By Shawn Greene
Nov. 21 – Navigating foreign investment in India can be daunting. The World Bank’s Doing Business 2014 report ranks India among the most difficult countries in which to start a business – 179th out of 189 countries analyzed. As such, foreign firms are highly recommended to hire a professional services firm to assist with setup and investment in the country.
For foreign institutional investors (FII) and firms considering foreign direct investment (FDI), a familiarity with India’s recent changes in FDI policy is critical. Below, important amendments made to India’s foreign investment policy in 2013 are summarized, and changes currently under discussion for 2014 explored.
Amendments made this year in Indian FDI policy impact a number of key business sectors, and in many instances eliminate the need for foreign investors to obtain approval from the Indian Government before investing. Additionally, policy changes in 2013 alter the legal definition of ‘control’ and regulations for single and multi-brand retail trading. Continue reading
Nov. 15 – The Reserve Bank of India has issued a new circular designed to increase capital inflows by allowing foreign investors to purchase credit-enhanced bonds issued in India. The new decree, Circular No. 74, will allow foreign institutional investors (FII) and qualified foreign investors (QFI) to purchase a total of US$5 billion in domestically issued credit-enhanced bonds.
A credit-enhanced bond is a debt instrument issued with a third-party guarantee, often in the form of collateral or cash promises. These enhancements improve the bond’s credit rating and lower the issuing company’s interest obligations, resulting in a lower cost of debt.
As per Circular No. 94, issued in April of this year, the maximum investment quota for FIIs will remain fixed at US$51 billion for corporate debt and US$25 billion for government-issued debt. Continue reading
Nov. 7 – After markets closed on Wednesday, the Reserve Bank of India, the country’s Central Bank, announced a series of new regulations that will allow foreign banks much greater access to the country’s domestic market. The domestic market had previously been highly protected against added competition from foreign banks.
In essence, under the new regulations, foreign banks will be treated the same as domestic banks.
In order to be eligible under the new regulations, foreign banks much switch from how they currently operate in India by upgrading from a branch to a wholly owned subsidiary structure. Upon forming the subsidiary, foreign banks are required to invest at least US$80 million (5 billion rupees). Continue reading
Aug. 28 – India’s Ministry of Finance has released a draft proposal with new rules governing the safe harbor policy for transfer pricing calculations. The draft proposal aims to simplify and codify the country’s transfer pricing scheme following a record increase in tax and audit disputes last year.
Transfer pricing is used when two affiliated companies exchange goods. It should be calculated using the arms-length principal, which states that the price charged should be equivalent to the price that would be charged by a third-party. Tax authorities pay special attention to transfer pricing as companies may undervalue the exchange of their products in order to avoid a larger tax bill, resulting in burdensome compliance procedures and tax disputes.
Under the safe harbor policy, income tax authorities will accept the transfer prices declared by associated entities operating in different tax jurisdictions. Continue reading
A combination of taxes and FDI polices will drive MNCs to invest in Indian factories
Jul. 23 – India is set to increase import duties on a number of luxury items, including automobiles, televisions, high-end mobile phones, tablets, laptops and exotic foods. As part of a series of strategic tax and FDI initiatives currently being implemented by Finance Minister Chidambaram, the increases are specifically targeted at imported consumer goods that add no manufacturing or FDI value to the country.
“The increases in these strategic items comes at a time when India is, for the first time, coordinating its FDI policy with tax policy,” says Chris Devonshire-Ellis, Managing Partner of Dezan Shira & Associates. “For example, while luxury tax is being imposed on smartphones and tablets, at the same time FDI restrictions in the telecommunications industry are being relaxed. The message is clear: manufacture these products in India for the domestic market or face being priced out through luxury tax. The same is true of autos and other sectors.”
India thus far has a patchy record of matching FDI policy with import duties. However this has now changed, and corporate policy as to accessing the Indian consumer market will have to change along with it. Continue reading
Jun. 7 – In an attempt to slow the country’s consumption of imported metals, India’s Ministry of Finance raised the import duty on gold and platinum this week from 6 to 8 percent. The change came after the demand for gold jumped 13 percent last month, putting further strain on the country’s current account deficit (CAD).
As a net importer of gold and oil, India has seen its CAD grow over the past several years. In the fourth quarter of 2012, the CAD reached its highest level, accounting for 6.7 percent of the country’s GDP. The large CAD has been a worry for economists who believe the state of India’s current account may jeopardize the country’s economy.
“The biggest risk to the economy stems from the CAD which, last year, was historically the highest,” said Reserve Bank of India Governor Duvvuri Subbarao. Continue reading
Jun. 7 – India’s Union Cabinet passed the Real Estate (Regulation and Development) Bill 2013 this week after congress agreed on changes to garner wider approval for the Bill. The Bill will put into effect a uniform regulatory system for real estate developers and will impose sanctions on any agent that misrepresents the scope and characteristics of their developments and properties.
The real estate market has been a hot bed for corruption in India due to the lack of an oversight entity. In the past, it has not been uncommon for contractors to demand under-the-table payments to finish a construction project or for agents to manipulate the prices of the estates they represent.
“The absence of a regulator is the root cause of corruption, anxiety and malpractice,” said Deepak Parekh, chairman of India’s largest real estate finance company. Continue reading