ventures

  • Wholly Owned Subsidiaries

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the FDI policy.

Joint Venture : Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners. It may entail the advantages like established distribution/ marketing set up of the Indian partner, available financial resource such as accounts receivable financing & established contacts of the Indian partners which help smoothen the process of setting up of operations.

Wholly Owned Subsidiary : Foreign companies can also set up wholly owned subsidiary is sectors where 100% foreign direct investment is permitted under the FDI policy.

For registration an incorporation of a Company an application has to be filed with the Registrar of Companies (ROC). Once a Company has been duly incorporated & registered as an Indian company, it is subject to Indian laws & regulations as applicable to other domestic Indian companies.

As a foreign company

Foreign Companies can set up their operations in India through

  • Liaison Office / Representative Office : It acts a channel of communication between the principal place of business & its entities in India. Its role is limited to collection of information about possible market opportunities & providing information about the company & its products to the prospective Indian customers. It can promote export/import from/to India & also facilitate technical/financial collaboration between parent company & companies in India.

  • Project Office : Foreign companies planning to execute specific projects in India have now been granted general permission by Reserve Bank of India (RBI) to set up temporary project/site offices in India, subject to specified conditions. Such offices cannot undertake or carry on any activity except that incidental & relating to the execution of the project.

  • Branch Office : Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes

    • Export/Import of goods

    • Rendering professional or consultancy services

    • Carrying out research work, in which the parent company is engaged

    • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

    • Representing the parent company in India and acting as buying/selling agents in India.

    • Rendering services in Information Technology and development of software in India.

    • Rendering technical support to the products supplied by the parent/ group companies.

    • Foreign airline/shipping Company.

  • Branch Office on a 'Stand Alone Basis': such branch offices would be isolated & restricted to the Special Economic Zone (SEZ) alone & no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.

Foreign Direct Investment

Since the beginning of economic liberalization in 1991, the attractiveness of India as an investment destination has grown at a steady pace. According to a study by Goldman Sachs, Indian economy is expected to continue growing at the rate of 5% or more & is slated to become the fourth largest economy by 2050. This favorable scenario has been made possible through an increased level of flexibility & rationalization of the policies by the government as regards foreign direct investment.

Automatic Route

Under the existing policy, FDI up to 100% is allowed under the automatic route in all activities/sectors except the following, which require the prior approval of the Government

  • Activities/items that require an Industrial License

  • Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the 'same' field

  • Proposals for acquisition of shares in an existing Indian Company in

    • Financial Services Sector

    • where Securities & Exchange Board of India (Substantial Acquisition of Shares & Takeovers) Regulations is attracted

All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted

FDI in sectors to the extent permitted under the automatic route does not require any prior approval either by the Government or Reserve Bank of India (RBI).the investors are only required to notify the Regional office concerned of RBI within 30 days of the receipt of inward remittances & file the required documents within 30 days of the issue of shares to the foreign investors.

Government Route

FDI activities not covered under the automatic route require prior Government approval & are considered by the Foreign Investment Promotion Board (FIPB). An application can be made online or on a plain paper accompanied by all the relevant documents. The approvals are generally granted expeditiously.

Forbidden Territories

The extant policy does not permit FDI in the following sectors:

  • Retail Trading

  • Atomic Energy

  • Lottery Business

  • Gambling & Betting
  • Agricultural or plantation activities or Agriculture (excluding Floriculture, Horticulture, Development of seeds. Animal husbandry, Pisiculture & cultivation of vegetables, & service related to agro & allied sectors) and Plantations (other than Tea Plantations)

FIPB Territories

The following comprise an illustrative list of the sectors not under the automatic route (subject to sectoral regulations & guidelines as notified by the respective Departments/ministries):

  • Petroleum Sector

  • Existing Airport Projects

  • Asset Reconstruction Companies

  • Atomic Minerals

  • Broadcasting

  • Construction Development Projects (Resorts, Townships, commercial Premises etc.)

  • Defence production

  • Investing Companies in infrastructure / services sector (except telecom sector)

  • Print Media

  • Satellites establishment & operation Equity participation by International Financial Institutions such as ADB, IFC, CDC, etc. in domestic companies is permitted through automatic route, subject to SEBI / RBI regulations & sector-specific cap on FDI. Free repatriation of capital investment & profits is permitted subject to original investment having being made in convertible foreign exchange. The policy further permits Indian companies to raise funds in the international capital markets. The Indian capital market is also open to the Foreign Institutional Investors under the Portfolio Investment Schemes.

FDI in EOUs / SEZs / Industrial Park / EHTP / STP

  • FDI upto 100% is permitted under the automatic route for setting up of Special Economic Zone (SEZ). Proposals not covered under the automatic route require approval of FIPB.

  • FDI upto 100% is permitted under the automatic route for setting up 100% Export Oriented Units (EOU), subject to sectoral policies. Proposals not covered under the automatic route would be considered & approved by FIPB.

  • FDI upto 100% is permitted under automatic route for setting up of Industrial Park

  • Proposals for FDI / NRI investment in Electronic Hardware Technology Park (EHTP) Units & Software Technology Park (STP) Units are eligible for approval under the automatic route, subject to the parameters mentioned under the Automatic route. For proposals not covered under automatic route, the applicant should seek separate approval of the Government through the FIPB.

Technical Collaboration

RBI accords approval under the automatic route for foreign technological agreements in all industries for technical know-how, design & drawings and engineering services within the prescribed monetary limits for lump sum payments & royalty payments. Indian Companies entering into technology transfer agreements with the foreign companies are permitted to remit payments towards know-how & royalty under the terms of the foreign collaborations agreements, subject to certain limits. Indian Companies can hire services of foreign technicians & make remittances for technical services fees subject to certain conditions regardless of the duration of engagement of foreign nationals in any calendar year. Dividends & profits earned in India by foreign companies are allowed to be repatriated after, however, the payment of taxes if any due on them. No RBI permission is necessary for such remittances except to the compliance of certain specified conditions.

Licensing Of Trademarks

The Concept

The provision regarding the licensing of trademarks in favour of the registered users was introduced for the first time in the United Kingdom by the Trade Marks Act, 1938 on the recommendations of the Goshen Committee which suggested the relaxation of common law principle that there could be no separation or splitting up between the proprietorship of the mark & the trade origin of the goods bearing such marks. Cogently put, Trademark Licensing is an authorization by the proprietor granting to another person the right to exploit his trademark, either on an exclusive or non-exclusive basis. In international trade, licensing is in the present day is much more extensive as compared to the domestic market & has now assumed importance as an indispensable tool of business organization on an international level.

The Indian Scenario

The law governing the licensing of trademarks (The Trademarks Act, 1999) & registration of the registered users has been substantially modified to reflect the approach towards the modern trend of business. A Licensee would fall under the definition of a permitted user under the 1999 Act, where 'Permitted Use' means not only the use by a third person of a registered trademark as a registered user but also use by a third person of a registered trademark by consent of the registered proprietor in a written agreement without that person being a registered user. Though the Act is mute on the question of licensing of an unregistered trademark, yet the courts have endorsed the same as common law licensing.

The Purpose

Registered proprietors of trademarks find it beneficial to enter into licensing agreements for various reasons :

  • Grant of license for the use of their trademark to subsidiaries / independent manufacturers

  • To meet a large demand for the goods or services bearing such marks, which they are not incapable to meet through their own operations

  • The profitability quotient which accrues to the proprietor through an exchange for a license fee or royalty.

The Territorial Scope

The territorial limits of a license agreement for a registered trademark are determined by the consent of the parties. The owner of an unregistered trademark selling his goods in a particular territory acquires the right of trademark in that territory only. The same trademark can be used by any other person outside the territory without violating the trademark rights vested in the owner.

The Term

There is no fixed term for the grant of license under the Act & the same is dependent on the terms of license agreement entered into between the licensor & the licensee. Nevertheless, the law provides for a confirmation at any time by the Registrar of Trademarks from the proprietor, as to whether the registered user arrangement still subsists.

Rights & Obligations of the Licensor

As the maker of goods seeks to acquire & maintain a reputation for the quality of his goods, the licensor has the right to exercise control over the quality of the products manufactured & marketed under the trademark license. The owner also has the means to review the manner in which the trademark is being used by the licensee. The licensor has a right for the 'permitted use' of his mark to be considered as use by him & so no application can be filed by anyone for revocation of the trademark on the grounds of non-use, if there is a permitted use of the trademark in that period. Further, the registered licensor has the right to maintain the continuing distinctiveness of the trademark.
Since the function of the trademark is to indicate the trade origin of goods & services, to prevent any deception of the public, the Act imposes an obligation on the licensor/owner of the trademark to maintain a connection in the course of trade with those goods & services. The registered proprietor also has an obligation to confirm to the Registrar as to whether the Agreement filed before the Registrar continues to be in force.

Rights & Obligations of the Licensee

A registered user has a right to use the registered trademark in relation to the goods or services for which it is registered, but does not get any assignable or transmissible right to use the mark. However, the registered user has the right to file suit for infringement in his own name, making the registered proprietor a defendant. The rights & obligations of such registered user must be concurrent with those of the registered roprietor. A 'permitted user', however will have no rights to institute any proceedings for any infringement. The obligations of the licensee can be introduced & the existing ones can be further qualified by the stipulations under the License Agreement.



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