Doing Business with India

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1-846730-22-8_FM_ii_12/29/2006

GLOBAL MARKET BRIEFINGS

Doing Business withIndia

Second Edition

Consultant Editor:Roderick Millar

Forewords from:Kamal Nath, Minister for Commerce and Industry

andR Seshasayee, President, Confederation of Indian Industry

GMB

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Publishers’ note

Every possible effort has been made to ensure that the information contained in this pub-lication is accurate at the time of going to press and neither the publishers nor any of theauthors, editors, contributors or sponsors can accept responsibility for any errors or omis-sions, however caused. No responsibility for loss or damage occasioned to any person acting,or refraining from action, as a result of the material in this publication can be accepted bythe editors, authors, the publisher or any of the contributors or sponsors.

This second edition first published 2007 by GMB Publishing Ltd.

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GMB Publishing Ltd.120 Pentonville Road 525 South 4th Street, #241London N1 9JN Philadelphia, PA 19147United Kingdom United States of Americawww.globalmarketbriefings.com

© GMB Publishing Ltd. and contributors

Hardcopy ISBN 1-84673-022-8 E-book ISBN 1-84673-023-6

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Typeset by Digital Publishing SolutionsPrinted and bound in Great Britain

ContentsForewordShri Kamal Nath, Minister for Commerce and Industry

ForewordMr R Seshasayee, the President of the Confederation of Indian Industry

About the Contributors

vii

ix

xiii

Acronyms

Map

Part One – Overviews

1.1 India at a Glance1.2 Political Background and Overview1.3 An Economic Overview of India

Part Two – Mechanics of Business Engagement

2.1 Labour, Skills and Training2.2 Real Estate2.3 An Opportunity to SE(i)Z(e)2.4 Inward Investment2.5 ITES-BPO2.6 Distribution2.7 Partner Selection2.8 Analyzing the Indian Market

Part Three – Finance, Tax and Accounting

3.1 Audit Requirements3.2 Accounting Requirements and Tax Issues

Part Four – Legal Issues

4.1 Available Legal Structures4.2 Investment Facilities for NRIs/PIOs and Other Foreign Investors4.3 Mergers and Acquisitions4.4 Employment Issues

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Contentsvi

4.5 Export and Import Issues4.6 Intellectual Property4.7 Company Dissolution and Liquidation4.8 Dispute Resolution4.9 Contract Issues, Consumer Protection and Property Issues4.10 Legal Impediments

Part Five – Business Culture

5.1 People5.2 Language and Communication5.3 Management and Leadership Style5.4 Business Interaction

Part Six – Industry Sector Reports

6.1 Trends in the Indian Pharmaceutical Market6.2 The India Opportunity in the Energy Sector

Part Seven – Appendices

1. Sector Specific Guidelines for FDI

2. Clearances and Approvals Information

3. Addresses for Filing Applications

4. Inward Investment from Japan Liaison Office

5. State Statistics

6. Joint Venture Service Providers in India

7. Indian Numbering System

8. Useful Websites

139145153161167175

185191197203

211231

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ForewordIndia’s economy is expected to grow at over eight percent in 2007. This is aremarkable statistic for any economy, it is an extraordinary one for an econ-omy the size of India’s. The fact that it will be the fourth year in a row withover eight percent GDP growth means that it is little surprise that India hasbecome such an attractive and exciting place to do business.

The most recent ATKearney FDI Confidence Index puts India’s FDI attrac-tiveness at an all-time high above all other countries save China, and notes“India appears to be on the cusp of an FDI take-off”. With the continuedemphasis of the Indian Government on moving the Indian economy on frombeing a major provider of IT and service sector related exports to also being adestination for manufacturing investment dollars the country is truly now“open for business”.

As such this new edition of Doing Business with India is well timed. Indiais a complex and sophisticated country and the prospect of entering such anenormous market can be daunting. This book is a welcome guide to gettingstarted with that process, giving the prospective business person a detailedintroduction to the structures and processes that exist and indicating some ofthe best practices in establishing a business presence in India.

The Indian government welcomes the increasing involvement of foreignbusinesses in the growth of the Indian economy as Indian businesses, in turn,are increasingly being seen as major players in the international economy. Ihope that this guide will encourage even more businesses to come to India anddiscover the wealth of opportunities that awaits them here.

Mr Kamal NathMinister for Commerce and Industry

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ForewordVarious studies done across the globe and different views from economistshave been of the opinion that India along with China will rule the world inthe 21st century. By 2025 the Indian economy is projected to be about 60 percent the size of the US economy. The transformation into a tri-polar economywill be complete by 2035, with the Indian economy only a little smaller thanthe US economy but larger than that of Western Europe. By 2035, India islikely to be a larger growth driver than the six largest countries in the EU,though its impact will be a little over half that of the US.

Since independence, the Indian economy has flourished improving its paceof development. India has set up joint ventures in a number of countries andundertaken successfully several projects and contracts independently of andin co-operation with developed economies. Not only that even the infrastruc-ture within the cities of India have had enormous upgradation.

The Indian Economy is now in a state of rapid growth and developmenthaving a strong industrial backbone. It is now regarded as a major player inthe global economic horizon, driven by a commitment to achieve a world-classstandard in future years to come.

Industrial growth is driven by robust performances from manufacturingand construction sectors. Within industry, while manufacturing growth hasaccelerated steadily from 7.1 per cent in 2003-04 to 9.4 per cent in 2005-06,construction growth has been in double digits in each of the last three years.Substantive commercial bank credit flows to the housing and real estate andretail sectors continue to provide support to the boom in construction andconsumer durables. Looking at all this one can concur that India is the perfectrecipe for growth.

Even if we look at the food sector, India is the world’s second largest pro-ducer of food next to China, and has the potential of being the biggest in theworld. Food processing is a key industrial sector for India, it accounts for agross output of more than US$ 69.4 billion, out of which value-added foodproducts comprise US$ 22.2 billion. Size of the semi-processed and ready toeat packaged food industry is over US$ 1 billion, and it is growing at over20 per cent a year. The total processed food production in India is likely todouble in the next ten years.

In the year 2005-2006 itself, The GDP grew by 7.4 per cent in the firstquarter and 6.6 per cent in the second quarter of the current year, comparedwith 5.3 per cent and 8.6 per cent in the corresponding quarters of the previ-ous year. The Economic Survey 2005-06 estimates that the GDP will grow at8.1 per cent. Growth of Gross Domestic Product (GDP) at constant prices in

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excess of 8.0 per cent has been achieved by the economy in only five years ofrecorded history, and two out of these five are in the last three years.

In its initiative to consolidate this growth CII has as its theme for the year(2006-07) ‘Competitiveness for Sustainable and Inclusive Growth’. In conclu-sion, it may be appropriate to mention that the growth of Industry andEconomy are necessary prerequisites for sustained development to comeabout, but for it to be sufficient, we need to make this growth sustainable andinclusive.

Mr R SeshasayeePresident, Confederation of Indian Industry

Forewordx

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About the Contributors

CII Institute of Logistics. The Confederation of Indian Industry has estab-lished a specialized Institute of Logistics - to be built as a centre of excellencein logistics and supply chain management. The principal objectives of the CIIInstitute of Logistics are to enhance the competitiveness of the Indian Indus-try and all the key sectors of the economy, which impacts India’s growththrough integrated initiatives in supply chain management and logisticsdomain area; and meet the latent need of the industry for specialized servicesin Logistics and Supply Chain Management, ranging from education toresearch to consultancy, information services etc. Ramya Kannan is a seniorexecutive within the CII.

Mr Vivek Dahiya is an associate director of DTZ India, with over sevenyears’ experience in real estate. He is a town planner and an MBNA (finance).DTZ is one of the world’s leading property advisory groups with a strong pres-ence in Europe, the Middle East and Africa, the Asia-Pacific region and is inpartnership with the Staubach Company in the Americas.

Roderick Millar has an MBA from the University of Houston, USA and anMA in Economic and Social History from St Andrews University, Scotland.He has written several financial and business books and has been consultanteditor for eight GMB titles. He also is managing editor of IEDP.info, a businessthat monitors the executive education and management development indus-try. In the 1990’s he created and ran a new concept food retail business inLondon. He is a fellow of the Royal Society for the Arts Manufactures andCommerce and the SMWS. He now lives in Spain and Scotland.

C Jayanthi. Jayanthi has been working as a print journalist for over 17 yearsin leading English-language dailies in India and also with Gulf News, Dubai.He launched the Education Times supplement for the leading English dailyin India, The Times of India, in 1998 and was its editor, until 2005. Since thenhe has worked with The Financial Express as deputy features editor, corporatenews features. He has written a couple of novels, English JournalisticQuiche, and A Reporter’s Journey, published by the Writers Workshop, India.

KPMG India. KPMG is the global network of professional services firms ofKPMG International. KPMG member firms provide audit, tax and advisoryservices through industry focussed, talented professionals who deliver valuefor the benefit of their clients and communities.

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The member firms of KPMG International in India were established inSeptember 1993. As members of the cohesive business unit that serves theMiddle East and South Asia (KPMG’s MESA business unit), they respond toa client service environment by leveraging the resources of a globally alignedorganisation and providing detailed knowledge of local laws, regulations,markets and competition.

KPMG has offices in India in Mumbai, Delhi, Bangalore, Chennai, Hyderabad,Kolkata and Pune and services over 2,000 international and national clients.The firms in India have access to more than 1500 Indian and expatriate pro-fessionals, many of whom are internationally trained.

Dr Amit Kapoor is a Ph.D. in Industrial Economics and Business Strategy.He has lead several well-respected consultancy projects with the Governmentof India, Bharti Televentures, Spice Telecom and NAFED amongst others. Heis an affiliate faculty of the Institute of Strategy and Competitiveness,Harvard Business School. He also jointly offers the course with ProfessorMichael Porter at Management Development Institute, India. Amit is also theChairman of Institute for Competitiveness in India. Under this initiative heis looking at completing the India Competitiveness Report by December 2006.He is also a member of the Sub Committee on Manufacturing Competitivenessof CII.

Dr. A. Sahay, Professor of Strategic Management, a hard core business exec-utive turned academician has been successful in both the corporate andacademic world. He was Chairman and Managing Director of Scooters IndiaLimited, a company which had been declared a “mortuary case” until histurnaround of it. In recognition of this, he was made the founder President ofthe Strategic Management Forum of India. He has been invited to serve onmany Corporate Boards as well as those of the technical and managementinstitutions. He represents Govt. of India on task forces in companies likeNuclear Power Corporation Of India, Power Grid Corporation of India,National Thermal Power Corporation and National Hydro Power Corporation.A mechanical engineer by training he also studied management at Univer-sity of Madras and the Advanced Management Course at Henley College ofManagement (U.K). He is ferocious reader and writer and presently con-tributes in the fields of Business Strategy, Innovation & Technology andEntrepreneurship.

Rajdeep Sahrawat is a Vice President and part of the leadership team atNASSCOM and he is responsible for accelerating the growth of the domesticIT market and increasing innovation & R&D within the IT industry. Hestarted his career in 1990 with Tata Consultancy Services (TCS) and workedwith TCS for 15 years in various roles. Rajdeep has a Masters degree in Busi-ness Administration (Finance) from the Faculty of Management Studies,University of Delhi (1990).

About the Contributorsxiv

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Purvi Sheth, Vice President, Shilputsi Consultants, Inda and USA. Purvihas a first class BA from St Xavier’s College, Bombay University and hascompleted the Leadership & Strategy Program at Wharton Business School.In addition to her work at Shilputsi she is an advisor to the EntrepreneurshipCells at the Indian Institute of Technology, Mumbai and the Jamnalal BajInstitute of Management, Mumbai. She has been a member of the jury panelto judge “India’s Under 40 Hot Executives” for three years.

Shilputsi Consultants is a leading Indian consulting firm specialising inStrategic Human resource Development solutions. Shilputsi provides Strate-gic HR advisory, executive development and search and selection services.

Shilputsi has a global presence and reach with a wide range of multinationaland Indian clients. They work in a variety of industries to offer valuable guid-ance fro strategic business, HR and leadership issues.

Karthik Ramamurthy heads the business consulting operations of Synovatein Mumbai and Amit Naikare is a Manager in the same office. SynovateBusiness Consulting is the market strategy consulting arm of Synovate, aleading market research firm. Synovate India is headquartered in Mumbaiwith a pan-India presence. Synovate is a group company of global media com-munications specialist Aegis Group plc.

Titus & Co (10 biogs - to have a whole page for themselves)

Diljeet Titus is Managing Partner of law firm Titus & Co. He holds aBA from St. Stephens’ College, University of Delhi and an LLB from theUniversity of Jabalpur, Madhya Pradesh. He is member of the SupremeCourt Bar Association and the Bar Council of Delhi. His main practice areasinclude project finance, mergers and acquisitions, capital markets and debtrestructuring.

Suhail Dutt is Senior Member with law firm Titus & Co. and heads the Dis-pute Resolution Group. He holds a BA from St. Stephens’ College, Universityof Delhi and an LLB from the University of Delhi. He is member ofthe Supreme Court Bar Association and the Bar Council of Delhi. His mainpractice areas include civil and criminal litigation and alternate disputeresolution.

Rai S. Mittal is Senior Member with law firm Titus & Co. He holds a B.Comand an LLB from the University of Meerut, Uttar Pradesh. He is a memberof the Bar Council of Uttar Pradesh. His main practice areas include corporateand commercial transactions, mergers and acquisitions, joint ventures,inbound investments, capital markets, intellectual property, litigation andarbitration.

Clinton Johnston is a Of Counsel with law firm Titus & Co. He holds J.D.,Harvard Law School and M.A. in Latin American Studies, New York Univer-sity Graduate School of Arts & Sciences. He is member of New York State Bar

About the Contributors xv

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Association. His main practice areas include mergers and acquisitions, projectfinance, capital markets, venture capital finance and debt restructuring.

Baljit Singh Kalha is a Senior Member with law firm Titus & Co. He holdsBA (History Hons.) from St. Stephens’ College, University of Delhi, LLB fromUniversity of Delhi and LLM from the Georgetown University, USA. He ismember of the Bar Council of Delhi. His main practice areas include cross-border mergers and acquisitions, infrastructure projects, power, telecommu-nications, internet and software/information technology.

Payal Pohani is a Senior Associate with law firm Titus & Co. She holds BA(Sociology Hons.) from Lady Shriram College for Women, University of Delhiand an LLB from the University of Delhi. She is a member of the Bar Councilof Delhi. Her main practice areas include corporate transactions, mergers andacquisitions, capital markets, joint ventures and foreign investments.

Abhixit Singh is a Senior Associate with law firm Titus & Co. He holds BA.(History Hons.) and LLB from University of Delhi. He is member of the BarCouncil of Delhi. His main practice areas include project finance, joint ven-tures, inbound investments, civil and criminal litigation, alternate disputeresolution, corporate investment structuring and restructuring.

Chandra Shekhar is a Senior Member with law firm Titus & Co. He holdsMA in English Literature from Lucknow University and LLB from Universityof Delhi. With over 20 years of journalistic experience, he is currently workingas Chief of Research Bureau with the leading financial daily, The FinancialExpress, where he writes on the federal government’s fiscal and monetarypolicies, oil, trade and telecom.

Sushmita Ganguly is a Company Secretary with law firm Titus & Co. Sheholds B.Com from Allahabad University, Uttar Pradesh and is a member ofthe Institute of Company Secretaries of India. Her main practice areasinclude regulatory compliances for corporate transactions, mergers and acqui-sitions, capital markets, venture capital funds, joint ventures and foreigninvestments.

Sanjeev Jain is an Associate Advocate with law firm Titus & Co. He holdsBA and LLB from the University of Delhi. He is member of the Bar Councilof Delhi. He has co-authored articles on various legal subjects. His main prac-tice areas include mergers and acquisitions, joint ventures, civil and criminallitigation and arbitration.

Mr Deepak Mahtani, BA, MIMC, FRSA has a business degree from SophiaUniversity in Tokyo, Japan and the American College, Switzerland. Deepakis of Indian origin, lived in the Far East for 14 years and Switzerland for14 years, and speaks English, French, Spanish, Japanese, and two Indianlanguages. He is married and has two sons.

About the Contributorsxvi

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He is currently a management training consultant, specializing in under-standing and working with different cultures, especially in India, Japan, andChina.

He has coached and trained hundreds of senior managers who are involved inoffshore developments and outsourcing to Indian companies, and in remoteteam management around the globe. Most of his clients are FTSE100 orFortune 500 companies.

About the Contributors xvii

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Contributor Contact Details

CII Institute of Logistics - Ramya KannanExecutiveConfederation of Indian Industry – Institute of Logistics98/1 Velachery main roadGuindyChennai 600 032.IndiaTel : +91 44 42 44 4555 xtn 566Fax: +91 44 42 44 4510

DTZ Debenham Tie Leung - Vivek Dahiya

DTZ Debenham Tie Leung2A Paharpur Software Technology Park21 Nehru Place GreensNew Delhi 110 019IndiaTel: +91 11 2620 7108-114Fax: +91 11 2620 7575Mobile: +91 98715 07801

Global Market Briefings – Roderick MillarEditor120 Pentonville RoadLondonN1 9JNUnited KingdomTel: +44 (0)207 278 0433Fax: +44 (0)207 843 1965

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Email: ramya.kannan@ciionline.org

Associate Director

Website: www.ciilogistics.com

Email: vivek.dahiya@dtz.comWebsite: http://www.dtz.com

Email : info@gmbpublishing.comWebsite : www.globalmarketbriefings.com

C Jayanthi (Education article)46, Shivalik Apartments,Alaknanda, Pocket-A,New Delhi-110019,IndiaPhone 00 91 9810672403Office: The Financial Express,B 14A, Qutab Institutional Area,New Delhi-110016IndiaTel: +91 11 26030883

KPMG – Subir MoitraMarketing & CommunicationsBlock no 4BDLF Corporate Park, DLF CityPhase IIIGurgaonHaryana 122002IndiaPhone: +91 0124 3074000 / 2549191Fax: +91 0124 2549101 / 2549102

MDI - Dr. Amit Kapoor

Professor of Strategy & Industrial EconomicsManagement Development InstituteMehrauli Road ,Gurgaon - 122 001,HaryanaIndia.Tel: +91 124 2341053Fax: +91 124 2341189

Contributor Contact Detailsxx

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Email: Jchandrasekharan@gmail.com

Website: www.in.kpmg.com

Mobile: +91 98104 02639Email: dramitkapoor@gmail.com

Honorary Chairman, Institute for Competitiveness

Website : www.mdi.ac.in

Contributor Contact Details xxi

MDI - Arun SahayProfessor, Strategic Management & Chairman, Center for EnterpreneurshipManagement Development InstituteMehrauli Road,Gurgaon - 122001HaryanaIndiaTel +91-124-5013050-56, 2346162(direct)Fax: +91-124-2341189

NASSCOM - Rajdeep SahrawatVice PresidentNASSCOM (National Association of Software and Service Companies)International Youth CentreTeen Murti MargChanakyapuriNew Delhi – 110021IndiaTel: +91 11 23010199Fax: +91 11 23015452

Shilputsi Consultants - Ms Purvi ShethVice PresidentShilputsi ConsultantsMumbaiIndiaTel: +91 22 243 79611Fax: +91 22 243 62909

Synovate - Karthik RamamurthyHead, Synovate Business Consulting,2ndfloor, AML Centre I

Off Mahakali Caves RoadAndheri (East)Mumbai 400 093IndiaTel: +91 22 4091 8000Mob: +91 98676 97194

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Email: asahay@mdi.ac.inWebsite: www.mdi.ac.in

Email – Rajdeep@nasscom.in/info@nasscom.inWebsite: www.nasscom.in

8 Mahal Industrial Estate

Email: purvi@shilputsi.comWebsite: www.shilputsi.com

Email: karthik.ramamurthy@synovate.com

Contributor Contact Detailsxxii

Amit NaikareManager, Synovate Business Consulting, MumbaiMob: +91 98202 30365

Titus & Co - Diljeet TitusManaging PartnerTitus & Co, AdvocatesTitus HouseR-4, Greater Kailash-I,New Delhi-110048,India.Tel: 91-11-26280100, 26470700, 26475800Fax: 91-11-2648-0300, 2648-9950.

Winning Communications - Deepak MahtaniManaging Director of Winning Communications Partnership Ltd

Surrey

United KingdomTel: +44 (0)208 770 9717Fax: +44 (0)208 770 9747

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Email: amit.naikare@synovate.com

E-mail: dtitus@titus-india.com; titus@titus-india.com

PO Box 43Sutton

SM2 5WL

Email: mahtanid@aol.comWebsite: www.winningcommunications.com

AcronymsADR Alternate Dispute ResolutionAEZ Agri Export ZoneAoA Articles of AssociationASEAN Association of South East Asian NationsBTP Bio-Technology ParkCA2002 Competition Act 2002CA56 Companies Act 1956CLB Company Law BoardDEPB Duty Entitlement PassbookDGFT Director General of Foreign TradeDTA Domestic Tariff AreaEEFC Exchange Earners Foreign CurrencyEHTP Electronic Hardware Technology ParkEOU Export Oriented UnitEPCG Export Promotion Capital GoodsEPFMP Employees’ Provident Fund and Miscellaneous Provisions ActER Equal Remuneration Act (1976)ESI Act Employees’ State Insurance Act (1948)EU European UnionEXIM Export-importFA Factories Act (1948)FCNR Foreign Currency Non-Resident Account SchemeFDI Foreign Direct InvestmentFEMA Foreign Exchange Management ActFIPB Foreign Investment Promotion BoardFMCG fast moving consumer goodsFTP Foreign Trade PolicyGDP Gross Domestic ProductGoI Government of IndiaIDA Industrial Disputes Act (1947)IESO Industrial Employment Standing Orders Act (1946)IP Intellectual PropertyIRDA Insurance and Regulatory Development AuthorityITA Income Tax Act (1961)JV joint ventureJVC joint venture companyM&A mergers & acquisitionsMCI Ministry of Commerce and IndustryMBA Maternity Benefit Act (1961)

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MW Minimum Wages Act (1948)NCLT National Company Law TribunalNHDP National Highway Development ProjectNIC National Industrial Classification CodeNRE Non-Resident External Rupee Account SchemeNRI Non-Resident IndiansNRO Non-Resident Ordinary Rupee Account SchemeNTT National Tax TribunalOCB Overseas Corporate BodyPB Payment of Bonus Act (1965)PCT Patent Cooperation TreatyPIS Portfolio Investment SchemePPP public-private partnershipRBI Reserve Bank of IndiaRoC Registrar of CompaniesSEA Shops and Establishments ActSEBI Securities and Exchange Board of IndiaSEZ Special Economic ZoneSIA Secretariat for Industrial AssistanceSME small and medium-sized enterprisesSSI Small Scale IndustrySTP Software Technology ParkTM99 Trade Marks Act 1999TM Agreement Trade Mark Licensing AgreementTRIPS Trade Related Aspects of Intellectual Property RightsTU Act Trade Unions Act (1926)UNCITRAL United Nations Commission on International Trade LawWCA Workmen’s Compensation Act (1923)WOS wholly owned subsidiary

Acronymsxxiv

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Part One

Overviews

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1.1

India at a Glance

Government: Democratic Federal Republic, gained independence in 1947

Political Structure: Head of State: President (A.P.J. Abdul Kalam, elected 2002)Head of Government: Prime Minister (Manmohan Singh, since 2004)Bicameral Parliament (Sansad) - Council of States (Rajya Sabha) - People’s Assembly (Lok Sabha)

Current Government: A coalition headed by Congress. Next elections must be before 2009.

Main Parties: there are many regionally significant political parties. Below are the fivelargest parties in the Federal parliament, with their current number ofseats:

India National Congress (known as “Congress”) 145Bharatiya Janata Party (known as “BJP”) 138Communist Party of India (Marxist) (not to be confused with theCommunist Party of India) 43Samajwadi Party (a democratic socialist party based in UttarPradesh) 36Rashtriya Janata Dal (Hindu/Muslim based democratic party based inBihar) 24

Currency: Indian Rupee (Rs or INR) Nov 06 $1 = 45 Rs; €1 = 57 Rs; £1 = 85 Rs1

GDP: $3.611 trillion at PPP; $719 billion at official exchange rate(June 05 est)2

GDP Growth Rate: 8.3% forecast 2006-073

GDP per Capita: £3,400 (2005 est)2

GDP by Sector: AgricultureIndustryServices

18.6% (2005 est)2

27.6%53.8%

Exports 2002 - $44 billion2005 - $76 billion (est)

Imports 2002 - $52 billion2005 - $113 billion (est)

1 OANDA.com2 CIA Factbook3 CRISIL.com

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Labourforce: 482 million (1999 est)2

AgricultureIndustryServices

60%17%23%

Inflation Rate: 5.4% (yr to Oct 21, 2006)4

Area: 3.29 million sq km (approx 1/3 the size of the USA)2

Population: 1.095 billion (July 2006)2

Population structure2: 30% under the age of 15 years65% between 15-64 years5% 65 years and over

Literacy (able to read and write atage 15 years and over)2:

MaleFemale

70%50%

Below poverty line: 25% (people living on less than $1 per day)5

Main Holidays: 1st January (New Years Day)26th January (Republic Day)15th August (Independence Day)2nd October (Mahatma Gandhi’s Birthday)25th December (Christmas Day)

Some Religious Holidays/Festivals:

Musharram (Islamic New Year) (20th January, 2007)Holi (Last day of) (3rd March, 2007)Mahavir Jayanthi (8th March, 2007)Sri Rama Navami (Birthday of Sri Rama) (27th March, 2007)Milad-Un-Nabi (Birth of the Prophet) (31st March, 2007)Good Friday (6th April, 2007)Baisakhi, Vishu/Bahag, Mesadi, Maghi (14th April, 2007)Buddha Purnima (2nd May, 2007)Vijaya Dasami (10th Day of Dashain Festival) (20th October,2007)Dussera or Dusshera (Victory of Good over Evil)(21st October, 2007)Eid al-Fitr (End of Ramadan) (11th-13th October, 2007)Diwali (Festival of Lights) (9th November, 2007)Idu’L Zuha/Bakrid/Eid al Akhra) (Feast of the Sacrifice)(20th December, 2007)

These festival holidays change date each year, and are not necessarily observed nationally.

Languages Spoken: English is the principal business language.Hindi is the first language of approx 38% of the populationThere are 16 further principal languages and hundreds ofregional dialects.

4 Reserve Bank of India5 World Bank, Global Monitoring Report 2006.

Overviews4

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International Airports: New Delhi – Indira Gandhi International, www.delhiairport.com(unofficial site)Mumbai (Bombay) – Chattrapathi Shivaji International Airport,www.mumbaiairport.com (unofficial site)

Kolkata (Calcutta) – Netaji Subhash Airport (Dum Dum),www.calcuttaairport.com (unofficial site)

Kochi (Cochin); www.cochin-airport.com

Hyderabad; www.hyderabadairport.com (unofficial site)

Note: Both Hyderabad and Bangalore are building new internationalairports scheduled open in 2008.

Major Ports: Kolkata (Calcutta) – www.portofcalcutta.comChennai (Madras) – www.chennaiport.gov.inKandla – Gujarat, www.kandlaport.gov.inKochi (Cochin) – Kerala, www.cochinport.comMormugao – Goa, www.mormugaoport.gov.inMumbai (Bombay) – www.mumbaiporttrust.comNew Mangalore – Karnataka, www.newmangalore-port.comParadip – Orissa, www.paradipport.gov.inTuticorin – Tamil Nadhu, www.tuticorinport.gov.inVishakapatnam – Andhra Pradesh, www.vizagport.com

Climate (average monthly minimum/maximum temperatures and averagemonthly rainfall)

January April July October

Temp Rain Temp Rain Temp Rain Temp Rain

Bangalore 14/27 °C 6 mm 21/34 °C 41 mm 19/27 °C 100 mm 18/28 °C 149 mm

Hyderabad 15/29 °C 11 mm 24/38 °C 19 mm 22/31 °C 160 mm 20/31 °C 72 mm

Kochi 23/30 °C 23 mm 26/37 °C 125 mm 24/28 °C 592 mm 24/29 °C 340 mm

Kolkata 13/26 °C 9 mm 24/36 °C 44 mm 26/32 °C 125 mm 23/32 °C 114 mm

Mumbai 19/28 °C 4 mm 24/32 °C 4 mm 25/30 °C 165 mm 24/32 °C 64 mm

New Delhi 6/21 °C 25 mm 20/36 °C 8 mm 25/30 °C 179 mm 18/34 °C 10 mm

India at a Glance 5

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Chennai (Madras); www.chennaiairport.com (unofficial site)

Bangalore; www.bangaloreairport.com (unofficial site)

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1.2

Political Background andOverview

India has long been a nation of philosophers with a well-developed and peacefulsociety. One of the oldest scriptures in the world is the four-volume Vedas, whichmany regard as the thought repository of ‘Indic culture’ that projected some ofthe modern scientific discoveries. There have been many major ruling dynasties,for example the Maurayas, Guptas, the Shakas and the Kushans. Chanakya(350 BC–275 BC) is known for his political and economic astuteness and is stillquoted in management institutes whilst teaching strategy or policy. John DBarrow’s book The Book of Nothing credits the Indian astronomer Brhamagupta(628 AD) for defining zero, whilst Aryabhata (476 BC) is credited for inventingzero, without which today’s progress in science and technology would not havebeen possible. Nearly every major religion in the world is represented in India. Itis also the land of Lord Buddha, Lord Mahavira and Guru Nanak Dev, thefounders of Buddhism, Jainism and Sikhism.

Despite formidable barriers in the form of the mighty Himalayas to the Northand oceans to the East, South and West, India has also received a succession offoreigners, many of them carrying swords, guns and dynamite. The Aryans wereamong the first to arrive in India, which was, until then, inhabited by theDravidians. Others who came later included Greeks, Persians, Mughals and lat-terly the British, Portuguese and French. Among them, the British gainedsupremacy and ruled India for centuries.

Out of these waves of immigration, a composite culture has emerged. ThusIndia has become a land of unity in diversity – a land of integration, adoption andlearning, a land of change and continuity.

Mahatma Gandhi, a British-educated lawyer, mobilized the Indians andthrough his Satyagraha, a unique non-violent campaign, India threw off thebondage of British rule on 15 August 1947. Free India’s first Prime Minister,Pandit Jawaharlal Nehru, described the moment as a ‘tryst with destiny’. In lessthan three years of attaining freedom, India had framed a Constitution anddeclared itself a Republic on 26 January 1950. The Constitution was given shape

Dr Arun Sahay,Professor of Strategic Management andChairman, Centre for Enterpreneurship,Management Development Institute

1-846730-22-8_P01_7_12/29/2006

by some of the finest minds of the country, who ensured the trinity of justice,liberty and equality for the citizens of India. The Constitution was made flexibleenough to adjust to the demands of social and economic changes within a demo-cratic framework.

India, a union of states, is a sovereign, secular, democratic Republic with a par-liamentary system of government. The Indian polity is governed in terms of theConstitution, which was adopted by the Constituent Assembly on 26 November1949 and came into force on 26 January 1950. The President is the constitutionalhead of the Executive of the Union. Real executive power vests in a Council ofMinisters with the Prime Minister as head. Article 74(1) of the Constitution pro-vides that there shall be a Council of Ministers headed by the Prime Minister toaid and advise the President who shall, in exercise of his functions, act in accor-dance with such advice. The Council of Ministers is collectively responsible to theLok Sabha – the House of the People.

India’s bicameral parliament consists of the Rajya Sabha (Council of States)and the aforementioned Lok Sabha (House of the People). The legislatures of thestates and union territories elect 233 members to the Rajya Sabha, and the Pres-ident appoints another 12. The elected members of the Rajya Sabha serve six-yearterms, with one-third up for election every two years. The Lok Sabha consists of545 members; 543 are directly elected to five-year terms. The other two areappointed.

It is generally believed that states are represented in the Rajya Sabha and thepeople in the Lok Sabha but with so many regional parties springing up, the rolesof the Rajya Sabha and the Lok Sabha seem to have become inverted. After 1996,due to the pre-eminence of regional parties in the Lok Sabha, for all practicalpurposes, it is the Lower House (Lok Sabha) that represents states’ interests.Thus the importance of the Upper House (Rajya Sabha) has been declining. Giventhe scheme and design of Indian Constitution, the federalism has been weakbecause it flows downwards from the centre, rather than upwards from the states.The political scenario has changed and an era of coalition government at the cen-tre has emerged, due to the following four developments:

1. Emergence of formal regional parties – ‘regional’ meaning confined to onestate (or at best extended to the neighbouring states) – now account foraround half the seats in the Lok Sabha. This proportion is likely to increasein future elections.

2. Even the so-called national parties have now become regional in terms of theinterests they represent. This is partly due to the aggregative definition of‘national’ that is used in the electoral context. A party needs to win only morethan 5 per cent of the total votes polled to become national, regardless of thedistribution of those votes. Hence, the Communist Party of India-Marxist isa ‘national’ party, even though it is concentrated in just two-and-a-half states.

3. Due to criteria used for candidate selection by political parties – caste, moneyand muscle, in that order – there is lesser talent available in the Lok Sabhafor ministerial posts than in the Rajya Sabha. However, partly, it is compen-sated by the generally rising level of education. Nonetheless, the best minis-ters are from the Rajya Sabha, which also provides a way of bringing decent

Overviews8

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folk into politics. Thus the quality of parliamentary debate, which shouldform an essential element of governance and legislation, is better in RajyaSabha compared to that in Lok Sabha.

4. The balance between Rajya Sabha and Lok Sabha has been changing. Thebill that should be thoroughly debated in Lok Sabha and should passthrough Rajya Sabha in reality is debated in Rajya Sabha before being sentfor presidential assent.

There are 26 states and 6 Union territories in the country. The system ofgovernance in the states closely resembles that of the Union. In the states, theGovernor, as the representative of the President, is the Head of State, but realexecutive power rests with the Chief Minister, who heads the Council of Ministers.The Council of Ministers of a state is collectively responsible to the elected leg-islative assembly of the state.

The Constitution governs the sharing of legislative power between Parliamentand the State Legislatures, and provides for the vesting of residual powers inParliament. The power to amend the Constitution also vests in Parliament.

Government and its role

According to its constitution, India is a ‘sovereign, socialist, secular, democraticrepublic.’ Like the United States, India has a federal form of government. How-ever, the Central Government in India has greater power in relation to its states,and its Central Government is patterned after the British parliamentarysystem. Subjects like defence, foreign policy and atomic energy are dealt with bythe Central Government, whilst law and order is dealt with by the state govern-ments. Certain subjects like science and technology, education and environmentare concurrent and dealt with by both the governments.

In 1948, immediately after independence, the GoI (Government of India) intro-duced the Industrial Policy Resolution. This outlined the approach to industrialgrowth and development. To meet new challenges, from time to time, it wasmodified – in 1973, 1977 and 1980. The Industrial Policy Statement of 1980focused attention on the need for promoting competition in the domestic market,technological upgrading and modernization. The policy laid the foundation for thechange of attitude from import substitution to export promotion which encouragedforeign investment, especially in high-technology areas. A number of policy andprocedural changes were introduced in 1985 and 1986 under the leadership of thethen Prime Minister Shri Rajiv Gandhi. These policy initiatives aimed at increas-ing productivity, reducing costs and improving quality. The emphasis was onopening the domestic market to increased competition and readying the domesticindustry to stand on its own in the face of international competition. The publicsector was freed from a number of constraints and given a larger measure ofautonomy. The technological and managerial modernization of industry was pur-sued as the key instrument for increasing productivity and improving globalcompetition. The net result of all these changes was that Indian industry grew byan impressive average annual growth rate of 8.5 per cent.

Political Background and Overview 9

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However, India’s 1991 debt crisis provided the opportunity for major economicreforms to deregulate the private sector and liberalize trade and investment. Thisled to the drastic cut-back of compulsory licensing of private sector industries andby 1997 applied only to nine industries. Restrictions on foreign companies andforeign financial institutions wishing to enter the Indian market were lifted oreased. A steady process of removing quantitative quotas and reducing tariff rateson imports created a more favourable environment for export-oriented produc-tion. The recovery from the initial shock of structural adjustment, buffered by amassive infusion of IMF (International Monetary Fund) loans, has generally beenconsidered remarkable. Initially, the politicians of the opposition parties resistedthe reforms tooth and nail but when they came to power, they found no alternativebut to proceed with the reform.

When the present UPA (United Progressive Alliance) Government was formed,backed by the support of communist parties, the general expectations was thatthe reforms undertaken by the earlier governments would be made redundantand the economy would not be able to maintain its growth targets. However, todayin India there exists a stable government, privatization, improved education andjob opportunities, reduction in the deficit balance of payments and favourableforeign exchange reserves, despite pressure from the left-leaning parties opposingsuch initiatives.

Indian judiciary

India’s present judicial system came to life under the British. Thus its conceptsand procedures resemble those of Anglo-Saxon countries. The Supreme Courtconsists of a chief justice and 25 other justices, all appointed by the President onthe advice of the Prime Minister. The active role of the Indian judiciary, particu-larly the Supreme Court of India, has been widely appreciated both within as wellas outside India. The Indian judicial system proved its mettle in handling theBhopal gas leak case, which was unique for the whole world. The independenceof the judiciary ensured through the constitutional provisions and subsequentstrengthening by judicial interpretation has definitely contributed to the presentstatus of the Indian judiciary.

Judicial framework

● independent judiciary with minimal interference from the GoI;

● Supreme Court, the apex judicial authority, is vested with powers to enforcefundamental rights and act as a guardian of the Constitution;

● apart from the Supreme Court, the Indian judicial system has High Courts inevery state, and lower courts at town levels;

● in addition, there are alternative dispute resolution mechanisms to helpliquidate pending cases in the various courts, either through arbitration orconciliation.

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Change in attitude of Indian polity

As the fourth-largest economy in the world, India is undoubtedly one of the mostpreferred destinations for FDI (Foreign Direct Investment). The country hasstrength in IT (information technology) and other significant areas such as autocomponents, chemicals, apparels, pharmaceuticals and jewellery. India hasalways held promise for global investors, but its rigid FDI policies have proved asignificant hindrance in this regard. However, as a result of a series of ambitiousand positive reforms aimed at deregulating the economy and stimulating FDI,India has positioned itself as one of the front-runners of the rapidly growing AsiaPacific Region. India has a large pool of skilled managerial and technical exper-tise. The size of the middle-class population, at 300 million, exceeds the populationof both the US and the EU, and represents a powerful consumer market.

Since its liberalization in mi-1991, India has become a magnet for FDI. A note-worthy feature is the dramatic speed of approvals, some taking only a week.Automatic approval of projects in 34 industrial sectors is permitted. The con-straint that FDI should reach only 40% has been relaxed to 51%. In certain sectors,such as infrastructure and computer software, the ownership can also be as highas 74% and in some other sectors ownership can be 100%.

As a result of these policy initiatives, FDI rose from US $ 170 million in 1991–92to US $ 1.3 billion in 1994–95. It attracted a total of US $ 2.4 billion in 1996–97and US $ 3.4 billion in 1997–98. FDI is nearly 25 times higher than it was beforethe economy was liberalized.

400Foreign Direct Investment in India

350

300

250

200

150

Rs

in b

illio

n ($

1 =

Rs.

35)

100

50

Source: Reserve Bank of India

0 1991 1992 1993 1994 1995 1996 1997(Jan-Apr)

ApprovalsInflows

Source: Reserve Bank of IndiaFigure 1.2.1 Foreign Direct Investment in India

The recently liberalized FDI policy (2005) allows up to a 100 per cent FDI stakein ventures.The upward moving growth curve of the real-estate sector owes some

Political Background and Overview 11

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credit to a booming economy and liberalized FDI regime. In March 2005, the GoIamended the rules to allow 100 per cent FDI in the construction business. Thisautomatic route has been permitted in townships, housing, built-up infrastruc-ture and construction development projects, including housing, commercialpremises, hotels, resorts, hospitals, educational institutions, recreational facili-ties, and city- and regional-level infrastructure.

entrepreneurship

After independence in 1947, India embarked on a period of centrally plannedindustrialization. The centrepiece of the planning regime was the Industries(Development and Regulation) Act of 1951, which states that ‘it is expedient inthe public interest that the Union should take under its control the industries inFirst Schedule.’ This Act introduced a system of industrial licensing to control thepace and pattern of industrial development across the country, which becameknown as the ‘license raj’. Licensing became the key means of allocating produc-tion targets set out in the five-year plans to firms. Both state and private firms inthe registered manufacturing sector were covered under the licensing regime.State control over industrial development via licensing was intended to accelerateindustrialization and economic growth, and to reduce regional disparities inincome and wealth. However, the policy encouraged the industries to cornerlicense rather than serve consumers.

The bureaucratic nature of the licensing process imposed a substantial admin-istrative burden on firms. There was also considerable uncertainty as to whetherlicence applications would be approved and within what time frame. For example,35 per cent of licence applications in 1959 and 1960 were rejected, with therejected applicants accounting for around 50 per cent of the investment value ofall applications. Recognition of these problems led to various reforms in the 1970s,which attempted to streamline the application process, raise exemption andexpansion limits and exempt specific product lines from the provisionsof the 1951 Industries Act. By this time it had become apparent that industriallicensing had failed to bring about the rapid industrial development that had beenanticipated in the 1950s. The heightened political competition that followed ledto pressure to dismantle government controls, including the industrial licensingsystem. The Congress leader Indira Gandhi responded via the 1980 Statement onIndustrial Policy, which signaled a renewed emphasis on economic growth(GoI, 1980). Large-scale de-licensing, however, did not occur until her son RajivGandhi unexpectedly came to power following his mother’s assassination in 1984.Some 25 broad categories of industry were entirely exempted from industriallicensing in March 1985. In late 1985 and 1986, further relaxations of the indus-trial licensing system followed.

After Gandhi, his successors, in response to external pressures, implementeda large-scale liberalization of the Indian economy. Such reformist tendencies ofthe Narsihma Rao Government were unexpected. Perhaps the then FinanceMinister, Man Mohan Singh, saw the possibilities in reform. In 1991, industriallicensing was abolished, except for a small number of industries where it was

Overviews12

From license raj to the era of innovation and

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retained ‘for reasons related to security and strategic concerns, social reasons,problems related to safety and over-riding environmental issues, manufacture ofproducts of hazardous nature and articles of elitist consumption’ (GoI, 1991).Additional industries were removed from the provisions of the 1951 Industries inthe post-1991 period. With the advent of WTO, in which India plays a key role,non-tariff barriers were removed and tariff rates slashed. The stated rationale forthe liberalization of industrial policy was to actively encourage and assist Indianentrepreneurs to exploit and meet the emerging domestic and global opportunitiesand challenges.

Growing youth population

In the 1990s, the population growth rate came down from 2.1 per cent (recordedin the previous decade) to 1.9 per cent. Population control is a legitimate economicagenda but is shunned by political parties due to election pressures and the votinggame. India is the second most populous country in the world, with a higher pop-ulation growth rate than China. India’s population has cssed the billion mark andwill soon exceed that of China. Some 68 per cent of the population still live in ruralareas yet to witness the benefits of the reform process. However, there is a silverlining in this population growth. A total of 550 million Indians are under theage of 25, and 350 million under 15 years (source: IBEF, 2006). By 2013, the netaddition to the productive population (aged 25–44 years) will be 91 million, or33 per cent. The biggest benefit of this demography is the high consumer base.They will also form an educated labour force, trained in technology and aware offorces of globalization.

The youth brings with it newer and more advanced knowledge, technologicalknow-how, and an aggression that was not encouraged by earlier, more sober andrigid social and governmental systems. The manufacturing industry is on a rollonce again, banks have improved their efficiency to cater for demanding cus-tomers, and private entrepreneurship has found a new lease of life from the GoI’spolicies. A new trend of shifting from job seeking to searching for self employmentopportunities is also taking place.

Today’s youth

0100200300400500600

IndiaChina

Indonesia US

Brazil

Japan

Germany 0

102030405060

Absolute population below 25 years (m)Proportion of population below 25 (% RHS)

Source: www.childrendatabank.orgFigure 1.2.2 Today’s youth

Political Background and Overview 13

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The new face of the Indian consumers

Indian consumers are increasingly exposed to the latest products and technologiesavailable in different sectors. Exposure occurs not only through internationalmedia, including the Internet and satellite television but also through travel. Withmore and more Indians travelling to foreign countries for business or holidays,purchasing opportunities are also increasing. Around 5.5 million Indians trav-elled abroad in 2004, representing a rise of 25 per cent compared to 2003. Indianshoppers spent US $ 100 million during the Dubai Shopping Festival in 2003, witha large part dedicated to luxury goods such as fragrances, cosmetics, watches and

0

100

200

300

400

500

600

93 94 95 96 97 98 99 0 1 2 3E0

10

20

30

40

50

60GDP Per CapitaPeak Personal Tax Rate

Figure 1.2.3 (this needs some labelling)

Reforms and results during the last 15 years

● 1991 Economic liberalization initiated by Indian Prime MinisterPV Narasimha Rao and his Finance Minister Manmohan Singh in response toa macroeconomic crisis;

● 1998 India’s economy was US $ 1702.7 billion, which accounted for a 5% shareof world income;

● 2005 India’s economy is worth US $ 3319 billion (Purchasing Power Parity)which accounts for a 6% share of world income, the fourth largest in the worldin terms of Purchasing Power Parity.

Overviews14

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jewellery (Source: 2006 – www.beauty-on-line.com).

10

8

1951 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

7.6

2.69

6.23

2.533.28

4.67

7.31

4.94

-3.67

-0.33-0.5 -0.09

6

4

2

0

-2

-4

-6

Note: *Constant Prices: Chain seriesSource: Penn World tablesFigure 1.2.4 Growth rate of India’s real GDP per capita, 1950–2006*

Political Background and Overview 15

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1-846730-22-8_P01_16_12/29/2006

1.3

An Economic Overview ofIndia

India is a study in contrasts. It is undeniable that India is one of the fastest grow-ing economies in the world but stark issues stare it in the face like, low GDP percapita; a lowly rank on the Human Development Index; abject poverty with 26 percent of its people living under the poverty line; the growing economic disparity,still a large part of the population deriving income from agriculture; 2 per cent ofworld land accommodating nearly 17 per cent of the world population; a dismalstate of healthcare in India; crumbling infrastructure with projects that aredelayed for years; a power situation that is appalling; corruption that is a menace;interfering polity and bureaucracy; Foreign Direct Investment that is smallerthan that received by Hong Kong.

This paints a fairly gloomy picture for India as a country. Then what makes ittick? Why is it that every economist talks about India and each company has anIndia strategy? Lying under this dismal picture is the opportunity that presentsitself, the opportunity to change, contribute and grow. Even though India has alow GDP per capita it has one of the highest saving rates in the world. It is thisbase of GDP per capita that is about to explode and present to the world the largestmiddle class market in the world. At present it is estimated that urban and ruralmiddle class homes in the country total around 40 million. The opportunities thatawait the telecom market with an exploding market that is growing exponentiallyat 30 million connections a year; the opportunities in the healthcare industry; thegrowing tourism industry; the opportunities in infrastructure projects; the grow-ing airline industry; the coming of age of Indian manufacturing; the talentedworkforce that India presents to the world and last but not the least the dynamicIndian IT and ITES industry. India is sitting on the cusp of change, the changethat will transform the very structure and nature of the world economy in thecoming 5 decades.

Amit Kapoor,

Management Development InstituteProfessor of Strategy and Industrial Economics

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The Indian Economic History

India has a legacy of long term colonial stagnation and economic backwardness.It was in 1947 that India regained independence and started a journey towardsself-reliance. The aspiration of the leaders during independence was to turn Indiainto a vibrant, self-reliant national economy and do away with the vagaries ofabject poverty. India had negatives, in the form of a limited entrepreneurial classand non-functional capital markets. Looking at this the state, i.e. Government,had to fulfill the role of capital accumulation and acting as an entrepreneur. Thisgave rise to public sector units which ended up becoming the agents for growthand industrialization. The strategy gave results as it accelerated the pace ofgrowth and moved India out of stagnancy of the pre-independence era.

As India continued to pursue these goals, the policies ended up being moreinward looking and protectionist. The huge bureaucracy was put in place to mon-itor and govern the permits designed to stimulate and control the industry whilelimiting foreign trade and investment. The “License Raj” created high barriersthrough tariffs and quantitative restrictions on imports. This disincentiviseddomestic Indian industry from innovating and improving its manufacturing qual-ity. The License Raj administered almost all aspects of business, limiting thecapability of business to expand and improve its productivity. The Governmentinterfered in the proper functioning of the markets by setting prices in manyindustries, regulating transport costs and regulating the labor markets.

Due to these interventionist and isolationist policies the economy started tosuffer. The exports declined from 6.5 per cent of GDP to 3.6 per cent in 1970. Thetrend continued and India ended up facing the worst economic crisis since itsexistence as an independent nation. India faced a severe balance of payment(BOP) crisis in 1991. The crisis was exasperated with the collapse of the SovietUnion in the same year. The collapse of the Soviet Union depicted the final blowto the ideals of a centrally controlled economy, against which India had modeleditself. The collapse crippled India’s most significant export market and put a deathknell on its primary source of economic aid.

This crisis created a condition severe enough for the Government to re-examinethe approach to development that India had since independence. It was in July1991 that the Government embarked on a new approach to economic development.It was clearly recognized that correcting the macroeconomic imbalances, replacingoppressive control of managing entry of firms and competition would help in over-coming the BOP crisis. India started taking serious steps towards making asystematic shift towards a more open economy. The ideas behind the move wereto have a greater reliance on market forces, a larger role for the private sectorwithin the country and the changing role of the government.

The key features in India’s economic reforms were related to fiscal and mone-tary tightening, overhaul of foreign trade and investment regulation, reducedstate control of the industry, financial sector liberalization and elimination ofmicroeconomic regulation.

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The Present Economic Situation

The present economic situation in India looks promising with a GDP growth ratearound 8.4%. The economy is propelling upwards with the increase in domesticdemand. The service sector contributes 54% of economic output and is growing ata rate of nearly 10%. The Indian Information Technology and Business ProcessOutsourcing sectors are continuing to grow and perform, driven by internationaldemand and low cost labor that India has in quantity. This sector though has alimited impact on employment generation as at present it employees around onemillion people which is insignificant looking at the base of 1100 million populationof the country.

The Industry or the manufacturing sector accounts for about 26% of GDP andis growing at around 9%. The sectors that contribute to the success are textiles,metals and alloys and transport equipment.

Services54%

Agriculture20%

Composition of Indian Economy

Industry26%

The agriculture sector which has 20% share of GDP is the cause for concern. Eventhough India has had favorable monsoon in the last few years the growth rate forthe sector has been a meager 2.3%. This reflects the difficulties the agriculturesector faces in the country especially in raising productivity. The sector is begin-ning to face an acute water crisis with problems further accentuated throughmismanagement of irrigation and surface water management.

The development that India sees today seems outstanding when compared toits own historical data. If we look at the data in comparison to China the sheenseems to tarnish a little. India grows at 8.4% whereas China at 10%; India con-tributes 6.2% of world GDP as against China’s 14%; 44% of India live as destituteagainst that of 39% in China; China has a literacy rate of 95% to 68% that ofIndia; manufacturing is 16% of India’s GDP to 37% in China; Indian exports are$71 Billion which are just 10% of China’s export of $713 Billion.

Moving further on we notice that China commands 25,000 kilometers of 4 lanehighways against 3,000 kilometers in India; China has 375 million mobile phonesubscribers to that of 100 million in India; 73% of Chinese access the internet tothat of 23% Indians; it takes 71 days to start a business in India to 48 days inChina; 49.5% of per capita income is required to start a business in India tothat of 14% in China; enforcing contracts can be a problem in comparison to

An Economic Overview of India 19

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China; India received around $8 billion of Foreign Direct Investment (FDI)against $70 billion to that of China etc.

These statistics may seem to dim the picture for India but also give indicationsas to what India needs to do to have a more resilient model for growth. India needsto invest in infrastructure, focus on manufacturing, improve legal procedures etc.India is also a nascent market which is ready to explode as it would foresee “hockeystick” growth in sectors like telecom, internet, infrastructure. Beyond doubt ifIndia starts looking at infrastructure alone not only will it propel sectors like air-lines etc, the sector has a potential to move India out of dangerous levels ofunemployment which today stands at about 42 million unemployed graduates. IfIndia focuses on improving its governance and its legal frameworks then it hasthe potential of being one of the most attractive FDI destination amongst theemerging economies.

Indian Competitiveness

According to the acclaimed Harvard academic Prof. Michael E. Porter, competi-tiveness is the fundamental underpinning of prosperity. While macroeconomicshifts, political development, resource price swings, and spurs of trade can allmove GDP per capita, but the only reliable basis for true prosperity is the pro-ductive capacity of a nations economy. He further iterates that productivity setsa nations standard of living. Productivity supports high wages, strong currencyand attractive returns to capital and with a high standard of living. Going furtherPorter explains that productivity improves when a country can mobilize its humanresources to generating value within the economy. Porter articulates that it isinnovative capacity of the economy that would be the cornerstone of productivityin the long run. In the context of economic development the innovation referredto a country’s ability to upgrade its business environment. The aspects that reflectthe microeconomic business environment are Factor Conditions, Demand Condi-tions, Related and Supporting Industries and Context for Firm Strategy andRivalry. It is eventually the management of these four determinants that wouldincrease levels of competitiveness of an economy.

Analyzing these aspects of the microeconomic business environment further wecan look at factors that have an impact on growth of the Indian economy andfurther its competitiveness and economic prowess internationally. The aspectsthat are driving India’s growth are basically the factor conditions and the demandconditions.

Factor ConditionsPorter refers to “factor conditions” as the situation in a country regardingproduction factors, like skilled labor, infrastructure, etc., which are rel-evant for competition in particular industries.

India’s factor conditions are mixed with contradictions across cate-gories. India has one of the largest pool of engineers and scientists butwe see an abysmal rate of patenting within the country. It is perceivedthat India has a large English speaking population but according to some

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estimates it is around 2% of the population. The infrastructure in thecountry is improving but not at the rate at which it is required to sustainthe growth rates of greater than 8%. India faces huge problems in itstransport infrastructure including rail, road and air. Today the infras-tructure bottlenecks have started hindering the growth of sectors withinthe country.

Demand ConditionsIt is the demographic structure of India that spurts demand today andwould drive the demand for the future. As of today 33% of India’s popu-lation is below the age of 15. In the next 10 – 15 years it is estimated that250 million workers will be added to the labor pool, who when gainfullyemployed will create a consumption class that would be parallel to none.

Furthering the concept of Competitiveness we see that successful economicdevelopment is a process of successive upgrading, in which the nation’s businessenvironment evolves to support increasingly sophisticated and productive waysof competing by firms. The nations evolve through various stages of competitivedevelopment.

Stages of Economic Development

Factor DrivenEconomy

Input Cost

InvestmentDriven Economy

Efficiency

InnovationDriven Economy

Unique Value

Source: Porter (1990)

The growth strategy currently followed by India focuses primarily on exploitingits factor inputs. The boom in IT & BPO is driven by availability of low cost labor.The focus and growth has been lead in work which is not high in value addition.The growth in the software sector is not driven by innovation rather it is theavailability of cheap technical manpower which is driving the industry’s growth.If we look at the productivity of an Indian Information Technology professionalvis-à-vis an Israeli professional we would be surprised to see the results. Low costlabor does not necessarily provide competitive advantage to the nation as it isalways at a precarious position and in danger of being overtaken by another lowcost provider of human capital. In the long run it is not the low cost of factor inputsthat drives the economy rather it is the innovative capacity and capability thatmakes the difference. Innovation in all likelihood increases trade, helps in main-taining market share, improves processes and offers high quality products. Indiaas we see is clearly lagging behind in producing products efficiently. It is the long-term orientation and outlook which would make a difference and not the policyinitiatives that are incomplete and in bursts. India as a country has been drivenby inherited prosperity, i.e., focusing on population, low cost of labor, etc. India

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will have to move ahead, wake up and take action. To say the least, India is gainingadvantage because of labor arbitrage. In the future it would have to focus moreon manufacturing and innovation. At this juncture the economic situation Indiahas is full of promises as it has nowhere else to go except upwards.

Regulation

Looking at regulation becomes important as it sets the tone for entry of firms andthe business conducts itself in the country. India has an exhaustive legal frame-work governing all aspects of business. Some of the important ones that haveimplications for a foreign investor are Companies Act, 1956, Governing CorporateBodies; Competition Act, 2002, Ensuring Competitive Spirit in the Market; Con-sumer Protection Act, 1986, Law Protecting Consumers; Factories Act, 1948, LawRegulating Labor in Factories; Foreign Exchange Management Act, 1999, Frame-work regulating foreign exchange transactions; Industries Disputes Act & Work-men Compensation Act, 1951, Laws dealing with labor disputes; IT Act, 1999,Regulation for Internet Commerce Activities; Sales Tax Act, 1948, Governs thelevy of tax on sales.

Various regulatory bodies act as points of contact between the investors andthe Indian Government. Some of the significant regulatory authorities are theForeign Investment Promotion Board (FIPB), Reserve Bank of India (RBI), Reg-istrar of Companies, Securities and Exchange Board of India (SEBI), CentralBoard of Direct Taxes (CBDT) etc.

Since India is moving on the path of economic deregulation there have beensubstantial removal of bureaucratic controls and hurdles on the industry. Licens-ing has been abolished in most of the sectors except atomic energy and railways.Certain industries where licensing is still mandatory are alcohol, cigarettes andtobacco, electronics, aerospace and defense equipment, industrial explosives andhazardous chemicals. With the new Industrial Policy of 1991 the regulatory envi-ronment for foreign investment has been eased consistently which has made thepolicy much more investor friendly. FDI is permitted in most of the sectors exceptatomic energy, lottery and gambling businesses, plantations, retail trading andagriculture (excluding floriculture, horticulture, seed development, animal hus-bandry, pisciculture and cultivation of vegetables and mushrooms).

Challenges that India Faces

No doubt India, with its massive pool of humanity and resources is expected toplay a significant role in world and its own development in coming times. But thisshall necessitate a maturing to its expected role and thereby rising to take upthe challenge. In absence of this inner re-orientation happening the right way,it may collapse inwards, creating problems for rest of the world. The rest ofthe world can duly perceive India to be a vibrant place, filled with investmentopportunities (necessarily with the concomitant risks). Thus more clarity shallaccrue to current policy makers, industry players, potential investors in the

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immediate and long run in understanding the lesser known truisms about thephenomena of India following its liberalization-globalization and privatization.William Baumol, professor of economics and entrepreneurship at New YorkUniversity, talks of “the use of imagination, boldness, ingenuity, leadership, per-sistence and determination” as relevant characteristics of those who go forentrepreneurship, a useful inventory of attributes to be applied to assess require-ments of being a successful investor in the current ceaselessly changing India.

In 2006, though huge strides seem to have been made in economic and socialevaluation, the sustenance of momentum is found groping in dark. The initialexuberance is dwindling and policy framers are at mercy of parochial sectarianand regionally obsessed politicians. The disparities have grown. Report afterreport by global agencies rank the country relatively low on positive attributeslike per capita income and shamefully high on negative traits like corruption andease of doing business in India. Resilience to internal disturbances at the handsof terrorists and a successful combating of the Indo-Pakistan border conflict alongthe way is praiseworthy. Sadly, the resilience is more about apathy and ineffec-tiveness of peace ensuring mechanisms than rooting out fundamental drivers ofdisruptive vectors. The population is yet to invoke truly mature democratic routesto ensuring accountability by the ruling elite. If India is to give to its people acountry that commands respect all across the world in the coming years it willcertainly have to answer and tackle the issues it faces. Even though the negativesthat India faces can be burdensome and may disrupt the growth that India hastoday they are greatly outnumbered by the positives.

Finally, let it be said that it is a mistake to analyze India as a monolithic nation:its cultural diversity and economic disparities coupled with its geographical-people-economic size make it an equivalent in complexity to all Europe and Africa.Accordingly, its 29 states need to be studied on case-by-case basis. In fact, if aframework has to be used, we can talk of two India’s, with nearly 20% living inurbanized locations and the major part in rural areas. The sensibilities, mindsetsand priorities are dramatically different across these two India’s. Accordingly, allpolicy making that employs scale neutral techniques and harnesses the tremen-dous manpower resource, also exploiting the diversity shall yield better andlonger-term results.

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Part Two

Mechanics of BusinessEngagement

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2.1

Labour, Skills and Training

C Jayanthi

As is widely acknowledged, India’s economic growth has been nothing short ofinspiring, and the country’s growth – at 8.4 per cent – is among the highest in theworld. As a result, the country’s education system has been turned upside down.From a population of approximately 300 million at the time of independence, thecountry is now 1 billion people strong. However, a fast growing economy needspeople with skills. The first Prime Minister of the nation, Jawaharlal Nehru, builtexcellent institutions of higher education, such as the IITs (Indian Institutions ofTechnology) and the IIMs (Indian Institutions of Management), which havebenefited the country greatly. Some 80 per cent of India is still rural and primaryeducation has been in a state of neglect. To set right this anomaly, the GoI(Government of India) has attacked the problem with renewed vigour through theEFA (Education for All) or the SSA (Sarva Shiksha Abhiyan) programme.

The SSA, the flagship programme of the UPA Government – that the CentralGovernment launched in partnership with the State Governments, is expected tobe instrumental in attaining the goal of UEE (Universal Elementary Education)in the country. The Prime Minister heads the National Mission for the SSA, whichmonitors the progress made under the scheme. The SSA is expected to providerelevant elementary education for children in the country aged between 6 and14 years old by 2010. The goal of the SSA is consistent with the Constitution (86th)Amendment Act, 2002, which makes elementary education a fundamental rightof every child living in the country.

The performance audit of the SSA, carried out by the CAG (Comptroller andAuditor General) of India (March 2005) mentions specifically the aim of the SSA:“to ensure that all children complete five years of primary schooling by 2007; toensure that all children complete eight years of elementary schooling by 2010;bridge all gender and social category gaps at the primary stage by 2007 and at theelementary educational level by 2010 and achieve universal retention by 2010.”

Covering the period from 2003–04 to 2007, the SSA has received external fund-ing to the tune of US $ 1 billion from the World Bank’s IDA (InternationalDevelopment Association); the Department for International Development, theUK and the European Commission. The SSA is an ambitious programme, meantto cover 19,200,000 children in the country. It evolved from the recommendationsof the state education ministers’ conference held in October 1998 to kick-startUEE. The programme was launched in 2001–02. Since its inception, allocation offunds under the SSA has shown high growth from US $ 77,467,906 in 2000–01 to

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US $ 1.6 billion in 2005–06, and to US $ 2.4 billion in 2006–07, representing anincrease of 41 per cent over the previous year (2005–06).

The World Bank Aide-Memoire (January 2006) on the third joint-reviewmission of the SSA mentions that the target of reducing out-of-school children by3 million per year is being exceeded. It mentions that the number of out-of-schoolchildren has fallen from 25 million in 2003 to 13.5 million as on March 2005 andthat “the positive trend will continue in 2006”.

Clearly, a great deal needs to be done. There are 48 districts in the countrywhere more than 50,000 children are out of school, according to the World Bankreport. According to the CAG of India’s report on the SSA (March 2005), nation-ally, there were 71 children out–of school per thousand. Therefore, efforts need tobe speeded up in this direction. Gender parity continues to improve, almost withinreach at the primary level, according to the World Bank report. The girls to boysratio at the primary level has increased from 0.90 in 2003–04 to 0.91 in 2004–05.

Another key component of the flagship programme of the UPA Governmenthas been the midday meal scheme that is seen as key to retaining children atschool. The scheme was launched as a centrally sponsored scheme in August 1995.Central assistance comprised free foodgrain via Food Corporation of India andan admissible transport subsidy. Initially, most states received a dry ration of3 kilogrammes per person. The centre earlier provided a cooking cost of 1 rupeeper day, which has now been increased to 1.50 rupees per day, with 0.50 paisecontributed by the state – the bare minimum by any country’s standards.

Under the scheme, a cooked meal of a minimum of 300 calories is made avail-able to 12 crore children in over 950,000 schools. The allocation for the middaymeal scheme has gone up from US $ 2.7 billion in 2005–06 to US $ 3.7 billion in2006–07, signaling a rise of over 37 per cent, according to a parliamentary stand-ing committee report (2006) on the scheme.

The 2 per cent education cess levied through the Finance Act 2004 yieldedUS $ 1.08 billion in FY (financial year) 2004–05: in FY 2005–06 it rose to toUS $ 1.5 billion and in 2006–07 it amounted to US $ 1.9 billion, according to theMinistry of HRD (Human Resource Development). The cess is used exclusively tofinance the SSA and the midday meal scheme of the GoI. During 2006–07, fundsamounting to US $ 1.6 billion will be required to construct 500,000 much-neededclassrooms, according to the World Bank.

As far as secondary education is concerned, the age of 14–17 years is crucial. Itencompasses classes 9 to 12. According to figures available from the 2001 census,there are 91.7 million children eligible for secondary education in India. This seg-ment is expected to grow to 98.2 million by 2011. In the 1990s, the enrolment insecondary schools increased at a rate of 2.83 per cent per annum, whereas in theearly 2000s, the rate of growth was 7.4 per cent. According to government statis-tics, enrolment in secondary schools is expected to reach 26.4 million by2006–07. This will mean an additional billion dollars investment just for sec-ondary education. There is a government proposal to expand the level of skillstaught through industrial training institutes, which is expected to be considered.Industrial training institutes train students to become technicians, for exampleelectricians or plumbers etc. The aim of the GoI is also make sure that students,who do not want to study beyond class X, and join vocational courses, should be

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able to do so. The Planning Commission (determines priorities for the GoI forbalanced use of the country’s resources) of the GoI wishes to place vocationaltraining on a par with secondary in terms of resources and status, within the nextfive years.

India has progressed in the realm of higher education from having 30 univer-sities in 1950–51 to 324 now. The number of colleges is up from 750 in 1950–51to 16,000 now. Enrolment has risen from 263,000 in 1950–51 to 9,228,000 in2004–05 and the number of teachers has gone up from 24,000 to 436,000 in thesame period. There is also the UGC (University Grants Committee), anautonomous body that disburses grants to recognized institutions of higher learn-ing. There are also institutions of higher learning – the aforementioned IITs(seven) and IIMs (eight), granted autonomy through Acts of Parliament. Thenumber of students enrolled in universities and colleges in 2005 was 9.28 million,of which 3.6 million – 40 per cent – are women.

The percentage of young people (18–23 years) who are eligible for higher edu-cation form 7 per cent of the population; unlike the OECD (Organisation forEconomic Co-operation and Development) where it is as high as 40–50 per cent.The aim of the GoI, therefore, is to increase the access ratio by 20 per cent by 2015.

There are discrepancies, for example, only 16 out of 1,000 young people aregraduates in rural areas, whereas the number of urban graduates is higher innumber – 111 out of 1,000. Most colleges and varsities are located in urban areas.

The five southern states, Tamil Nadu, Karnataka, Kerala, Andhra Pradesh andthe western state of Maharashtra have 32 per cent of the population, whereasthey have 46 per cent of the total general colleges and almost 60 per cent of theprofessional institutions.

The IGNOU (Indira Gandhi National Open University) was set up in 1985under the IGNOU Act. According to the annual report 2005–06 of the Departmentof Human Resources Development, “The total number of students registered inIGNOU during 2005 was 460,807.” The open or distance learning university offersa range of general and professional degrees, including Bachelors’, Masters’ andPhD in general. It also offers professional courses, with the exception of medicaldegrees. This particular university was intended to reach the most remote cornerof India. Although IGNOU has established centres all over the country, thecourses and skill sets that they offer in areas such as management, health andcomputer sciences are more popular in urban areas.

The University Grants Commission, which disburses grants to various univer-sities in the country and coordinates between the Union and State Governmentsand the various institutions of higher learning, has set up a National Accredita-tion Council for periodic assessment of quality and standards in varsities andcolleges throughout India. Enrolment of women in higher education has increasedfrom 10 per cent of the total population to 40 per cent in 2004–05. According to angovernment estimate, US $ 774 million is required to upgrade existing varsities,filling vacancies of teachers, upgrading libraries etc.

Given the dire need for universities and colleges, the GoI is considering allowed100 per cent FDI (Foreign Direct Investment). This is, however, expected to besubject to the law of the land, which would mean allowing a certain percentage ofreservations for backward castes (backward classes). Foreign universities that

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want to set up campuses in India still have to wait a while, as the law has yet tobe enacted by the Indian Parliament. Currently, although FDI is allowed throughthe automatic route, a foreign institution must have an Indian partner – and thestake must be equal ie 50:50. If the foreign institution wants to increase the stake,it has to apply to the FIPB (Foreign Investment Promotion Board).

A consultative paper on entitled Higher Education in India and GATS: anopportunity, brought out by the Commerce Ministry, GoI, makes out a case forforeign participation in Indian higher education. It says, “GATS (General Agree-ment on Trade and Tariffs) could provide an opportunity to put together amechanism whereby private and foreign investment in higher education can beencouraged subject to high quality standards and efficient regulation.” AlthoughIndia may be far from treating education as a service that can be traded interna-tionally, rather than a fundamental right, higher education system in the countryis characterized by scarcity of resources. However, despite all this, India’s growthhas been tremendous in knowledge-based sectors, such as IT (information tech-nology) and ITES (IT-enabled services) and traditional sectors such as manufac-turing. IT is expected to need approximately 5 million skilled workers within thenext few years, according to Nandan Nilekani, CEO of Infosys, one of the topIndian IT companies, who spoke at a Confederation of Indian Industries seminar.Manufacturing in the next decade or so will create 25 million jobs and this willclearly require a skilled workforce. Will India be able to produce the jobs? Giventhe first half of the year 2006, 52 per cent of Indian companies have increasedtheir workforce, over 2.89 per cent for 2,143 companies across industry sectors.

The IITs currently have 15,000 undergraduate and approximately 12,000 post-graduate students. These institutes provide top-class engineering education invirtually every field of engineering education. There are 19 National Institutes ofTechnology that are next only to the IITs (Indian Institutes of Technology) ineducation. India’s IT revolution no doubt has its roots firmly attached to theattention and support that science and technology has got from the forefathers ofthe nation, when it attained independence from British rule in 1947.

There are also private engineering colleges. Tamil Nadu has witnessed a bigleap in the number of private engineering, medical and paramedical colleges sincethe mid-1980s, when the Central Government was looking for private investmentin higher education. Now, the state has 254 engineering colleges, offering over80,000 seats in undergraduate courses and accounts for approximately 20 per centof the 1,346 engineering institutions in the country. The GoI now runs only nineengineering colleges in the state. However, the quality of education offered by theprivate engineering colleges, which give courses in a range of engineering subjectssuch as civil, electrical, mechanical and chemical just like the IITs, is open toquestion. The National Accreditation Council, which follows stringent parametersto assess the quality of education offered by various institutes of higher learning,does not make it mandatory for institutions to seek accreditation.

Every university offers a legal degree and there are specialized law schools inBangalore, Hyderabad, Bhopal and Pune. However, legal literacy in India stillhas a long way to go. To some extent this inevitably delays law enforcement withinthe country. In terms of legal specializations, cyber law is still at a nascent stage

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in India. It tends to be offered more as a course module rather than a fully fledgeddegree course. Civil and criminal law specializations are still popular.

Some 81 per cent of Indian companies, according to a McKinsey survey, believethat the lack of human resource will be the single largest deterrent to speedydevelopment. The fact remains that nearly 50 per cent of students drop out ofschool at secondary levels, with another 75 per cent dropping out at the highersecondary level. Of the 3 million who then make it to the graduation, only 15–20per cent can be given a job or be hired. Only 10 per cent look into research – aprimary need for all industries for their future growth.

Hewitt India has painted two scenarios of India – the present one, with enroll-ment increases at the historical 2–5 per cent levels, low quality of educationalinputs and low rate of conversion to employment for a student. The other scenariosees enrollments growing exponentially, with improvement in education qualityand conversion to employment increasing with most graduates being employed.This leads to higher national income, increased consumption, increased knowl-edge employment and high economic growth, whilst the former leads to highrates of unemployment, social unrest, rapid wage inflation, and economic non-competitiveness.

Whilst IT&ITES professionals have the biggest chances of being hired ascompanies form the sector hired at an aggressive 11.9 per cent, with the bench-mark 30 hiring at even more aggressive rate of 16.1 per cent, those from sectorslike construction and manufacturing are also seeing an increase in demand at6.43 per cent and 1.9 per cent respectively. A figure corresponded by a 10.6 percent growth in industrial output over the first five months of the current fiscalyear. Manufacturing accounts for approximately 15 per cent of India’s GDP (GrossDomestic Product).

A Ma Foi survey (Global Search Services) predicts that 10,30,040 jobs will becreated this year. The sectors expected to drive job demand in India IT&ITES,manufacturing, retail, communication and transport. Looking at business educa-tion in India, it is largely driven by the IIM. The IITs have also started their ownschool of management, and there are also some private management schools, suchas the Indian School of Business, Hyderabad and the Management DevelopmentInstitute, Gurgaon. The IIMs are government-funded and offer a range of coursesin all areas of management. However, typically, a student who goes to study inthe IIM – after passing a nationwide competitive test – does not have work expe-rience. The ideal top qualification in India would be an IIT–IIM combination.

In conclusion, skilled human resource will be a critical issue in the years tocome in India. It is still necessary for it to keep pace with fast-moving economicdevelopment. Despite India’s 1 billion people, imparting the right skills for arapidly developing job market will test its institutions of learning.

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2.2

Real Estate

Vivek Dahiya,Associate Director, DTZ Debenham Tie Leung

Real estate is one of the fastest growing sectors in India. Market analysis pegsreturns from realty in India at an average of 12–14 per cent per annum, with atremendous upsurge in commercial real estate on account of the Indian BPO(Business Process Outsourcing) boom.

Lease rentals and occupancies have been picking up steadily and there is agaping demand for quality infrastructure. A significant demand is also likely tobe generated as the outsourcing boom moves into the manufacturing sector. Fur-thermore, the housing sector has been growing at an average of 34 per centannually, whilst the hospitality industry witnessed a growth of 10–15 per centlast year.

Apart from the huge demand, India also scores on the construction front. AMcKinsey report reveals that the average profit from construction in India is18 per cent, which is approximately double the profitability for a constructionproject undertaken in the US. Aided and abetted by a bullish economy, strongdemand from domestic and foreign sources, and proactive policy initiatives likerelaxation of FDI (Foreign Direct Investment) in construction, rationalization ofStamp Duty, and the repeal of the urban land ceiling act, Indian realty is on aroll.

The fundamental demand drivers of real estate remain strong and improvedeconomic growth, and availability of finance (institutional and retail) has resultedin surging needs for commercial and residential space.

Post liberalization, the last 15 years have seen a substantial improvement infundamentals of demand and the trend continues. The Indian economy hassteadily moved away from its over-dependence on agriculture to services and morerecently to manufacturing, the latter two being significant drivers of real estatedemand. ‘The last few years have seen [the] Indian market mature through reg-ulatory reforms, improving products in terms of quality and technology, changingtenant profiles (MNCs – multinational corporations – and respect for tenancylaws), and improving management and maintenance models’, says Vivek Dahiya,associate director, DTZ India.

Indian real estate can be characterized by a few key demand drivers –commercial, retail, residential, and hospitality. Fuelled by demand from thesesectors all over India, real estate is experiencing a boom. The IT/ITES (IT-enabled

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services) industry – the main driver for commercial real estate demand all overIndia – has grown at a 36 per cent CAGR (Compound Annual Growth Rate) overthe last decade. By 2008, it is expected to account for over 7 per cent of India’sGDP (Gross Domestic Product) and 30 per cent of foreign exchange inflows, cre-ating over 2 million jobs. In 2005 alone, the IT/ITES sector absorbed a total ofapproximately 30 million square feet across India. This sector is expected to con-tinue with its robust growth at least for the foreseeable future.

In the case that an IT/ITES company is considering starting operations inIndia, there are several building options available across multiple cities. Mostlarge cities like Bangalore, Delhi, Mumbai, Chennai, Pune, Hyderabad andKolkata have several IT Park projects operational and coming up. Based on theskill set of the human resources, infrastructure at city level, scalability options tocater to future expansion and cost requirements of the company, it is usuallyadvised to select the ideal location from these cities. Many international propertyconsultants, with operations in India, can assist all such companies in their cityevaluation, site selection and project management needs.

The retail sector is also growing at a robust rate, with continuing investmentfrom domestic retail companies. With the opening up of high-end retail to FDI,this sector is set to experience a further boost. Recent surveys have repeatedlyshown India as an attractive destination among emerging markets for retailersto enter. With organized retail still at a miniscule 3 per cent of the total market,the potential for growth is not lost on any investor. In fact, the growth rate oforganized retail is anywhere between 25–30 per cent per annum and a McKinseyand CII (Confederation of Indian Industry) economic review (2003), estimatedorganized retail to grow to 10 per cent of the retail market or US $ 30 billion by2007. The sector is seeing increased focus on the development of integrated retailand entertainment centres (malls) as opposed to stand-alone formats. The numberof malls is slated to increase from the current 100 to almost 350 by 2010, providingincreased opportunities to investors. ‘With a shift in the mindset of the Indianmiddle class consumer and a substantial increase in the population of the ‘young’consuming class, India is slowly emerging as a consumption led economy’, addedMr Dahiya.

Most large Indian cities now provide options in the organized formats (malls).The reach of these formats is now also spreading across the smaller cities. Somemicro markets in various cities are currently witnessing an oversupply situationand it provides opportunities to retailers to identify good bargains. Some of thekey points to be considered whilst taking up space in a mall in India are: profileof the developer, emphasis being given to trade and tenant mix in the design andif a mall manager would be appointed for the project. Most mall projects in India,so far, have concerns with regard to strata titles, which could be detrimental toits financial health in the long run.

Increasing urbanization and higher aspiration needs (better quality realestate) is fuelling the demand for residential real estate. Low per capita housingstock, higher disposable income, the falling age of first-time home buyers andlow interest rates coupled with surging home loans have also contributed signif-icantly to this phenomenon. The housing sector is currently growing at 30–35 percent per annum. A lot of demand is also coming from investors who view housing

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as a safer investment option as compared to shares and mutual funds. The deci-sion to liberalize FDI norms in the construction development sector is perhapsthe most significant economic policy decisions taken by the GoI (Governmentof India) last year. The most recent guidelines prescribed vide Press Note 2 of2005 series (please see separate attachment) has further opened up FDI intownships, housing, built up infrastructure and construction developmentprojects providing adequate investment opportunities.

Another key sector for growth is hospitality. India’s keen interest to leverageits tourism potential to attract a significant flow of high-spending foreign touristshas resulted in renewed interest in the hospitality sector, with established foreignbrands entering the market. On one account, five-star room capacity in Indianeeds to double in the next five years from the current paltry 96,000, giving apotentially golden opportunity for investors.

Finally, interesting changes are taking place even for industrial properties. Sofar, most industrial options were available as land in industrial parks developedand promoted by industrial development corporations. However, the GoI has nowenacted a policy allowing the setting up of SEZs (Special Economic Zones) inIndia, even by private developers. This is resulting in high interest from variousIndian and international developers to undertake development on scales (over25,000 acres) not previously witnessed in India.

A more recent phenomenon in the real estate industry in India has been thatof REFs (Real Estate Funds). REITs (Real Estate Investment Trusts) are cur-rently non-existent in India. Over the last few years, there have been severalrepresentations by the real estate industry and mutual funds to permit setting-up of REITs in India to the SEBI (Securities Exchange Board of India), the nodalagency for regulating mutual funds and stock markets in India.

Pursuant to such representations, SEBI, in consultation with the Associationof Mutual Funds of India, appointed a committee for studying the feasibility ofREITs in India. The committee has recommended that REITs should be imple-mented in India through the mutual fund schemes.

The report is still pending with SEBI. Whilst this demand has not been met, inApril 2004, SEBI opened a small window for real estate investments under theVCF (venture capital fund) and FVCI (foreign venture capital investor) regime.Pursuant to that, Fire Capital, IREO, HDFC, SBI and ICICI Ventures havealready announced their foray in this space and more are slated to enter (pleasesee table below).

Although the initial real estate boom was concentrated in places like Bangaloreand the NCR (National Capital Region) of Delhi (including Gurgaon), morerecently the geographical spread has been substantial. Southern states and theNCR continue to attract the majority share of IT/ITES and BPO investment, how-ever, secondary cities, like Chandigarh, Indore, Kochi, Kolkata (Calcutta), arenow emerging as destinations due to cost and infrastructure advantages. Retailis again an India-wide phenomenon, with retail chains targeting tier II and IIIcities. The demand for housing is widespread, with townships being built in met-ros and tier II and III cities as well. In a nutshell, investment opportunities areincreasingly being offered in various parts of the country.

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To conclude, the Indian real estate sector promises to be a big draw for foreigninvestments into the country. The continued growth of the Indian outsourcingindustry provides excellent opportunities for real estate investors. The boomingmiddle class will result in a continued demand for housing and retail space. ‘Thefact that foreign investors are willing to commit billions of Dollars in this sector,coupled with their understanding that real estate investment requires a longerterm commitment demonstrates the growing confidence of investors in the Indianeconomy’, says Mr Dahiya. If channelled properly, the Indian realty sector couldcatapult the growth of several other sectors in India through its backward andforward linkages.

Sector Commercial Retail ResidentialOccupancylevels

85–90% in DelhiNCR90% in Mumbai95% in Bangalore90–95% inChennai90–95% inHyderabad85–90% in Kolkata

Varies across India.Metro cities have seenalmost no availabilityof high-end retail space.Occupancies are quitelow in malls. NCR*region on an averagehas approx. 20-25%vacancy. Similarsituations across India

Still highinvestment demand.Thus end users arerelatively low.Anywhere between60–70%.

Note: *NCR = National Capital RegionSource: DTZ ResearchFigure 2.2. ??

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2.3

An Opportunity to SE(i)Z(e)

S.Gayathri,

The SEZ Landscape

If there is one phenomenon that has etched itself on the horizon of the Indianeconomy in recent times, it has to be the re-emergence of the SEZ (Special Eco-nomic Zones). Conceptually, as pockets of excellence blessed with high qualityinfrastructure, a liberal fiscal and administrative milieu, etc, SEZs have beenaround in the country since the 1960s.

What has ignited excitement this time around, and inspired the belief that thecountry is poised to match and beat global benchmarks of economic development,are aspects such as:

● The governance of SEZs by a dedicated, comprehensive legislation, in the formof The SEZ Act, 2005 and The SEZ Rules, 2006, which portends stability andclarity;

● liberal land area requirements specifically tailored to suit industry-basedrequirements – 1,000 hectares for multi-product SEZs, 100 hectares for multi-services and sector-specific SEZs, 10 hectares with specified built-up arearequirements for the IT-ITES (IT-enabled services), Gems and Jewelry, Bio-tech, equipment for non-conventional sources of energy;

● the existence of a single-window clearance system supported by ring-fencingadministration within the SEZ, aimed at providing a hassle-free environmentfor entrepreneurs operating within an SEZ;

● excellent fiscal benefits, in the form of relief from direct and indirect taxes,offered under the SEZ umbrella;

● easy availability of FDI (Foreign Direct Investment) without having to obtainregulatory approvals;

● a strong push towards private participation in the development of numerousSEZs spread across the country’s vast geographical area, with the variousstates vying with each other to provide infrastructure and other supportexpected of them under the legislation;

Associate Director KPMG, India

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● the promise of a global business environment, state-of-the-art infrastructureand an up-scale standard of living, going by the various infrastructure andsocial amenities that the SEZs are encouraged to provide for;

● the significant increase in exports in recent times from the country, by anincreasing number of entrepreneurs, who would wish to ride the SEZ wave;

● the encouraging and helpful attitude of the regulatory authorities at centraland state levels, in clarifying issues in the emerging legislation, and in theapproval process.

The Global SEZ landscape is dotted with the evidence of experiments by variouseconomies, mainly Asian, with the export zone model. SEZs in different countrieshave been triggered by various objectives, such as augmenting exports, generatingemployment, broad-basing industry, gearing-up foreign investment, etc. Interna-tional comparisons can be found in China, Philippines, the UAE and Ireland, aswell as Taiwan, Singapore, Mexico, Korea, Puerto Rico, the United States, andmore recently, Russia and Ukraine.

Participants and benefits

A participant in the Indian SEZ landscape could be:

1. A developer who owns/leases the requisite land, develops the infrastruc-ture and invites entrepreneurs to function within the SEZ. Income Tax is100 per cent exempt for 10 consecutive years in a block period of 15 years.Besides, there is relief from the MAT (Minimum Alternate Tax) and DDT(Dividend Distribution Tax). Also on offer are a host of other exemptions fromCustoms Duty, Excise Duty, Service Tax, Central Sales Tax, Research &Development Cess, all state and local taxes including VAT (Value Added Tax),and Stamp Duty.

2. A unit (includes branch of a non-resident) set up by an entrepreneur, carryingon business (includes manufacturing, services including trading [restricted]and sub-contracting on behalf of a foreign principal) functions in the SEZ,entitled to 100 per cent Income Tax exemption for the first five years, 50 percent, unconditional, for the next five years, and 50 per cent, conditional, forthe subsequent five years. The MAT is exempt as well. The Unit is also enti-tled to similar indirect tax benefits as in case of a developer, with referenceto the authorized business operations carried through the SEZ.

The Unit is required to ‘export’, a term liberally defined, without a prescribedthreshold, and earn positive ‘net foreign exchange’, not necessarily restrictedto earnings in foreign exchange, cumulatively over five years.

3. An OBU (Offshore Banking Unit) is the branch of a bank (including a foreignbank) carrying on wholesale banking operations in an SEZ. Income Tax is100 per cent exempt for the first five years and 50 per cent, unconditional, forthe next five years. There is exemption from maintaining Statutory Liquidity

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Ratio and Cash Reserve Ratio, subject to certain conditions. Exemption isavailable from the MAT, and the other various benefits applicable to a Unit.

4. An IFSC (International Financial Service Centre) is conceived as a providerof multiple financial and related services to units in an SEZ, and will probablywill be modelled (the governing legislation is yet to be passed) on similaragencies that operate globally. Income Tax would be 100 per cent exempt forthe first five years and 50 per cent, unconditional, for the next five years.Again, exemptions from the MAT, Stamp Duty and other indirect tax benefitsare available. Further, non-residents are exempted from levy of SecuritiesTransaction Tax on transactions executed through an IFSC.

An opportunity to seize

The compelling need for India to attract entrepreneurs is certainly central to theGoI (Government of India)’s economic aim and objectives. The opportunity toattract foreign capital and technology, promote greenfield investment, provideimpetus to exports, employment and economic activity, etc, with their owncommercial interests, provides both government and business with a win-winsituation.

Fiscal benefits are definitely not the only drivers to the SEZ experience; it ismatched by the inherent advantages of functioning in a global and hassle-freeenvironment, leveraging on the cost advantage and huge knowledge base that thecountry has to offer, and harnessing the benefits of a cluster development sce-nario, with backward and forward linkages.

The huge initial response by aspiring developers (330-plus applications to date)has led the GoI to announce a cap on the number of SEZs that would be approvedin the initial phase, to 150. In granting approvals, they would be guided by factorsthat demonstrate the commitment of the applicants, such as possession of land,their experience and capabilities. The authorities would also be mindful of theneed to avoid concentration in certain states, which may lead to territorial imbal-ance and disparity in the overall economic growth.

An evolving legislation implies areas of unchartered territory which need to betreated with full knowledge of likely pitfalls, based on similar laws, current orgone by. For example, the migration of existing export-oriented units into an SEZ.Whilst the legislation has provisions expressly facilitating migration, the author-ities have recently announced in the press that the shifting of existing units intoan SEZ, is not in the spirit of the SEZ law. Besides, the unintended tax leakageit would result in would not be permitted. Greater clarity will, no doubt, emergein the near future.

However, the inherent benefits surrounding an SEZ scenario, coupled with thesunset on other Income Tax benefits for export-oriented units, presents the aspi-rant entrepreneur with fewer but clearer options. With some planning and guid-ance the SEZ opportunity is frequently the only obvious way forward.

An Opportunity to SE(i)Z(e) 39

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2.4

Inward Investment

Roderick Millar

As the Minister of Commerce, Shri Kamal Nath, has noted “…during the last14 years there has been a sea change not only in the world’s perception aboutIndia’s future, but in our own perception about ourselves. The world has acknowl-edged the “arrival of India”. We no longer discuss the future of India, we say “thefuture is India”.”

This is well expressed by examining the foreign direct investment statisticsover those 14 years since the 1991 reforms came into effect (1992-2006). The firsttwelve years showed inward investment to India rising from US$393 million in1992-93 and growing steadily to US$3.62 billion in 1997-98. There was a notice-able lull in the trend over the millennial period, but FDI was up again in 2001-02,following some retrenchment during the global downturn it has continued upwardvigorously in the last three years.

* six months only source: Govt of India, Dept of Commerce

Indian FDI 1991-2006

0100020003000400050006000

US$

's m

illio

ns

1991

-92*

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07*

Mauritius continues to head the list of originating FDI countries throughout theperiod by a considerable margin. This is due to the Double Taxation AvoidanceTreaty (DTAT) between India and Mauritius that has created a beneficial taxloophole through which vast amounts of FDI have been funnelled. This continuesto be a sore point with India, and although Mauritius has tightened the tax resi-dency certificate rules for overseas companies the Indian government would stilllike to see more done.

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The two popular avoidance schemes are where companies from high-tax, usu-ally developing countries route their investments through Mauritius’s low taxsystem and thus take advantage of the DTAT regime. This has come to be knownas “treaty shopping”. The other scheme is where Indian domestic companies takeadvantage of the Mauritian tax regime by investing back in India via Mauritius,known as “round-tripping”; clearly this loses the Indian government many mil-lions in tax revenue – and distorts the FDI figures to the extent that some of theMauritian FDI is, infact, re-routed Indian domestic investments.

Recently Mauritius has tightened its rules requiring at least two bona fidedirectors to be resident in Mauritius for the DTAT to apply, in addition all boardmeetings and bank transactions must occur on the islands. If these measures donot make a significant impact it is likely that India will put pressure for more tobe done.

Ignoring the Mauritian anomaly the lead investing nations in India are moreobvious. See Table 1 below. Once you reach below the level of the top five investorsit should be noted that single large deals can significantly distort the order.

Table 1: Top Indian FDI Countries 2005-06

Rank Country 2004-05(Apr-Mar)

2005-06(Apr-Mar)

2006(Apr-Jul only)

Totals 2004-06

1 Mauritius $1129 m $2570m $1506m $5205m

2 USA $669m $502m $263m $1434m

3 Singapore $184m $275m $432m $891m

4 Germany $145m $303m $28m $476m

5 UK $101m $266m $79m $446m

6 Netherlands $267m $76m $77m $420m

7 Japan $126m $208m $29m $363m

8 Switzerland $77m $96m $19m $192m

9 France $117m $18m $36m $171m

10 South Korea $35m $60m $20m $115m

Source: Govt of India, Dept of Commerce

Where the money is going

Of more interest to the inward investor is where the investments are directed,both in terms of Indian geography and industrial sector.

If we examine the sectors first we see that the technology area is drawing in byfar the greatest financial input from outside of the country. The electrical equip-ment and telecommunications sectors account for over one quarter of all FDI andthe financial and non-financial services a further 11%. This to some extent under-emphasises the role of services in FDI, the fact that services are less capital

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intensive than other sectors means they require less initial start-up investmentthan other areas for equally large potential returns.

Table 2: Main Sectors Attracting FDI 2004-06

Rank Sector 2004-05(Apr-Mar)

2005-06(Apr-Mar)

2006(Apr-Jul only)

Totals 2004-06

1 Electrical Equipment (incl..software and electronics)

$721m $1451m $524m $2696m

2 Telecommunications (radio,mobile and fixed line)

$129m $680m $854m $1663m

3 Services (Financial andNon-financial)

$469m $581m $337m $1387m

4 Chemicals (not fertilizer) $198m $447m $86m $731m

5 Transportation $179m $222m $219m $620m

6 Drugs & Pharmaceutical $292m $172m $45m $509m

7 Cement & Gypsum $0m $452m $21m $473m

8 Metallurgical Industries $192m $153m $67m $412m

9 Fuels (power & refining) $166m $94m $106m $366m

10 Food Processing $38m $42m $27m $107m

The main regional beneficiaries of FDI are as obvious as the sectors that attract it.

Table 3: RBI Office Areas Attracting FDI Jan 2000 to July 2006

Rank RBI – Regional Office State Covered US $’s millions

1 New Delhi Delhi; part of Uttar Pradesh; Haryana 5732.7

2 Mumbai Maharashtra, Dadra & Nagar; Haveli;Daman & Diu

5239.0

3 Bangalore Karnataka 1676.6

4 Chennai Tamil Nadu & Pondicherry 1560.0

5 Hyderabad Andhra Pradesh 849.7

6 Ahmedabad Gujarat 826.1

7 Chandigarh Chandigarh; Punjab; Haryana; Himachal Pradesh 328.3

8 Kolkata West Bengal; Sikkim; Andaman & NiocobarIslands

311.1

9 Panaji Goa 180.2

10 Kochi Kerala; Lakshadweep 73.9

Inward Investment 43

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This exemplifies one of the major issues facing the developing India. The greatdivide between the urban and rural areas. Some 70% of the Indian populationremains rurally based and to a large extent is missing out on the changes beingbrought by the FDI inflows. Nearly two-thirds of India’s FDI inflows have beeninvested in the five city-areas of New Delhi, Mumbai, Bangalore, Chennai andHyderabad. These are the electronics, computer and financial service hubs ofIndia and have left the old-economy powerhouses, such as Kolkata, far behind interms of recent investment and development.

Government Assistance for FDI

Dealing with the Indian government is not always as straight-forward as it mightbe. The Indian system is notoriously bureaucratic and the administrative proce-dures that are often required to be progressed through can appear over-complexto those more used to flatter government systems.

In addition to this background of bureaucracy the potential investor must alsoassure themselves that they have met all the requirements placed on them byboth the Federal and State levels of government. It also is recommended to dis-cover whether any particular incentive schemes, again at either Federal or Statelevel, are available. The question soon arises as to how to start this process.

There are two main approaches; employ an advisor to help with this initialphase and guide you through the first steps or to make the first round of investi-gation in-house. Sooner or later professional advisers will probably be necessaryand we look at options for seeking these in the chapter on Partner Selection.However if low-cost initial research is more appropriate there are some usefulagencies to help and offer a wide range of data.

The Department of Industrial Policy and Promotion (DIPP) within the Ministryof Commerce has created a series of bodies that are there to serve the inwardinvestor and others that offer help to domestic entrepreneurs, to make the invest-ment process as simple as possible.

Principal amongst these is the Secretariat for Industrial Assistance (SIA).Its stated remit is “to provide a single window for entrepreneurial assistance,investor facilitation, processing all applications which require Governmentapproval, assisting entrepreneurs and investors in setting up projects (includingliaison with other organisations and State Governments) and in monitoring theimplementation of projects.”

presents a mass of information regarding specific industrial policies and licensing.Usefully, they have a “bulletin board” where questions can be posted on technicalquestions relating to FDI and a department employee will respond to them. Afurther service is offered in the form of a “chat room” where twice a day (11am to12pm and 4pm to 5pm each working day, Indian time) questions can be sent forimmediate responses in the form of online messages.

For more specific or sensitive enquiries the best route is through the “NodalOfficer” whose contact details are available from the above webpage.

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The SIA is best approached through its website (http://dipp.nic.in) where it

The SIA also is home to the officer in charge of dealing with grievances thatbusinesses may have in the manner in which their applications are addressed.The Joint Secretary (Public Grievances) contact details are also to be found onthis website.

Also within the DIPP/SIA structure is the Foreign Investment ImplementationAuthority (FIIA) set up to “facilitate quick translation of FDI approvals intoimplementation, to provide a pro-active one stop after care service to foreigninvestors by helping them obtain necessary approvals, sort out operational prob-lems and meet with various Government agencies to find solution to their prob-lems”. The site allows for certain applications to be submitted online.

Under the auspices of the Department of Economic Affairs at the Ministry ofFinance, but in close association with the DIPP is the Foreign Investment Pro-motions Board (FIPB) that “provides a time bound, transparent and pro-activeFDI regime for approval of FDI investment proposals”. All “non-automatic route”FDI proposals have to go through the FIPB for approval. The FAQ page at

dural questions.Other potential sources of data and advice exist. One of the best is the Confed-

State Incentives, Bureaucracy and the Single WindowSystem

The liberalisation process started in the 1990’s has made India a much moreplausible location to do business. However, as mentioned, the bureaucratic over-lay is still a major obstacle. This is most prevalent at the state level.

Trying to identify which States offer the best environment for any particularproject can be daunting. Appendix 5 lists all the states and their relevant websites;although not all State websites are very clear in their presentation of investmentincentives. The federal government business website does a good job at listing all

In an attempt to make the process of application more streamlined the “SingleWindow System” has been developed where a single agency coordinates all thenecessary applications, approvals and regulations required in establishing newbusinesses. Not all States have yet implemented it, and it is not totally seamlesseven where implemented, but the Single Window System does offer a substantialstep forward with this process. More State by State information can be found in

Infrastructure Investment and Incentives

The speed of development in India is such that enormous improvements in thecountry’s infrastructure are required. The Government of India has focussed on

Inward Investment 45

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http://siadipp.nic.in/publicat/most_frq.htm covers many basic application proce-

eration of Indian Industry’s associate organisation the India Brand Equity Foun-dation, IBEF, which has a useful selection of resources at www.ibef.org.

appropriate department or individual.The government directory http://goidirectory.nic.in is also useful in seeking the

the various incentives at http://india.gov.in/business/incentive.php.

the online booklet at http://siadipp.nic.in/publicat/books/sinwin.pdf.

these areas and makes special tax holidays and other incentives available to com-panies interested in developing these areas.

Power – non-atomic electricity generation, transmission and distribution canhave 100% FDI. The government offers a 10-year tax holiday on new developmentprojects started before April 2010. Renovation and modernisation projects will notbe taxed on any profits prior to this date either. The 2005 Electricity Act enableseasier private sector involvement; it is believed that 41000 MW of extra power areneeded, requiring approximately $120 billion of investment.

Telecommunications – 100% FDI in telecoms equipment; 100% FDI in elec-tronic and voice mail services, on condition that at least 26% of shares are madeavailable to the Indian public if the shares are publicly listed. Fixed and mobileservices are subject to a 49% FDI ownership cap. An initial 5-year tax holidayfollowed by a 30% tax reduction for 5-years is offered to telecoms service providers.Mobile and internet usage in India is growing fast.

Road – 100% FDI available in road construction and maintenance, and inreturn a 10 year tax holiday is available. Capital Gains Tax exemption is alsooffered under certain rules. The National Highway Development Programmeenvisages over 24,000 kms of road construction and improvement.

Civil Aviation – 100% FDI for Greenfield airport construction. 49% (1005 forNRI’s) FDI for air transportation services as long as there is no foreign airlineinvolvement. A 10-year tax holiday is available to airport operators. Airline usageis growing fast currently.

Automobile – car and other vehicle assembly and components are growthindustries in India. 100% FDI is available. Certain incentives exist on a State byState basis and further tax reductions are available on R&D investment.

Technology Transfer

Foreign Technology Transfer (or Foreign Technology Collaboration agreements,FTC) approvals are closely managed in India. The system is overseen by the DIPPand non-automatic approvals are made through the Reserve Bank of India (RBI).

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SEZ’s – see chapter 2.3.

2.5

ITES-BPO

Rajdeep Sahrawat,Vice President, NASSCOM (National Association ofSoftware and Service Companies)

Worldwide spending on IT (information technology) and related business servicesgrew by nearly 7 per cent in 2005, on the back of healthier spending in the UnitedStates and Western Europe, and strong growth in emerging markets. Outsourcingcontinued to be a key growth engine of the IT industry, with global delivery form-ing an integral part of the strategies adopted by customers as well as serviceproviders.

The Indian IT-ITES (IT-enabled services) services industry continued to showa strong growth trajectory in FY 2005–06 and grew by a CAGR (compoundannual growth rate) of 28 per cent to reach an overall size of US $ 36.3 billion.The export services (IT & ITES) grew by 32 per cent to reach an overall size ofUS $ 23.8 billion.

Complementing the growth in IT-ITES exports is a growing domestic market,which reached a size of US $ 12.5 billion in 2005 and has placed India amongstthe fastest-growing IT markets in the Asia Pacific Region. With spending on ser-vices and the outsourced model gaining noticeable traction, the domestic marketis witnessing the early signs of service line depth, which characterizes maturingmarkets.

The year 2005 also witnessed the coming of age of Indian multinational ITfirms, with traditionally India-centric companies beginning to build significantpresence in other locations – through cross-border acquisitions, onshore contractwins and organic growth. This was complemented by global majors continuing toramp-up of offshore delivery capabilities – predominantly in India, vindicatingthe success of the global delivery model and highlighting India’s important rolein the new world’s IT order.

The leading publicly listed players1 have reported a year-on-year top linegrowth of nearly 34 per cent, over the first half of the current fiscal year. Addi-tionally, MNC (multinational corporation)-owned captive units have been steadilyscaling up their operations, with the headcount forecast to grow by at least 30 percent this year.

1 Comprising over 50 leading publicly listed companies, accounting for approximately two-thirds ofthe total revenues earned by Indian companies.

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Below is an examination of the performance of each of the two segments of theIndian IT-ITES industry in more detail.

IT services

IT services exports accounted for approximately 35 per cent of the industry aggre-gate (domestic + export revenues), and grew by 32 per cent during FY 2005–06.Steady demand in traditional areas such as custom application development andmanagement has been supplemented by increasing traction in package imple-mentation and software deployment, as well as emerging areas such as remoteinfrastructure management, IT consulting and software testing.

Indian exports from traditional IT services have grown from US $ 7.3 billion inFY 2003–04 to US $ 13.2 in FY 2005–06.

7.310.0

13.2

215

398

297

FY 2004 FY 2005 FY 2006E

Revenues (USD Billion)Employees ('000)

Supportand

Training11%

FY 2005

OutsourcingEngagements

33%

ProjectBased

Engagements56%

Note: employee figures rounded to the nearest ‘000; E = estimateSource: NASSCOMFigure 2.5.1 Indian IT services exports – growth trends and share of keysegments, 2004–06

Indian firms are gradually increasing their share of revenues earned fromannuity-based multi-year outsourcing contracts. –A steady growth in demand forapplication development, support and customer preferences for the use of offshoreservice providers are still higher for discrete services than for end-to-end engage-ments, but revenues from project-oriented engagements continue to be the majorcontributors.

Functional IT outsourcing services (including application management, IS(information systems) outsourcing, network and desktop management services)accounted for nearly 28 per cent in FY 2005–06. Whilst application managementservices remain the mainstay of this segment, increasing traction in remoteinfrastructure management services is helping Indian companies increase theirpenetration of infrastructure outsourcing engagements. IT support and trainingservices exports from India grew from US $ 640 million in FY 2003–04 to US $1.45 billion by FY 2005–06.

Engineering & R&D (research and development) services and software prod-ucts are two emerging service lines that hold significant opportunity for the IndianIT services industry. Driven by the demonstrated success of adapting offshoremodels to traditional IT services and the expanding scope of IT services, firmsare increasingly applying the same concepts to core product/service design

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and development processes, using globally distributed development teams. In2005–06, these emerging service lines accounted for US $ 3.9 billion in revenueswith a CAGR for the 2003–06 period.

ITES services

The ITES segment is currently in its third stage of evolution with a rapid prolif-eration of players, service lines and sourcing destinations.

Phase I (1996-2000)Pioneers–focus on buildingscale Absence of vendorswith exhibited capabilitiesPreference for the captivemodel

Phase II (2000-2003)Early adopters–sharpenoutsourcing strategyRise of the 3PSP*

•

•

•

•

•

•

•

•

•

• Widespread globalacceptance of the economicimperative of global sourcing;

•

•

•

•

Phase III (2003-2008E)Cautious followers–embraceoutsourcing unconditionallyHigher degree ofconsolidation –shakeout

Operational culturespreviously seenonly in westernshared-servicecenters weredeveloped;Large operationsand high-qualityinfrastructure werebuilt;Development ofdelivery processes–legalizing shift workfor men and women;Low-resistanceto off shoreoutsourcing.

Improving risk profileof the businessmodel–supply sidestill perceived to beimmature;Early movers displayadvantage of scale;Credibility of thebusiness modelreinforced–perceivedrisks dealt withsatisfactorily;Initiation of work onprocess and regulatorystandards;Rise in anti-off shorebacklash.

Proliferation of players,service lines and sourcingdestinations;

Shift towards higher order,cost-plus benefits from globalsourcing;Maturity of process andregulatory standards in theindustry

Changing cost economics–decline in labour arbitrageoffset by leveraging processand SG&A (Selling, General& Administrative Expenses)efficiencies and scale

Note: 3PSP* Third-party service provider

Source: IBM Consulting Services, NASSCOM

Figure 2.5.3: Phases of ITES-BPO evolution in India, 1996–2008

SERVICE CATEGORIES FY 2004 FY 2005 FY 2006EProject-oriented engagements 4.04 5.58 7.39

IT consulting 0.13 0.25 0.33Systems integration 0.15 0.20 0.26Custom application development 3.71 4.98 6.60Network consulting and integration 0.05 0.15 0.20

Outsourcing engagements 2.57 3.29 4.36Application management services 2.27 2.69 3.56IS outsourcing* 0.30 0.60 0.79

Support and training 0.64 1.10 1.45TOTAL 7.25 9.96 13.20

Note: *includes network and desktop outsourcing (NDOS), hosting infrastructure services,infrastructure management services; E = estimateSource: NASSCOMFigure 2.5.2: Indian IT services exports: growth trends in key service categories(in US $ billion)

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The structure of the Indian ITES services segment is relatively more fragmented,as compared to the IT services segment – with the top-10 third-party playersaccounting for a market share of approximately 30 per cent (the correspondingfigure for IT services is over 50 per cent). Further, unlike in IT services whereMNCs account for approximately 30 per cent of the exports, MNCs with captiveBPO (business process outsourcing) operations in India (end-customer captivessuch as E-serve for Citigroup as well as third-party service providers such as IBMand Accenture), account for approximately two-thirds of the segment. Currently,over 1,500 firms provide services to clients across 120 countries.

In India, firms are expanding their operations within as well as beyond existingITES hubs into satellite towns and newer cities – the latter offering several incre-mental benefits such as access to different sources of talent, lower facility andadministrative costs and distributed facilities for business continuity.

In addition to expanding operations at various locations within the country,Indian firms are also building capabilities – organically or through M&A (mergersand acquisitions) – in other geographies to strengthen their global service deliveryproposition and skill/service portfolio.

Whilst offshore cost effectiveness continues to add pressure to the averagebilling rates, Indian service providers have managed to maintain a relatively sta-ble pricing system across key categories. Mature customers are moving beyondpurely cost-based negotiations to develop innovative deal structures that includepricing models in which the service providers assume greater risk by correlatingrevenue with outcomes of the engagement.

In FY 2005–06, Indian ITES-BPO exports are estimated to have grown fromUS $ 3.1 billion in FY 2003–04 to US $ 6.3 billion.

216

316

409

3.1

4.6

6.3

FY 2004 FY 2005 FY 2006E

Revenues (USD Billion)Employees ('000) Human

ResourceAdminsit

ration3%

Financeand

Accounting40%

Others11%

CustomerInteractionServices

46%

FY 2005

Note: over the years, ITES-BPO service lines have matured into three distinct groups ofcustomer interaction, finance and accounting and human resource administration, and awide range of other vertical specific and niche services (that do not come under CIS (Cus-tomer Interaction Services), F&A (Finance and Accounting) and HR (Human Resource).NASSCOM has reclassified its earlier service line break-outs to reflect this categorization.As a result, the segment level break-outs for the previous years are not directly comparable.Source: NASSCOMFigure 2.5.4: Indian ITES-BPO exports – growth trends and share of keysegments, 2004–06

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Net employment in the ITES-BPO segment is estimated to have grown by approx-imately 100,000 in FY 2005–06, taking the total direct employment to 409,000.Employee turnover/attrition levels appear to be stabilizing with the talent acqui-sition, development and retention initiatives being undertaken by the players,beginning to deliver results.

BFSI

Professional services

Technology andtelecom

Automotive and heavymachinery

Pharmaceuticals/biotechnology

Vision HealthSource (Perot Systems), Eli Lilly, Astra Zeneca,Pfizer

Others/conglomerates AOL, Tesco, Unilever, General Electric

Fidelity, JP Morgan, Bank of America, American Express,HSBC, Standard Chartered Bank, ABN AMRO, GoldmanSachs, Prudential, Morgan Stanley, Deutsche Bank,Lloyds TSB, Capital One, Axa, Winterthur, Lehman Brothers

McKinsey & Co, Delloitte Consulting, Accenture, Bain & Co.,Ernst & Young, Reuters, Frost & Sullivan, Datamonitor

Hewlett Packard, IBM, EDS, Dell, Samsung, Honeywell,Yahoo!, City of London Telecom (COLT), Alcatel, Accenture

General Motors, Hyundai, Ford, Daimler Chrysler, Caterpillar,Bechtel, Lear, Magna

COMPANYVERTICAL

Source: NASSCOMFigure 2.5.5: Fortune 1000 Firms sourcing ITES services from India

Some of the key growth drivers of the Indian ITES services industry are as follows:

1. Rapid growth of globalization has added to competitive pressures across geo-graphic markets that were previously relatively isolated from overseas com-petition. The resulting impact on growth and profitability continues to pushorganizations towards more cost efficient business models including IT-ITESoutsourcing.

2. As a part of mainstream business strategies, offshore/outsourcing initiativesare being accorded significant senior leadership. Increasing emphasis onleveraging the model for greater strategic business impact; not restricted tofunctional support (IT, HR, etc).

3. Outsourcing to India has provided companies with significant benefits overand above cost arbitrage, through business process enhancements andimprovements. In spite of the rising elements of cost, Indian offshore opera-tions provide cost savings of 40-50 per cent. In spite of wage inflation aver-aging 10-15 per cent annually, companies are able to leverage declines intelecom and other overhead costs, productivity gains and economies of scaleto sustain the cost arbitrage.

4. Indian vendors are expanding their service offerings, enabling customers todeepen their offshore engagements; the shift from low-end business processes

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to higher value knowledge-based processes is having a positive impact onoverall industry growth.

5. India has the largest English-speaking talent pool in the world – over 440,000engineering degree and diploma holders, approximately 2.3 million other(arts, commerce and science) graduates and 300,000 postgraduates are addedeach year. Three-fifths of the Indian technical work force has more than fouryears of experience and an even higher proportion has an engineering degree.

Selection of an ITES outsourcing model

What is the most appropriate model for outsourcing ITES-BPO services to India?This is a question that often gets asked by prospective customers. Whilst there isno ‘one size fits all’ engagement model and each customer has to select the out-sourcing model based on its context, there are some broad parameters to definethe two components of any outsourcing model – engagement structure and pricing(see Figure 2.5.6).

Nature of Process

Transition TimeShort Long

Lim

ited Build Operate

Transfer(BOT)

Third-PartyDedicated

Center

Joint Venture Captive

ControlLow High

Lim

ited

Hig

hIn

itial

Inve

stm

ent

Hig

hVa

lue

Capt

ure

Build OperateTransfer

(BOT)

Third-PartyDedicated

Center

Joint Venture Captive

Key Influencing Factors Engagement Models

Management Capability toHandle Global Operations

Availability of 3PSPs

Desired Controlon OperationsStrategic Intent

to Invest

Total CostEconomics

Tax Implications

Transition Time

Source: NASSCOM, neoITFigure 2.5.6 Key influencing factors and engagement models

The selection of a suitable offshore outsourcing engagement model is governed bythree primary factors:

● the nature of the process – degree of complexity, risk of IP loss;

● the availability of third-party service providers with the requisite scope andscale to undertake the process;

● the management capability to handle global operations.

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Other factors include the desired level of control on operations, investment intentand capability, total cost economics and tax implications, and the targeted tran-sition time.

Based on their assessment, companies have traditionally chosen between cap-tive and third-party vendor models. Some companies have formed JVs (jointventures) to spread the enterprise risk. The BOT (build-operate-transfer) modelis a relatively newer model under which the client firm contracts with an inde-pendent vendor to undertake a process in a dedicated manner and acquire it oncean agreed scale and scope has been achieved.

The following is a list of commonly used pricing models in the offshore ITESindustry:

1. Per-unit time/variable pricing (per seat, per hour, etc): This is the mostcommon pricing model adopted by Indian ITES companies. The client guar-antees a minimum amount of business and is billed on a per hour/seat basis.

2. Per seat or FTE (full time employee) per month: The client guaranteesa minimum amount of business for a number of FTEs on a monthly basis.

3. Activity-based billing: Billed by the volume of activity (ie per call, perstatement, per line transcribed).

4. Gain-share models: Billing determined based on quantifiable value deliv-ered (ie success rate, conversion ratio, etc) – based on mutually agreedparameters.

5. Hybrid-pricing models: A combination of two or more models and typicallyincorporates a fixed volume rate plus a marginally higher rate for peak-loadabsorption.

Sustaining competitiveness

For the Indian IT-ITES industry to fully capitalize on the available opportunityand sustain its leadership, it must concentrate on the following key focus areas:

● enhancing the talent pool advantage – focus on skill development to betterleverage the worlds largest working population;

● strengthening urban infrastructure in existing (Tier 1) and emerging (Tier2 & 3) cities and continued emphasis on proactive regulatory reform to facilitategreater ease of doing business;

● driving a philosophy of operational excellence amongst industry players (acrossthe board) to ensure that India-based delivery sustains world-leading bench-marks in performance;

● catalyzing domestic market development;

● actively promoting an uncompromised agenda towards global free trade.

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The large pool of skilled professionals has been a key driver of the rapid growthin Indian IT-ITES industry. There have been concerns that a part of the availablepool is unsuitable for direct employment into the industry. However, recentresearch has proved that at current levels of suitability, India has the singlelargest pool of suitable offshore talent, accounting for 28 per cent of the total suit-able pool available across all offshore destinations. It also outpaces the share ofthe next closest destination by at least a factor of 2.5.

The industry has created several initiatives to further enhance the availabilityof and access to suitable talent for IT-ITES services. These include a comprehen-sive skill assessment and certification programme for entry-level talent andexecutives (low-middle level) and an image enhancement programme to buildgreater awareness of the career opportunities in this segment. NASSCOM is alsoworking with academic institutes to encourage and facilitate greater industryinteraction.

The year 2005 witnessed an increase in the number of incidents involving lossor misuse of data across the world. A review of the Indian policy environment andcompany practices by independent authorities has revealed that the policy andpractices in India match and often exceed those observed in the client countries.The positive evaluation of the policy environment is further complimented by theefficiency of the Indian law enforcement agencies to track down perpetrators inthe few cases that occurred in India.

Indian policy-makers are further strengthening the information security envi-ronment in India through key initiatives, including enhancing the legal frame-work through proposed amendments to the IT Act 2000, currently under reviewby the GoI (Government of India). This will increase interaction with the enforce-ment agencies to help create awareness regarding information security andprovide any support they require.

Demonstrated process quality and service delivery expertise has been a keyfactor driving India’s leadership in global service delivery. Today, India-baseddelivery centres constitute the largest number of quality certifications achievedby any single country. Further, several client organizations have acknowledgedthat superior process and project management capabilities at their India-basedcentres have helped deliver higher performance levels in comparison with theirother sourcing locations.

The transition from discrete outsourcing to global sourcing of services isexpected to drive the next phase of evolution in process quality frameworks andpractices. With their experience of aligning internal processes and practices tointernational standards such as ISO, CMM, Six Sigma, etc, Indian firms will playan integral role in defining best practices, standards and global benchmarks.

Policy reforms

Progressive policy reform in India’ post-liberalization era has been a key contrib-utor to the accelerated growth of the Indian economy and the IT-ITES sector is noexception.

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In addition to the continuing policy reforms aimed at addressing the evolvingneeds of the industry and sustaining India’s attractiveness as a sourcing desti-nation, the GoI continues to support the interests of the industry by being anactive proponent of global free trade.

India’s core proposition of talent, quality and cost advantage has been comple-mented by the rapid scaling up of business infrastructure across the country. Inaddition to telecom links, most cities possess office facilities, hotels and othersupporting business infrastructure matching global standards.

Physical connectivity, via road and air, has also improved significantly over thelast few years. Furthermore, the deregulation of the aviation sector and therecently enacted open-skies policy has enhanced availability and affordability ofairline travel.

Notwithstanding these developments, certain elements of physicalinfrastructure – mainly in a few hubs – are beginning to show some signs of strain.Recognizing the imperatives of having adequate infrastructure for continuedbusiness growth, the Central and State Governments have initiated severalefforts including expansion of existing airports and developing plans for the build-ing of new airports, strengthening the highway networks in the country, andscaling up public transport infrastructure within the cities.

Whilst some imbalances may persist in few areas over the short term, success-ful execution of the outlined programmes will address any concerns of infrastruc-ture availability in the country. Furthermore, the experience of developing initialhubs is helping urban planners to proactively manage infrastructure demand dueto the rapid growth expected in this sector.

Alternatives to India

Inspired by the Indian success story, several other locations are often presentedas alternate options for offshore outsourcing. However, organizational experi-ences as well as syndicated analyses comparing the various sourcing locations hasrevealed that India continues to offer and deliver the best ‘package’ of benefitssought from global sourcing.

However, India’s unparalleled attractiveness as an IT-ITES destination is notthe only factor attracting international investors to the country. Strong economicprospects backed by sound fundamentals of favourable demographics and invest-ment ratios, human capital, trade openness, increasing urbanization and risingconsumption spending make India an attractive investment destination – as asourcing base as well as a significant market.

Conclusion

The future holds significant opportunity for India and the strong, consistent per-formance so far, coupled with a positive outlook, have put it well on track toachieve the targeted US $ 60 billion in exports by FY 2010 and an overall industrysize of over US $ 80 billion. However, the opportunity for India is much larger.

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With less than 10 per cent of the current addressable (offshore) market capturedto date, there is still significant headroom for further growth.

Recognizing the potential of the sector and the opportunity it holds for thecountry, all key stakeholder groups including the GoI, the industry sector andNASSCOM and the academic community are actively engaged in developing andimplementing initiatives to strengthen India’s bid for sustained leadership.

Clearly, the Indian growth story remains unchanged. In spite of sporadic scep-ticism and rhetoric observed in the media over the past few months, the IndianIT-ITES sector continues on its high growth trajectory and is well on track toachieve the targets that the industry has set for itself by the end of the decade.

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2.6

Distribution

Mr. Aswin Kumar and Ms. Ramya Kannan,Confederation of Indian Industry

The trucking industry in India is a major contributor to the economy. It is runprivately and is dominated by small road transport operators; the majority beingsingle truck owners. In recent years, it has increased its share in the movementof goods within the country vis à vis other modes of transport, up from less than20 per cent in 1951 to 70 per cent currently.

India has 3.4 million km of roads, comprised of national highways (65,569km),state highways (1,28,000 km), major district roads (4,70,000 km) and rural andother district roads (2.65 million km). Road infrastructure increased significantlyafter independence, both in terms of spread and capacity. Road traffic has over-taken railways in both the passenger and freight segments.

At present, road transport accounts for 85 and 70 per cent of total passengerand freight transport respectively. The railway accounts for most of the remainingtraffic, with a small percentage using the air transport sector.

Category Total / Surfaced 1991 1995 2000 2001 2002(P)

T 2327362 3057411 3316078 3346667 3383344All India

S 1090167 1379300 1573800 1597749 1603691

T 33650 34262 52010 57679 58006National Highways

S 33399 34046 51952 57679 58006

T 127311 134085 132797 132100 137711State Highways

S 124847 131506 130592 129862 135546

T 509435 511046 730680 736001 725425Other PWD Roads

S 390931 414320 601512 610516 603358

T 1260430 1949866 1938356 1945163 1986858Rural RoadsS 373978 611304 545378 551354 561645

T 396536 428152 462235 475666 475238Other Roads

S 167012 188124 244366 248338 245136

Note: *most recent data available, taken from 2004 report (2002 figures projected)Source: Ministry of shipping, Road Transport and HighwaysFigure 2.6.1 Basic road statistics in India, 1991–2002*

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This article will focus on the issues faced by the trucking industry and the legalframework adopted by the GoI (Government of India) to overcome thesedifficulties.

The Structure of the Trucking Industry

At present, there are no regular arrangements for the collection of data relatingto truck operation. The structure of the trucking industry can be studied as asystem consisting of truck operators, intermediaries and users. See Figure 2.6.2below.

User

TransportCompanies/Contractors/

Supplier BookingAgents

Brokers

Transport Operator

Small Operator Large Operator

Intermediaries

User needsspecialized orgeneral transportgoods. Hedemand side

Collecting,forwardingdistributing goods

Ensures supply oftrucks to transportcontractor

Providinghaulage service

Players Functions

Source: CII LogisticsFigure 2.6.2 Players in the industry and their functions

The structure is adversely affected by factors such as nature, financing costs,vehicle technology, the absence of roadside amenities, the condition of the roads,the increased delays and waiting times of vehicles involving addition of fuel cost,the increase in turnaround time which leads to under utilization of vehicles andthe legal framework.

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Regulation

The road transport sectors are regulated by the Motor Vehicle Act (1988), theMotor Transport Act (1961) and the Carriers Act (1865).

Amongst others, the Motor Transport Workers Act regulates the hours of workof a person engaged in operating a transport vehicle.

The Motor Vehicle Act covers the legislation by which trucking is regulated andis, by and large, fairly comprehensive. However, it suffers from two lacunae:

● failure to keep pace with its small print, which involve the emerging changesin economic and technological parameters;

● the overall design makes enforcement difficult, owing to certain inherentcontradictions.

New provisions need to be incorporated in the Motor Vehicle Act relating to theissue of driving licences, inspection and maintenance of vehicles, registration ofintermediaries and the insurance of goods. The most important part is the over-loading of goods (new provisions include large fines for overloading).

The Carriers Act covers the loss or damage of the goods and other insuranceaspects.

Regulation of these acts can be effective only:

● if the regulator makes a clear distinction between bilateral contracts betweenbuyer and seller;

● if the larger, unwritten contract between the service providers and the publicinterest is better observed.

It is therefore necessary to make rules that are compatible with both theseobjectives.

The regulation of trucking also needs to be reoriented with a new perspectivegeared towards globalization, keeping in view the fact that the maximization ofprivate utilities may not lead to a socially optimal outcome. Entry regulation is aproblem in India, where it involves determining important economic tradeoffs andmanaging the severe negative externalities. Achieving the right balance is animportant goal in trucking.

In order to ensure smooth and consistent application of the laws, it is not onlynecessary to make those laws simple and enforceable, but it should also adopt theprinciple of third party regulation and adjudication. It is therefore recommendedthat a Road Transport Regulatory System be set up.

Major problems with taxation are common regarding motor vehicles, with vari-ation both in the basis of rates at which these taxes are levied, the high incidenceof these taxes and also the absence of guidelines for tax authorities. The complex-ities increase in India’s federal polity, where not only are there opportunities tolevy taxes but also the proceeds of the taxation have to be shared between theCentral and State Government.

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The present tax structure provides neither economic efficiency nor equity. Ithas no relationship with the cost of the vehicles imposed on the roads. There is animperative need to harmonize the basis and the rates at which different tax-entitled entities in the Indian federation should levy taxes on road transportation.An important feature of the prevailing tax system is the existence of the numberof check posts, which interfere with the free flow of traffic within the state andcause inconvenience on large sections for road users.

The existence of check posts does not contribute significantly to monitoring taxevasion. On the contrary, the more the number of check posts, the higher thewastage resulting from stopping traffic.

Perhaps India should take a leaf out of the EU’s (European Union’s) book. If allthe states come together and operate as a single market, it will be easier to main-tain control without causing problems. In the EU, there are still spot checks fordurgs or immigration issues, but routine internal border checks are now on alesser scale.

Road Infrastructure

The existing road networks cannot handle the projected traffic. The vehicle trafficon inter-city routes is expected to grow 4–6 times over the next 20 years. To meetthe growing demand, the Road Development Plan Vision 2021 has estimated therequirement of the road sector in terms of augmentation, strengthening andexpansion for the next twenty years.

Massive investments are being made to strengthen the road network. As theroad infrastructure and its supporting services improve, there is likely to be a shiftin the tonnage mix, from medium commercial vehicles to heavy commercial vehi-cles. This would reduce the cost of operations by carrying higher loads withminimum distress to the roads themselves.

In view of excessive overloading of vehicles, the latest guidelines of the IndianRoad Congress provides for the designing of roads on the basis of a prevailingstandardised axle weight limits and that there is uniformity in the design of roadsacross the network.

Building and maintaining good roads is a priority when it comes to improvingtrucking services. Many of the other corrective measures will follow automati-cally. Given the large fund requirement for improving the highway network andthe physical constraint of the GoI, there is a need for mobilizing all possible fund-ing sources, private financing, multinational loans and aids to meet the proposedtarget.

Technology

In order to improve technology in the trucking industry, there are two importantfactors to be considered. First, the introduction of more truck manufacturers isnecessary in order to increase competition and therefore general standards. Sec-ond, on the demand side, the cost structure of the industry has to change in such

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a way that trucking firms begin to work towards technological solutions, in orderto gain maximum profit.

The recent trends in vehicle technology emphasize the need for legistlationaimed at promoting the road friendliness of heavy vehicles, thereby creating anenvironment in which enhances overall transport capacity and productivity. Thisincludes the provision of road-friendly suspension systems, multi-axles, powersteering and improved tyres etc.

Conclusion

These proposed reforms will certainly improve the efficiency and quality of truck-ing services in the country, removing the hurdles in the way of healthy growth

2001–11 2011–21 2001–21Highway Category Length

(km)Amount

(Rs.Crore)

Amount(Rs.

Crore)

Amount(Rs.

Crore)

Length Length

National Highways� Four–six laning� Two–laning with

hard shoulders � Strengthening

weak pavements� Bypasses, over

bridges, safetyand drainagemeasures

� Expansion of NHsystem*

16,000

15,000

20,000

Lumpsum

10,000

64,000

18,750

15,000

7,250

15,000

19,000

7,000

24,000

Lump sum5,000

76,000

8,750

18,000

9,250

7,000

35,000

22,000

44,000

Lumpsum

10,500

140,000

27,500

33,000

16,500

25,500Total NHs 120,000 130,000 250,000Expressways 3,000 30,000 7,000

7,000

70,000 10,000 100,000State Highways

� Four–six laning� Two–laning with

hard shoulders� Strengthening

weak pavements � Bypasses, over

bridges, safetyand drainagemeasures

� Expansion of SHsystem

3,000

35,000

30,000

Lumpsum

1,000

10,000

28,000

22,000

10,000

5,000

60,000

40,000

Lump sum

20,000

25,000

50,000

30,000

10,000

10,000

10,000

95,000

70,000

Lumpsum

30,000

35,000

78,000

52,000

20,000

15,000

Total SHs 75,000 12,5000 200,000

Note: *adjusted on the basis of existing NH length of 65,500kmSource: Road Development Plan Vision 2021Figure 2.6.3 Proposed Development of Highways

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within the industry. As a result, the various stakeholders/interest groups willstand to benefit in their area of operation.

References:

Planning Commission Report, 2005G.Raghuram, and NarayanRangaraj April2005,”Sythesis Paper on Strength-

ening Policy Reforms For Transport Infrastructure Development”, (downloadedfrom IIM website)

Dr.Bibek Debroy and Dr.P.D.Kaushik “Barrier To Interstate Trade and com-merce The Case of Road Transport”

Mr. K.L. Thukral, AITD “Enhancing the quality of Trucking Services”.

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2.7

Partner Selection

Purvi Sheth,

It is not easy to create growth opportunities in new markets without adequatesupport. Every business has several generic and specific criteria in selecting a JV(joint venture) partner. This makes it imperative to analyze the most significantenvironmental and industrial trends impacting strategic advantage and the for-mation of JVs in India.

Approach to joint ventures in India – an evolvingperspective

1. Potential for future growth and new global competitors: India is viewed asboth an emerging market as well as a strategically competitive base for off-shore outsourcing of services and manufacturing. Alliances and partnershipsin India offer business advantages along with prospective opportunities forexpansion in the sub continent and Asian region.Businesses contending with established competitor positions can draw onIndian collaborations to counter strong opposition presence.

2. Liberalization of regulatory regime: Indian companies are rapidly growingthrough global acquisitions and mergers. They are open to setting up ven-tures that are mutually beneficial, allowing the partner to leverage its localstrengths and fulfilling their own global aspirations.With the liberalization of several industries and potential non – interventionistgovernment policies in some other sectors, joint ventures in India can helpmultinational companies to flourish from a cost and sales perspective.

3. Important means of FDI: Partnerships are an advantageous route to ulti-mately making direct investments in India. JVs can become a platform forlong-term investment. Acquisition of assets and establishment of brandsthrough alliances are a good way of entry to the market. The process helps inunderstanding the landscape and selecting niche areas of operation for long-term returns on investment.

4. Varying compulsions and challenges for local and foreign companies: Withthe rapid rate of market change, Indian companies are increasingly entering

Vice-President, Shilputsi Consultants

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international territories and building large visible businesses abroad.Alliances make it easier for Indian companies to influence their partners’global capacities and capabilities, simultaneously enhancing their position inIndia with foreign technology and brands.International companies gain through Indian partnerships, especially ifentering regulated industries, and save costs of investing in large-scale cap-ital at the outset. Alliances allow foreign corporations to establish brands andbecome familiar with distribution systems, consumption patterns, manage-ment practices, etc.

5. Dilution of comparative advantage and onslaught of information age: Withreduction in global comparative advantages, a JV or collaboration in emerg-ing markets helps to attain global competitive advantage. India has achievedsignificant visibility and progress in technical know-how, making Indiancompanies appropriate candidates for international collaborations. As tech-nology and knowledge becomes widely accessible and corporate dominancedoes not solely rely on IP (intellectual property), businesses with interna-tional ambitions need to freely exchange information and ideas. Indian com-panies today are able to facilitate this exchange as a matter of course.

Creating successful partnering capability for India

There are some essentials to prepare for before entering any partnership. Allorganizations, whether foreign or Indian, have peculiar partnering behaviourpatterns, their own customs and alliance models. Prior experience of alliances andprocesses to build an alliance capability is an important factor for a winning per-formance. It has been observed that equity levels in an Indian alliance are notcorrelated with success.

Below are some basic elements to fortify alliance competence in India:

1. Build trust and share knowledge: Since liberalization of the economy in theearly 1990s, Indian corporations have seen a wide range of alliances and JVswith foreign companies – both Western and Asian. Some have worked andbecome benchmarks of success, whilst others have failed.Trust is of utmost importance for the success of an alliance. Indian companiesmay generally not be suspicious of motives but might be unsure of their part-ners’ longer term objectives. It is necessary to create a feeling of completefaith and absolute trust with your Indian partner to enable learning, increasespeed of response and lower transaction costs.It is vital for foreign companies to believe and have faith in their Indian asso-ciates’ motives, management and abilities. Make a checklist of questions andrequest for detailed information and evidence, if required, to obtain absoluteconviction in your partners’ word.

2. Avoid culture clashes: Myths and stereotypes are attached to every culture.There is no one culture or trait that binds the Indian work force. Every Indian

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organization has its identifiable culture, a combination of traditional Indianpractices, as well as contemporary Western processes.In forming a JV in India, extensive due diligence of nuances in interaction,organizational linkages as well as softer aspects of organizational processeswill go a long way in making a successful working relationship. Study yourown cultural imperatives and map it with those of your collaborators’ to min-imize divergence in working philosophies. Develop conflict resolution mech-anisms to drive the success of the venture.

3. Mutually agree investment plans and performance milestones: Business objec-tives of both partners in a venture must be clearly defined at the outset. Notonly should aspirations be discussed, but well-framed performance matricesare necessary. To increase chances of a win–win situation, it is useful for bothpartners to assess and agree if the venture is truly central to the parent com-pany’s portfolio, the apparent benefits of the alliance and if the combined forcehas real power in the market.

Any intended investments are best discussed honestly and dormant businessgoals must be mentioned. Expectations of reciprocal candour should be commu-nicated to the Indian partner company.

Selection criteria

There could be several reasons for forming an alliance in India, ranging fromexternal factors like geographical advantages to merit in bottom lines throughbetter product positioning. The selection criteria would naturally vary accord-ingly. Some common measures and standards would be:

For business

1. Increased competitive positioning/ product differentiation: Multinationalcompanies with modifiable services and products should seek a local partnerthat has the ability and knowledge to facilitate adaptation to suit Indianpreferences, tastes and consumption patterns. It helps to have a collaboratorthat can strengthen brand position, increase distribution power and distin-guish service offerings.Some large multinational companies have already been able to launch highlysuccessful and leading global brands with distinctive Indian variances, withthe aid of appropriate partners.

2. Learn critical skills and capabilities: In JVs, Indian companies look forwardto experiencing enhanced business processes, geographical spread and newtechnologies, whilst foreign companies may seek more understanding of mar-ket segments, sales channels and people management. Depending on themost vital learning curve to be honed, as well as the learning intent andcapacity, international companies should choose a partner tested in thatarea.

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Several Indian organizations offer learning benefits across a range of welldeveloped capabilities in areas like finance and treasury, regulatory issues,sales and distribution, branding and pricing, vendor development, customerservice, HR and performance management, etc.

3. High value input to influence your costs: Indian partners can positively impactcosts, like providing suppliers to develop better bargaining strength in termsof purchasing power and/or developing favourable long-term contracts. If theJV relies on the Indian partner for significant input in the value chain, orga-nizations known for their power and weight on vendors and suppliers can bechosen as partners. Scale/scope economies in a JV partner’s business can alsobe leveraged.For regulated sectors, a partner with well established contacts and perceiv-able bearing with authorities should be a major criterion.

4. Offer customers fuller range and maintaining a stronger sales force: For cat-egories that are better valued with supplementary and support products/services, Indian companies with synergies in such areas make excellent JVpartners. Several Indian companies have existing well established productand service ranges with a strong sales team on an India-wide basis. This canbe fully leveraged to provide the market with a complete range and assort-ment of offerings. This combined with distribution strength would make aflourishing business in India.

Organisational

1. Cultural compatibility: Apart from financial due diligence, it is extremelyimportant to do an HR due diligence of a partner. Look for cultural proximi-ties and similarities, in order to identify management linkage.Several traditional family-owned Indian groups have progressed to com-pletely professionally managed, decentralized businesses where decision-making powers are not concentrated with family members. Publicly listedcompanies are required to have independent directors and corporate gover-nance is practised as per international norms. Many Indian companies notonly recruit qualified talent at all levels and functions, but are increasinglyselecting expatriates of non-Indian origin for leadership and other manage-rial jobs. They are becoming multicultural and even offer international levelsalaries.However, there are companies that continue to practise certain conventionalmanagement procedures. Some even have orthodox management styles thatmay not be well matched to certain foreign cultures. The closer the valuesystems, management policies and work ethics of the two companies, thebetter the chances of a fruitful relationship.

2. Internal support: Group support of both partners should be an uncompro-mised condition for alliance success. If there is little internal managerial andleadership backing and cooperation, the likelihood of success diminishesgreatly. It is therefore advisable to speak with the Indian company’s

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managers and teams at various levels, in order to gauge the amount ofencouragement and empathy the alliance has gained. Managerial flexibilityis another yardstick to measure how fitting a partner would be.

3. Learning symmetries: An Indian company and its foreign partner may havedivergent learning patterns.Many international companies have found that Indian companies interestedin technology gain manage to acquire generic competencies faster, whilst thepartner struggles with country-specific issues related to distribution pro-cesses, vendor development, financial compliance etc.On the other hand, Indian companies have seen foreign partners use collab-orators as short-term options to explore potential growth options, quicklyinternalizing operational capabilities and leaving the Indian partner withlittle or no advantage of the alliance.The alliance should facilitate organizational learning and evenness in knowl-edge for both partners.

4. Changing priorities: Both partners may be inclined to change objectives withtime. In opting for a partner, possibility of alterations in direction should beconsidered. An attractive partner at the time of due diligence whilst enteringIndia may become less appealing by the time an alliance is formed. In select-ing an associate, evolving business needs should determine the kind of part-ner a company ultimately makes an alliance with.Indian companies may also change their goals with time. Internal governanceunits can be set up in an alliance, to keep a check on shifting priorities.

Common perceptions of partnerships in India

Foreign companies

● local companies are unable to match investments, yet insist on retaining share-holding and management control;

● Indian family-managed companies run companies for family members:

● Indian companies are looking for easy and immediate returns on their capitalinvestment.

Indian companies

● unstable with a tilt in favour of foreign companies;

● more an ‘escort service’ than ‘marriage material’;

● investment capability differential is constantly held and used against theIndian partner.

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The view on alliances and JVs in India have evolved over a period of time. JVs areno longer seen as win-lose situations because both partners seek and provideclarity of goals at the time of partnering. There is more transparency of operationsand objectives of the alliance, for example, personal wealth versus businessgrowth are verified and confirmed before entering a partnership.

Today, Indian companies have deeper pockets and access to cheaper capital andhence do not simply look for ‘rent on assets’. Instead they are keen on attainingglobal market accessibility, contemporary technology and better profitability forlong-term growth. Indian companies, irrespective of size, have been setting theirsights on scale and growth. With more professional management and corporategovernance norms, powers and resources are not appropriated by family membersbut shared with stakeholders.

Indian corporations and conglomerates are opening their doors to global talentand paying international level remuneration and perquisites to attract managers.The emphasis is on a long-term view to bringing the most appropriate people intojobs that especially impact bottom line, customer service and innovation.

International companies in most sectors do not require a ‘stepping stone’ withincreasing possibilities of direct investment. The experience and success of manytransnational JVs make international companies less suspicious of the localpartners’ motives and agenda. Foreign firms look for longer term gain and sta-bility as opposed to ‘quick entry’ to India. Not only has the position of thesecompanies changed, but the general perception is a great deal more positive thanbefore.

Table 2.8.1 The progression of joint ventures

Early 90s JV boom/era of alliances/rush of MNCs to form collaborations

97–2000 Alliance unsteadiness/JV turbulence/disillusionment/distrust

2001 onwards Several dissolved JVs end in FDI*/MNCs* integrate local business with globaloperations/local companies buying out foreign partners/new alliances forpartner compatibility and visible competitive advantage.

Note: *FDI = Foreign Direct Investment; MNC = multinational corporation

Factors threatening partnership stability in India

1. Unequal partner contributions: For every alliance that has failed, there is apartner that felt the imbalance of involvement and contribution. The inequal-ity could be in financial strength, ownership of critical resources, ability toattract management talent or even process to build alliance capability. Mostoften, the local Indian partner is viewed to be low on these characteristics.

2. Disparity in decision making and control: Several unsuccessful JVs andalliances seem to differ in partner control. In many alliance set-ups, theIndian partner provides operating staff, whilst the foreign partner controlssenior management. In some, the foreign partner also manages operations

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and controls strategy, linking it to the parent company. The domestic partnerthen provides local expertise and some senior managerial support. This maylead to discord and frustration.

3. Insufficient market growth: With higher expectations, failure to attain antic-ipated market potential is another cause of venture collapse. Changes in theenvironment due to regulatory and market adjustments create a breakdownin alliances.

Conclusion

JVs in India have so far been formed as a response to the rapid changes in theenvironment and markets. Companies identify partners to gain competitiveadvantage in a dynamic and vibrant market.

For an alliance to succeed in India, a method of determining analytical andfinancial fitness as well as organizational fitness is crucial. Once a venture isformed, effectively managing the interaction and organizational processes willensure alliance longevity.

Over time, multinational companies have created significant competitiveadvantage by leading and owning alliance capabilities in India, which are used astemplates and directives for ventures in other emerging markets.

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2.8

Analyzing the Indian Market

Karthik Ramamurthy and Amit Naikare,Synovate Business Consulting

Introduction

India is like a cellar of wine – only the connoisseur who takes time to taste, appre-ciates the differences, and identifies the mature ones, enjoys the wine for a longperiod of time. Ones looking for a quick shot at the available wines seldom get theright one and go back with a bad impression of what is available. The Indianmarket is diverse in every sense and it takes perseverance and readiness to beflexible to succeed in this market.

This chapter looks at what market analysis means in India and what charac-terizes the Indian consumer. It also helps to understand what the supply envi-ronment looks like in this market, and provides sources of information, importantindustry associations and prominent firms that can be contacted for marketanalysis.

Defining the Indian Market

The aptly named Indian sub-continent is more of a continent than a country, withits numerous religions, languages, dialects, customs and traditions. Spread across29 states and six union territories, this market of a billion people is somethingthat needs to be well researched and understood before making the entry strategy.

If we want to gauge the vastness of the country, we could simply take a look atthe environmental diversity of the country and the seasons that exist within it.Whilst the northern reaches of Kashmir see snowfall, the southern reaches ofKerala see rain for six months every year. These varied environmental conditionshave a direct impact on every aspect of the market, be it the type of products thatwould sell or the kind of supply chain a firm would have to plan to serve themarket.

The vastness also means the population is diverse in its language, culture andeducational levels. With over 850 languages, each with its own subset of dialectsand with a literacy rate of 61 per cent in 2004, whilst it could be a segmentationexperts dream, it could also turn out be a challenge for the product and marketingmanagers.

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Additionally, urbanization is a trend that is catching on rapidly, with 28.7 percent of the population belonging to this category in 2005. This combined with sus-tained, rapid economic growth clocking around 7–8 per cent year-on-year andincreased exposure to foreign media, has led to a renewed thrust on market seg-mentation, based on ‘urban versus rural’.

Customizing products and communication according to the population demo-graphics and consequently diverse usage patterns is the challenge for a firmlooking at this market. The good news is that this whole segmentation exercisehappens on a pretty large population base and each segment, albeit small in termsof percentages, is large in terms of absolute numbers.

Thus, it is not a coincidence that India today is on every multinational com-pany’s radar and there is an increased thrust towards an India-specific strategy.Indian GDP (Gross Domestic Product) in PPP (Purchasing Power Parity) termsis now ranked fourth place and with 40 per cent of the population under the ageof 15 years, The future is increasingly looking more promising and not merespeculation.

Market Research in the Indian Context

Doing a thorough market analysis in India can be confusing. The challenge in thisvast country is not so much how and where to position your brand or product, butknowing whom to target and where. Targeting the right audience among con-sumer segments can be difficult, meaning it is essential to marketers striving towoo the consumer classes to get the ‘benefit-image-price’ and ‘consumer equation’right.

One uniform strategy cannot be adopted for the Indian market. Unlike matureeconomies where a number of brands fight for shelf space, in India the number ofbrands chasing one consumer segment are minimal. Additionally, the Indian con-sumer is evolving into an aspirational class, splashing out on luxury items likeplasma TVs, cars and watches. This propensity to spend has been enabled byhigher disposable income and easy availability of credit. This is a sea change overthe market that existed a decade ago.

The most important challenge faced by a market researcher in India is themyriad of languages to deal with. Although English is the most prevalent businesslanguage, consumer insights may not be well covered in English alone. There areten major languages that are spoken and have to be considered whilst coveringthe market, see Section 5. There are also challenges in the translation of ques-tionnaires, as well as their responses – there is a lot of difference in the spokenand theoretical language. Adequate lead time needs to be given to complete this,as a result of which the project launch takes time.

Culturally too there is a challenge in the interviewing process. For example,when there’s a group discussion scheduled, there are bound to be drop-outs ordelays in the last minute. Therefore, the sample size of respondents to be takenshould almost be double that of the successful numbers intended. In case of high-net worth individuals or senior personnel, additional gestures like personally

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escorting them have to be provided to ensure that there is participation and co-operation.

Similarly, there is a difference between attracting respondents in large citiesversus smaller ones. The respondents in smaller cities tend to be more co-opera-tive and willing compared to larger ones, where incentives are almost a must forparticipation.

Another aspect to be considered is the use of technology enablers to streamlinethe research process. CATI (Computer-Aided Telephonic Interviewing), which ispretty popular internationally for fast turnaround and cost minimization, has itslimitations in an Indian context. This could be attributed to lack of penetration ofphone lines across the strata of society and also to the cultural lack of interest inanswering the phone. So, CATI is seen to be effective only in the more affluentareas, which constitutes around 10 per cent of the country.

Whilst on the subject of respondents, it is also important to look at businessrespondents. These typically would need to be covered to gain an understandingof the business environment including competition, channels, raw material sup-pliers, business partners, and government agencies. These respondents, unlikethe developed markets, have an inherent tendency to be suspicious of givinginterviews and sharing information. They tend to respond either vaguely or pro-vide responses that do not necessarily reflect reality in the market. Therefore itis imperative that cross checks are done continually on the veracity of informationcollected from the respondents before using that information for modelling themarket.

Macro Level Characteristics of the Indian Market

The key areas to be looked into at great depth through market research and anal-ysis are:

● Consumers;

● Competitors;

● Distribution channels;

● Suppliers;

● Regulatory environment.

Consumers

The Indian market shows differences in consumer behaviour from one region toanother in terms of usage, preferences, brands, tastes, etc. Cases of marketersfinding growth in shampoo demand in a particular region driven by usage forwashing cattle, or washing machines being used for making “Lassi” - a traditionalcurd drink, characterize the Indian market!

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Rural India constitutes approximately 70 per cent of the country’s population.Although in terms of buying power urban India would rate higher, the rural mar-ket has been showing rapid growth in recent years. This is generating demand forsome products that were previously unfamiliar. Micro-serving by converting ofsample packs into single-serve sachets is one such example.

As a result of the increasing penetration of cable television and electronicmedia, advertising plays a vital role in moulding the consumer mindset for buyingcertain products. Given the global exposure, Indian consumers are becomingbrand-conscious when it comes to such names as Nike, Adidas, Honda, Toyota,etc. Consumers are differentiating products not only based on quality but alsoon brand perceptions such as premium, economy, value for money, etc.Consumers are open to global brands and also associate them with individual’sstatus in the society.

In such a dynamic environment, it is becoming essential for a player to contin-ually gather market feedback and use it effectively for differentiating the con-sumer segments and addressing the needs accordingly by appropriate productpositioning and effective communication.

Distribution channels

India is a sub-continent, nearly 2,000 miles from north to south and 1,800 milesfrom east to west with varying terrains. Population is wide spread across thegeography. Almost 70% of Indian population is in rural India and forms a sizeableand, most importantly, growing market. It poses a challenge to a firm to distributeits product to these upcountry markets. To overcome this challenge, marketersare adopting different distribution channels to reach the consumer. Cut-throatcompetition is forcing the market players to adopt highly dynamic and innovativechannel ‘push strategies’, such as higher margins and non-cash incentives. Mar-ket analysis would help understand the appropriate channel mix, channel mar-gins as well as distribution support systems such as logistics and warehousing.

Competitors

The Indian market poses a unique challenge to a foreign player. For example, theIndian retail market is dominated by the relationship driven Kirana shops (smallunorganized players) with over 95 per cent of the market share. Similarly, amultinational hardware supplier would find the Indian market crammed with‘grey market products’ (illegally imported products). MNC (multinational com-pany) players in certain industries like apparel, footwear and watches eyeing theIndian market would find themselves already present in the form of counterfeits.Thus, a new market entrant faces competition, not only from domestic and MNCplayers but also from unorganized grey market and counterfeit players.

Financial information such as sales, revenue, profit, etc available for companiesthrough public sources does not always represent the realities unless it is a pub-licly listed company. Market research and analysis agencies with local presenceand expertise help new entrants understand the competition with thorough all-round diligence.

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Suppliers

To set-up a manufacturing plant it is critical to have a reliable, consistent andaffordable source of raw material. Sourcing from a local supplier versus importingraw material is a dilemma faced by a new entrant whilst considering thequality and price implications. Some large MNC fast-food chains have ‘developed’local suppliers by imposing global standards, thus ensuring reliable qualityat an affordable cost. Market analysis would help with a diligence of claimedcapabilities versus the ground realities in terms of quality, capacity, processes,governmental clearances, financials, clients, etc. and this is crucial to ensure along term, stable sustenance.

Regulatory environment

GoI (Government of India) policies play a vital role in determining the course ofaction for doing business in India. Though the market is opening up for foreigninvestment, there are still governmental controls on the market. Global retailers’entry into the country is an example of a sector that is being debated and thereare restrictions on foreign players. Certain industries require compulsory licens-ing to operate. A foreign company can invest in India either through automaticapproval by the RBI (Reserve Bank of India) or through the FIPB (ForeignInvestment Promotion Board). Understanding duty structures on imported rawmaterials/finished goods is critical. Knowledge of the basic tax structure is alsoimperative for a new business. Market analysis can give an overview of theseaspects, which would help an entrant make a ‘go/no-go’ decision, but a legaland financial expert would be a wise choice in order to obtain more detailedadvice.

Data – Availability, Accuracy and Timeliness

One of the largest drawbacks in India is the availability of data in the publicdomain. Even countries like China are better documented. Whatever is availableis either outdated or is highly fragmented, with no single authoritative source.For example, the latest GoI census data available is for 2001 and there have beenmajor changes in the market in the last five years. Using this could lead to adistorted market model.

Another key consideration is that whilst data may be maintained in hard copy,the digitization process is only a recent phenomenon and progress is slow. Thiscan be prominently seen in dealings with the RoC (Registrar of Companies). Indi-vidual ROC offices have different levels of digitization, making it extremelydifficult to get similar data for companies across India. This is also the case withvehicular databases, which are maintained by individual Road Transport Officesin each city or town.

Of course, there are private firms that have taken up this opportunity andmake data available at a cost. However, again this data is limited by the capabil-ities of private firms to comprehensively cover the widely spread market. Only

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limited investments are possible so as to not make the report prohibitively expen-

Recently, there has been an initiative from the GoI to give the public access toinformation under the control of public authorities through the Right to Informa-tion Act. This enables access to information for a fee and within a specifictimeframe. Of course, this is limited to the requested data and cannot be used asa definitive source for information on a continual basis and is not centralized inany form.

Other sources of overall information on India are the India Brand Equity Foun-

vidual central government departments (india.gov.in) and individual StateGovernments.

Trade and Market Research Associations

Looking specifically at conducting market research, the MRSI (Market Research

research body formed by a large fraternity of research suppliers and users spreadacross India. Established in January 1988, the MRSI was formed to maintainstandards of excellence in the market research industry. It is a proactive andneutral society, striving to promote the needs of market research in India. TheMRSI has over 40 corporate members and is involved in furthering marketresearch interests through a variety of events.

Apart from this, there are nodal trade bodies that provide assistance inthe form of information, access to Indian firms and also provide verticalspecific networking opportunities through events conducted both withinIndia and abroad. A few of the prominent trade bodies are the Confederation of

information. Statistics, reports and news are usually available from these orga-nizations and they also help companies from abroad network with Indian firmsin the domain.

Agencies for Market Research and Analysis

There are a number of agencies that provide market research and analysis ser-

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sive. Examples of agencies providing such services are CMIE (www.cmie.com),Indiastat (www.indiastat.com), and Euromonitor (www.euromonitor.com).

dation (www.ibef.org), the National Informatics Center (indiaimage.nic.in), indi-

Society of India – www.mrsi-india.com) is a non-profit autonomous market

Indian Industry (www.ciionline.org), the Associated Chambers of Commerce

Chambers of Commerce & Industry (www.ficci.com). Additionally, there areand Industry of Indian (www.assocham.org) and the Federation of Indian

Service Companies (www.nasscom.org), the Society of Indian Automobile Manu-industry-specific associations, like the National Association of Software and

facturers (www.siamindia.com), and the Cellular Operator’s Association of India(www.coai.com) etc., which can be contacted for industry-specific insights and

India Pvt Ltd (www.synovate.com), AC Nielsen (www.acnielsen.co.in), the Indian

and Frost & Sullivan (www.frost.com).

vices. The prominent players who specialize in market research are Synovate

Market Research Bureau (www.imrbint.com), TNS Global (www.tns-global.com)

Apart from market research firms there are also other providers of detailedmarket analysis including management consultants such as McKinsey & Co

details of their India office would be available. The recommended approach for

critical to look into details of past engagements in the industry of interest aswell as the Indian market. Most critical in market analysis is the methodologyof collecting facts and whether the agency outsources the field coverage to athird party. Outsourcing could jeopardize the quality and validity of the datawhich in turn would affect the models used for analysis and subsequent businessrecommendations.

In conclusion we can say that there are a few golden rules to succeed in India:

● enter the market with a long-term vision;

● research the market well;

● use multiple sources to corroborate information;

● hire locally experienced personnel or chose a local partner for entry.

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(HYPERLINK “http://www.mckinsey.com” www.mckinsey.com), The BostonConsulting Group (www.bcgindia.com), Ernst & Young (HYPERLINK “http://www.ey.com/india” www.ey.com/india), KPMG (HYPERLINK “http://www.in.kpmg.com” www.in.kpmg.com), and A.T. Kearney (HYPERLINK

The easiest way to approach these firms is to access the website and the contact

“http://www.atkearney.com” www.atkearney.com) and boutique market entry

quick response would be to call up the agency. While evaluating the firms it is

consultants such as Synovate Busines Consulting (www.synovate.com/bc).

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Part Three

Finance, Tax andAccounting

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3.1

Audit Requirements

KPMG

Chartered accountants in India are regulated by the ICAI (Institute of CharteredAccountants of India), constituted under the Chartered Accountants Act, 1949,an act of Parliament. The MCA (Ministry of Company Affairs) exercises supervi-sion over the ICAI. It is thus the statutory body in India to which all charteredaccountants must belong in order to conduct audits in India.

The Accounting Standards are issued under the authority of the Council of theICAI. The ICAI, recognizing the need to harmonize the diverse accounting policiesand practices in use in India, first took on the task of laying down standards ofaccounting in India in 1977, in the guise of the ASB (Accounting StandardsBoard). The ICAI also has separate boards/committees for the formulation ofstandards related to auditing, ethics, etc). However, the Accounting Standardsissued by the ICAI were mandatory only for its members. It was the Companies(Amendment) Act, 1999 that gave legal recognition to accounting standards,thereby making it mandatory.

As per the Indian Companies Act, standards have to be prescribed by the Cen-tral Government in consultation with NACAS (the National Advisory Committeeon Accounting Standards). Pending notification of standards by the Central Gov-ernment, standards specified by the ICAI are required to be followed by thecompanies. NACAS has completed the review of all the accounting standardsissued by the ICAI to date and has finalized and submitted its recommendationson the same to the GoI (Government of India) for notification under the CompaniesAct. Some 28 Accounting Standards have been recommended by NACAS to dateto the Central Government, including recommendations for necessary exemptionsand relaxations for small and medium-sized companies.

Accounting Standards are designed to apply to the general purpose financialstatements and other financial reporting, which are subject to the attest functionof the members of the ICAI. They apply in respect of any enterprise (whetherorganized in corporate, co-operative or other forms) engaged in commercial, indus-trial or business activities (however small), irrespective of whether it is profit-oriented or established for charitable or religious purposes. Accounting Standardswill not, however, apply to enterprises only carrying on activities which are notof a commercial, industrial or business nature (egcollecting donations and givingthem to flood-affected people). The ‘General Purpose Financial Statements’include a balance sheet, a statement of profit and loss, a cash flow statement(wherever applicable) and statements and explanatory notes which form part

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thereof, issued for the use of various stakeholders, governments, their agenciesand the public. The enterprises are classified into three levels based on factorssuch as listing, nature of activities, turnover, use of public funds, etc. Small andmedium-level enterprises have been granted exemptions from specific disclosures.

Whilst formulating the Accounting Standards, the ASB takes into considera-tion the applicable laws, customs, usages and business environments prevailingin India. The ICAI, being a fully-fledged member of the IFAC (InternationalFederation of Accountants), is expected, inter alia, to actively promote the IASB’s(International Accounting Standards Board) pronouncements in the country witha view to facilitating the global harmonization of Accounting Standards. Accord-ingly, whilst formulating the Accounting Standards, the ASB gives due consider-ation to IASs (International Accounting Standards/IFRSs (international financialreporting standards) issued by the International Accounting Standards Commit-tee/IASB, as the case may be, and tries to integrate them, wherever possible,according to the conditions and practices prevailing in India.

The Indian Accounting Standards, like IASs/IFRSs, are principle-based stan-dards. They describe the accounting principles and the methods of applying theseprinciples in the preparation and presentation of financial statements in order togive a true and fair view. They are mandatory in nature. Any deviation from theAccounting Standards is required to be adequate and appropriately disclosed inthe audit report. The ICAI has also started issuing ASI (Accounting StandardsInterpretation). The authority of an ASI is the same as that of the AccountingStandard to which it relates. Thus, an ASI would be mandatory if the standarditself is mandatory.

Additional accounting principles and practices have also been recommended bythe ICAI in the guidance notes that form an integral part of the financial reportingframework. There are other pronouncements, such as opinions issued by theExpert Advisory Committee of the ICAI and research publications providing use-ful and practical guidelines. The documents do not enjoy the authoritative statusof a mandatory or recommendatory document, but nevertheless provide valuablesupport in understanding accounting treatments applicable to specific issues.

Apart from the Accounting Standards (and related ASIs), the financial state-ments also need to comply with the relevant statutory requirements, eg theCompanies Act which mandates the format of the financial statements and theinformation to be included therein. In this context, it should be noted that withthe exception of the ICAI, there are other independent regulators in India gov-erning companies which may lay down specific accounting and/or disclosurenorms for financial reporting. An example of this would be the SEBI (Securitiesand Exchange Board of India), which regulates the functioning of stock exchangesand protects the interests of investors, for listed companies. Another example isthe RBI (Reserve Bank of India), the apex bank in India, for banks, non-bankingfinancial institutions and financial and foreign exchange markets. There is alsothe IRDA (Insurance Regulatory and Development Authority) for insurance com-panies. In specific circumstances such as mergers and amalgamations, the legalsystem, through the courts, also provides accounting norms.

Whilst issuing Accounting Standards, the ICAI makes an effort to ensure thatthese conform with the provisions of applicable laws, customs, usages and the

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business environment in general in India. However, if a particular AccountingStandard is found to be not in conformity with law, the provisions of said law willprevail. Thus statutes like the Companies Act etc supersede the Accounting Stan-dards and may require some deviation.

Taxable income is calculated in accordance with tax laws. In some circum-stances, the requirements of these laws to compute taxable income differ from theaccounting policies applied to determine accounting income. Thus, a particularitem of revenue or expense may be treated differently in the general purposefinancial statements and for the computation of taxable income. The effect of thisdifference is that the taxable income and accounting income may not be the same.

The last few years have seen many developments relating to financial reportingby corporates, which in turn influence the auditing profession. The issues oftransparency, accounting practices and corporate governance have come to thefore as high agenda items in organizations worldwide. The parameters of financialreporting need a constant review, as they have to keep pace with the fast changingmilieu and the corresponding expectations of society in general and the specificusers of financial statements in particular. In India, financial reporting is, in anycase, in a stage of transition – a stage where hectic changes are being introducedto catch up with the developed world. The ICAI has taken a big leap in financialreporting by introducing new Accounting Standards and other technical pro-nouncements. This has been further supported by the initiatives taken by theMCA and SEBI with the objective to tighten the regulatory regime for corporates,ensure better corporate governance practices and protect investors’ rights.

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3.2

Accounting Requirementsand Tax Issues

KPMG

In India, taxes are levied by the Central and State Governments, and also by localgovernment bodies. Principal taxes, including Income Tax, Custom Duties, Cen-tral Excise Duty and Service Tax are levied by the Central Government. On theother hand, states levy taxes such as State Excise Duty, VAT (Value Added Tax),Sales Tax and Stamp Duty. Local government bodies levy Octroi Duties and othertaxes of local nature like Water Tax and Property Tax.

Income is taxed in India in accordance with the provisions of the Income TaxAct, 1961. The Ministry of Finance (Department of Revenue) through the CBDT(Central Board of Direct Taxes) – an apex tax authority – implements and admin-isters direct tax laws.

India has embarked on a series of tax reforms since the early 1990s. The focushas been on rationalization of tax rates and simplification of procedures.

Direct taxes

India follows a residence-based taxation system. Broadly, taxpayers may be clas-sified as ‘residents’ or ‘non-residents’. Individual taxpayers may also be classifiedas ‘residents but not ordinary residents’. The tax year in India runs from 1 Aprilto 31 March of the following calendar year for all taxpayers. Taxable income hasto be ascertained separately for different classes of income (called ‘heads ofincome’) and is then aggregated to determine total taxable income. The ‘previousyear’ basis of assessment is used ie any income pertaining to the tax year is offeredto tax in the following year (known as the assessment year).

Income tax is levied on taxable income, comprising income under the followingheads of income:

● salaries;

● income from rental property;

● profits and gains of business or profession;

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● capital gains;

● income from other sources.

Generally, the global income of domestic companies, partnerships and localauthorities are subject to tax at flat rates, whereas individuals and other speci-fied taxpayers are subject to progressive tax rates. Foreign companies andnon-resident individuals are also subject to tax at varying rates on specifiedincomes which are received/accrued or deemed to be received/accrued in India.Agricultural income is exempt from Income Tax at the central level but is takeninto account for rate purposes. Income earned by specified organizations eg trusts,hospitals, universities, mutual funds etc, is exempt from Income Tax, subject tothe fulfillment of certain conditions.

India adopts the self-assessment tax system. Taxpayers are required to filetheir tax returns by the specified dates and pay the tax. The Tax Officer maychoose to make a scrutiny assessment to assess the correct amount of tax by call-ing for further details.

Generally, taxpayers are liable to make Income Tax payments as advance tax,in three or four installments, depending on the category they belong to, duringthe year in which the income is earned. Balance tax payable, if any, can be paidby way of self-assessment tax at the time of filing the return of income. Employedindividuals are subject to tax withholding by the employer on a ‘pay-as-you-earn’basis. Certain other specified incomes are also subject to tax withholding atspecified rates.

Residential status

IndividualDepending upon the period of stay in India during a given financial year, an indi-vidual may be classified as a resident or a non-resident in India or ‘not ordinarilyresident’ in India.

CompanyA resident company is a company formed and registered under the CA56 (Com-panies Act, 1956) or one whose control and management is situated wholly inIndia. An Indian company is always an Indian resident. Consequently, an Indiancompany that is wholly owned by a foreign entity and managed from India byforeign individuals/companies is also considered a resident Indian company. Anon-resident company is one whose control and management are situated whollyoutside India.

Kinds of taxes

Annual Income TaxAnnual Income Tax is levied on income earned, for a financial year as per the ratesdeclared by the annual Finance Act.

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MAT (Minimum Alternate Tax)With a view to bring zero taxpaying companies having book profits under the taxnet, the domestic tax law requires companies to pay MAT in lieu of the regularcorporate tax, in a case where the regular corporate tax is lower than the MAT.

However, MAT is not applicable to:

● income exempt from tax (excluding exempt long-term capital gains from taxyear ending 31 March 2007);

● income from units in specified zones including SEZs (Special Economic Zones)or specified “backward” districts;

● income of certain ailing industrial companies.

MAT is levied at 7.5 per cent [proposed to be increased to 10 per cent] (plus appli-cable surcharge and education cess is a widely used term in India that refers toany hypothecated tax) of the adjusted book profits of companies where the regularcorporate tax payable is less than 7.5 per cent [proposed 10 per cent] of their bookprofits.

A tax credit, being the difference of the tax liability under MAT provisions andregular provisions, can be carried forward for set-off in the year in which tax ispayable under the regular provisions. Such set-off shall be allowed on the differ-ence of tax as per regular provisions and as per MAT provisions. However, no carryforward shall be allowed beyond the seventh assessment year (proposed) succeed-ing the assessment year in which the tax credit becomes allowable.

DDT (Dividend Distribution T)DDT is a tax payable on the dividend declared, distributed or paid. Dividends paidby an Indian company are currently exempt from Income Tax in the hands of therecipient shareholders in India. However, the company paying the dividends isrequired to pay DDT on the amount of dividends declared, at the rate of 14.03 percent (inclusive of surcharge and educational cess). An exemption from this tax hasbeen granted in case of dividends distributed out of profits of SEZ developers.

Tonnage Tax on shipping companiesIndian shipping companies are taxed on a presumptive basis. Tax is levied on thenotional income of the shipping company arising from the operation of ships atnormal corporate tax rates. The notional income is determined in a prescribedmanner on the basis of the tonnage of the ship. Tax is payable even in the case ofloss. The scheme is applicable to the shipping companies that are incorporatedunder the Indian Companies Act (with its effective place of management in India)with at least one ship with minimum tonnage of 15 tonnes and holding a validcertificate under the Merchant Shipping Act, 1959. Shipping companies have anoption to opt for the scheme or for taxation under normal Income Tax provisions.

Once the scheme has been opted for, it would apply for a mandatory period of10 years and other Income Tax provisions would not apply.

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FBT (Fringe Benefit Tax)FBT was introduced in the Finance Act, 2005. FBT is a tax payable by theemployer on benefits (provided/deemed) that employees (past or present) receiveas a consideration of their employment. FBT is leviable on every employer exclud-ing individuals, HUFs (Hindu Undivided Family – a special community-basedentity in India) and certain institutions enjoying certain exemptions.

Certain expenses are directly covered within the ambit of FBT. In respect ofexpenditure such as entertainment expenditure, conferences etc, a certain per-centage of these expenses are deemed as fringe benefits, upon which FBT isleviable. FBT is leviable at the rate of 30 per cent plus applicable surcharge andeducation cess.

The due dates for filing the return of fringe benefits in the case of a companyor a person whose accounts are required to be audited under the Act, is the31 October following the end of the financial year. In any other case, the due dateis the 31 July following the end of the financial year.

The manner of payment of FBT is similar to that of Advance Tax. FBT shouldbe paid in each quarter, on or before the 15th day of the month following suchquarter, except for the quarter ending on 31 March, in case of which the FBT willbe payable on or before 15 March of the relevant financial year.

STT (Securities Transaction Tax)STT is levied on the value of taxable securities transactions at specified rates.

The taxable securities transactions are:

● the purchase/sale of equity shares in a company or a derivative or a unit of anequity-oriented funds entered into in a recognized stock exchange;

● the sale of unit of an equity-oriented fund to the mutual fund.

The rates of STT are shown in the following Figure.

Period

From 1June ´2006

0.125 % 0.025 % 0.017 % 0.25 %

Purchase/ Sale ofequity shares,units of equityoriented mutualfund (deliverybased)

Sale of equityshares, units ofequity orientedmutual fund (non-delivery based)

Sale of derivatives

Sale of unit of anequity orientedfund to themutual fund

Source: KPMG IndiaFigure 3.2.1 Rates of STT

BCTT (Banking Cash Transaction Tax)BCTT is levied on the following ‘taxable banking transactions’ entered with anyscheduled bank on any single day:

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Accounting Requirements and Tax Issues 89

● the withdrawal of cash from any bank account other than a savings bankaccount;

● the receipt of cash on encashment of term deposit(s).

The value of the above transactions chargeable to BCTT is 25,000 rupees(approximately US $ 600) or more, in the case of individuals and HUFs and1,000,000 rupees (approximately US $ 2,200) or more, in the case of persons otherthan individuals and HUFs. The BCTT will be payable by the person from whoseaccount the cash is withdrawn.

The BCTT is levied at the rate of 0.1 per cent of the value of each taxable bank-ing transaction.

Wealth TaxWealth Tax is leviable on specified assets at 1 per cent on the value of the assetsheld by the assessee in excess of the basic exemption of assets amounting to1,500,000 rupees (approximately US $ 33,000).

Tax rates

IndividualsIndividuals (excluding women and senior citizens) are liable to tax in India atdifferent rates of tax. See Figure 3.2.2 below.

Capital Gains TaxGains arising from the transfer of long-term capital assets are taxed at specialrates/eligible for certain exemptions (including exemption from tax where the saletransaction is chargeable to STT). Short-term capital gains arising on transfer ofassets other than certain specified assets are taxable at normal rates.

Taxability of non-resident IndiansNon-resident Indians may also be liable to tax in India on a gross basis dependingupon the type of income received.

Foreign nationalsIndian tax law provides for exemption of income earned by foreign nationals forservices rendered in India, subject to prescribed conditions. For example:

● remuneration from a foreign enterprise not conducting any business in India,provided the individual’s stay in India does not exceed 90 days and the paymentmade is not deducted in computing the income of the employer;

● remuneration received by a person employed on a foreign ship provided his stayin India does not exceed 90 days.

CompaniesA resident company is taxed on its global income. A non-resident company is taxedon income received/accrued or deemed to be received/accrued/ arisen in India. The

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90

scope of Indian income is defined under the Act. The tax rates for the tax yearending 31 March 2006 and proposed for the tax year ending 31 March 2007 are:

● domestic company – 33.66% (Income Tax 30 per cent plus surcharge of 10%thereon plus education cess of 2% on Income Tax including surcharge);

● foreign company – 41.82% (Income Tax 40 per cent plus surcharge of 2.5%thereon plus education cess of 2% on Income Tax including surcharge).

# Where the income exceeds USD 22,200, surcharge @ 10 percent would be leviable on the total tax payable

Income Slab

Upto USD 2,200 NIL

10.2 percent

20.4 percent

30.6 percent

33.66 percent #

USD 2,200 to USD 3,300

USD 3,300 to USD 5,500

USD 5,500 to USD 22,200

Above USD 22,200

Effective tax rate (including surchargeof 10 percent and educational cess of 2percent)

# Where the income exceeds USD 22,200, surcharge @ 10 percent would be leviable on the total tax payable

Income Slab

Upto USD 3,000 NIL

10.2 percent

20.4 percent

30.6 percent

33.66 percent #

USD 3,000 to USD 3,300

USD 3,300 to USD 5,500

USD 5,500 to USD 22,200

Above USD 22,200

Effective Tax rate (including surchargeof 10 percent and educational cess of 2percent)

# Where the income exceeds USD 22,200, surcharge @ 10 percent would be leviable on the total tax payable\Note: Income slabs rounded off to nearest USD 100, USD 1 = INR 45

Income Slab

Upto USD 4,100 NIL

20.4 percent

30.6 percent

33.66 percent #

USD 4,100 to USD 5,500

USD 5,500 to USD 22,200

Above USD 22,200

Effective Tax rate (including surchargeof 10 percent and educational cess of 2percent)

Women

Senior citizens (individuals of the age of 65 years or more)

Figure 3.2.2: Income slabs

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Additionally, a company is required to pay the other taxes eg FBT, STT, BCTTand MAT.

Modes of taxation

Gross basis of taxationCertain specific income streams earned by non-residents are liable to tax on agross basis in certain cases, ie a specified rate of tax is applied on the gross basisand no deduction of expenses is allowed. The details of the nature of income andapplicable rate of tax are as follows in Figure 3.2.3 below.

# The rates are in the case of a foreign company and are inclusive of surcharge of 2½ percent and education cess of2 percent on tax and surcharge in respect of agreements made on or before May 31, 1997; or after May 31, 1997 butbefore June 1, 2005; and after June 1, 2005 respectively. In case of other non-residents the basic tax rate would beincreased by a surcharge of 10 percent where income exceeds INR 1000,000 (approx. USD 23000) and educationcess of 2 percent on tax and surcharge.

Rate of Tax

20.91 percent

31.368/ 20.91 / 10.455 # percent

31.368/ 20.91 / 10.344 # percent

Income stream

Interest

Royalities

Technical Know-how fees

Figure 3.2.3 Income stream and rate of tax

Presumptive basis of taxationForeign companies engaged in certain specified business activities are subject totax on a presumptive basis ie income is recognized at a specific percentage of grossrevenue and thereafter tax liability is determined by applying the normal taxrates on deemed income. Certain activities taxed on a presumptive basis alongwith the basis of taxation are set out below in Figure 3.2.4.

Oil and gas services Deemed profit of 10 percentof revenues

4.182 percent

Execution of certainturnkey contracts

Deemed profit of 10 percentof revenues

4.182 percent

Air transport Deemed profit of 5 percentof revenues

2.091 percent

Shipping operations Deemed profit of 7.5 percentof freight revenues

3.1365 percent

Effective tax rateincluding surcharge of2.5 percent of educationcess of 2 percent

Basis of taxationActivity

Source: KPMG IndiaFigure 3.2.4: Activities and their taxation

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Deductions allowable from business incomeGenerally, all revenue expenses incurred for business purposes are deductiblefrom the taxable income. The requirement for deductibility of expenses is that theexpenses must be wholly and exclusively incurred for business purposes; that theymust be incurred or paid during the previous year and supported by relevantpapers and records. Expenses of a personal or capital nature are not deductible.Income Tax paid is not allowable as a deduction. Depreciation on specified capitalassets at prescribed rates is also deductible.

Expenditure incurred on taxes (excluding Income Tax) and duties, bonus orcommission to employees, fees under any law, interest on loans or borrowings frompublic financial institutions and interest on loans and advances from scheduledbanks is deductible only if it is paid during the previous year. Alternatively, it isdeductible if it is paid on or before the due date for furnishing the return of income,and the return is accompanied by evidence of such payment. However, interest oncapital borrowed for the acquisition of assets acquired for extension of existingbusiness is not allowed as a deduction until the time that such assets are actuallyput to use.

Employee’s contributions to specified staff welfare funds – that is, providentfunds, gratuity funds, etc – are treated as employer’s income and are allowed asdeduction only if actually paid during the previous year on or before the applicabledue date. However, employer’s contributions to these funds are deductible even ifpaid before the due date of the filing of the return of income.

Salaries, interest, royalties, technical service fees, commissions or any otheramount payable outside India or in India to a non-resident (other than a foreigncompany) or a foreign company, on which the applicable withholding tax has notbeen withheld or after deduction has not been paid are not deductible. Suchamounts are deductible in the year in which the withholding tax is paid. Where,in respect of these payments, tax has been deducted in the relevant year but paidin the subsequent year within the prescribed time limit, such payments made aredeductible in the relevant year. However, if the tax so paid in the subsequent yearis not paid within the prescribed time limit, the deduction is allowed only in thesubsequent year.

Similarly, any payment made to residents for interest, commission or broker-age, fees for professional or technical services, contract/sub-contract payments,where taxes have not been withheld or after withholding have not been paid asper prescribed regulations, will be disallowed in the hands of the payer. Thededuction for such a sum will be allowed in the year in which the withholdingtaxes are paid.

Head office expenditureForeign companies operating in India through a branch are allowed to deductexecutive and general administrative expenditure incurred by the head officeoutside India. However, such expenditure is restricted to the lower of 5% ofadjusted total income (as defined) or expenditure attributable to the Indianbusiness.

In cases where the adjusted total income for a year is a loss, the expenditure isrestricted to 5 per cent of the average adjusted total income (as defined).

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Bad debtsBad debts written off are tax-deductible. Provision for doubtful debts is not taxdeductible. Banking companies are allowed a deduction for provisions for bad anddoubtful debts up to 7.5% of total income or 10% of its assets classified as doubtfulassets restricted to the provision for doubtful debts made in the books. Banksincorporated in a country outside India and public financial institutions areallowed a deduction for provisions for doubtful debts up to 5 per cent of income,as specifically defined for this purpose. Bad debts actually written off by banksand public financial institutions, in excess of the accumulated provision fordoubtful debts, are deductible.

Grouping/consolidationNo provisions currently exist for the grouping/consolidation of losses of entitieswithin the same group.

Withholding of taxesGenerally, income payable to residents or non-residents are liable to withholdingtax a tax “withheld” by the payer and given directly to the relevant tax authority,especially for overseas and non-resident tax payers by the payer (in most casesindividuals are not obliged to withhold tax on payments made by them). The ratesin the case of residents would vary, depending on the income and the payeeinvolved eg in the case of rent, the rate is 15% if the payee is an individual and20% in all other cases.

Except where preferential tax rates are provided for under Double Tax Avoid-ance Agreements, payments to foreign companies/non-residents are subject to thefollowing withholding tax rates.

(3) Other than exempted long term gains(2) Rate includes surcharge of 10 percent where income exceeds USD 22,200 and education cess of 2 percent(1) Rate includes income tax+ two and a half percent surcharge and 2 percent education cess thereon.

Interest on foreign currency loan 20.91 percent

11.22 percent

33.66 percent

33.66 percent

33.66 percent

22.44 percent

22.44 percent (3)

22.44 percent20.91 percent

20.91 percent (2)

41.82 percent

10.455 percent

31.365 percent

31.365 percentWinnings from horse races

Winnings from lotteries and crossword puzzles

Any other income

Long-term capital gains

Royalities and technical services fees payableunder an agreement approved by theGovernment of India or in accordance withthe new Industrial Policy

Type of Income Foreigncompanies (1)

Othernon-residents (2)

Figure 3.2.5 Withholding tax rates applicable to foreign companies/non-residents

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Carrying forward losses and unabsorbed depreciation

This is subject to the fulfillment of the following prescribed conditions:

1. Business loss can be carried forward for eight consecutive financial years andcan be set off against the profits of subsequent years. Losses from a specula-tion business (as defined) can be set off only against gains from speculationbusiness for a maximum of four years.

2. Unabsorbed depreciation may be carried forward for set off indefinitely.

3. Capital losses may also be carried forward for set off for eight subsequentfinancial years subject to fulfillment of certain conditions. Long-term capitallosses can be set off only against long-term capital gains, whereas short-termcapital losses can be set off against short-term as well as long-term capitalgains. These losses cannot be set off against income under any other head.

4. Carry back of losses or depreciation is not permitted.

Corporate reorganizations

Corporate reorganizations, such as mergers, demergers and slump sales areeither tax neutral or taxed at concessional rates subject to the fulfillment ofprescribed conditions.

FIIs (Foreign Institutional Investors)

To promote the development of Indian capital markets, qualified FIIs/sub-accountsregistered with the SEBI (Securities and Exchange Board of India) and investingin listed Indian shares and units, are subject to tax as per beneficial regime.

# Subject to payment of Securities Transaction Tax (STT)

20 percent

NIL

10 percent

Interest

Long-term capital gains #

Short-term capital gains #

Figure 3.2.6: Capital gains interest rates

In addition, there is a surcharge of 2.5% in the case of companies and 10% in thecase of non-corporate where the income exceeds 1,000,000 rupees (approximatelyUS $ 22,000) and education cess of 2 per cent. Additionally, capital gains earnedby an FII are not subject to withholding tax in India.

The rate of tax on other short-term capital gains is 30 per cent plus surchargeand education cess; and on long-term capital gains is 10 per cent plus surchargeand education cess.

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Relief from double taxation

For countries that have DTAAs (Double Tax Avoidance Agreements) with India,bilateral relief is available to a resident in respect of foreign taxes paid. Generally,provisions of DTAAs prevail over the domestic tax provisions. However, domestictax provisions may apply to the extent that they are more beneficial to thetaxpayer. The DTAAs would also prescribe rates of tax in the case of dividendincome, interest, royalties and fees for technical services that should be appliedif the rates prescribed in the Act are higher. Business income of a non-residentmay not be taxable in India if the non-resident does not have a permanent estab-lishment in India.

For countries with no DTAA with India, a foreign tax credit is available underIndian domestic tax law to a resident taxpayer in respect of foreign taxes paid.The amount of credit allowable should be the lower of the tax in the foreign countryor the Indian tax attributable to the foreign income. Currently, there is no carryforward/carry back of excess tax credits.

With effect from 1 June 2006, it has been proposed that statutory recognitionis given to agreements entered into between specified Indian associations and anon-resident specified associations for a grant of double taxation relief, for avoid-ance of double taxation, for exchange of information for the prevention of evasionor avoidance of income tax or for recovery of income tax. The provisions of the Actwill apply to the extent that they are more beneficial than the provisions of theagreement. It is also clarified that a higher charge of tax on the foreign entity willnot be considered as discrimination against such an entity.

Tax incentives

SEZs (Special Economic Zones)

Units set up in SEZsUndertakings set up in SEZs are eligible for Income Tax holiday for 10 years(100% exemption for the first five years and 50% exemption for the next fiveyears), on the profits derived from exports from the year in which such an under-taking begins manufacturing or commences its business activities (effective AY2006–07). A further deduction of 50 per cent of profits is available for another fiveconsecutive years, after the first 10 years, subject to the fulfillment of certainconditions.

SEZ developerTax holiday for 10 consecutive years out of 15 has been extended to undertakingsinvolved in developing/developing and operating/maintaining and operatingnotified SEZs before 31 March 2006.

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OBUs (Offshore Banking Units) and IFSCs (International Financial ServiceCentre units) set up in SEZsOBUs and IFSCs in SEZs are entitled to tax holiday of 100% for the first five yearsand 50% for the next five years.

EOUs (Export-oriented Units)Undertakings set up in export processing zones/foreign trade zones, EHTP(Electronic Hardware Technology Park), STP (Software Technology Park) or 100per cent EOUs, are eligible for a deduction of 100 per cent on the profits derivedfrom exports for any 10 consecutive years from the year in which such undertakingbegins manufacturing or commences its business activities. Such deduction wouldbe available only up to FY 2008–09.

Industrial parks, model towns and growth centres

For developers of industrial parksSome 100% tax holiday is available to the developers of industrial parks for any10 consecutive assessment years out of 15, beginning from the year in which theundertaking or the enterprise develops an industrial park, provided it begins nolater than 31 March 2006. In the Budget 2006, this time limit is proposed to beextended until 31 March 2009.

Units set up in industrial parksDepending on the location of the industrial parks, the following tax holiday isavailable to units set up therein:

● Himachal Pradesh/Uttaranchal:- 100% tax deductible in the first five years;- 30% tax deductible in the next five years;

● Sikkim/North Eastern States:- 100% tax deductible for first 10 years.

Tax holidays in respect of infrastructure projects/power/housingUndertakings engaged in prescribed infrastructure projects are eligible for aconsecutive 10-year tax holiday as set out below:

1. A 10-year tax holiday in a block of 20 years will be extended to undertakingsengaged in developing/operating and maintaining/developing, operating andmaintaining infrastructure facilities like roads, bridges, rail systems, watersupply projects, water treatment systems, irrigation projects, sanitation andsewerage systems or solid waste management systems.

2. A 10-year tax holiday in a block of 15 years has also been extended to under-takings involved in developing/operating and maintaining/developing,operating and maintaining, ports, airports, inland waterways or inland ports.A similar exemption has also been extended to undertakings set up before31 March 2010 for generation/generation and distribution of power.

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3. A two-tier benefit of 100% tax holiday for the first five years and a deductionof 30% of profits for the subsequent five years are available to undertakingsthat start providing telecommunications services before 31 March 2005. Thescope of telecommunications services has been extended to include Broad-band networks and Internet services.

Transfer pricing

In the case of businesses carried on by multinational companies, detailed provi-sions relating to transfer pricing were introduced by the Finance Act, 2001 inorder to facilitate the computation of reasonable, fair and equitable profits andtax in India. The Indian transfer pricing provisions generally follow OECD(Organisation for Economic Co-operation and Development) Guidelines, albeitwith some significant differences, such as a wider definition of the term ‘associatedenterprise’; and the concept of arithmetical mean as opposed to internationallyfollowed statistical measures of median/arm’s length range.

In simple words, transfer pricing regulations require cross-border transactionsbetween associated enterprises to be undertaken on an arm’s length basis. In thisregard, Section 92 of the Income Tax Act, 1961 (Act) provides that the price ofany transaction between associated enterprises, either or both of whom are non-resident for Indian Income Tax purposes (international transaction), shall becomputed having regard to the arm’s length price.

Two enterprises are considered to be associated if there is direct/indirectparticipation in the management or control or capital of an enterprise by anotherenterprise or by same persons in both the enterprises. Further, the transfer pric-ing regulations have prescribed certain other conditions that can trigger anassociated enterprise relationship. Significant conditions among these include:

● direct/indirect shareholding, giving rise to 26 per cent or more of voting power;

● dependency relating to source of raw materials/consumables, as well as depen-dency relating to customer(s) for manufactured/processed goods, price andother conditions being influenced by the other contracting party;

● authority to appoint more than 50 per cent of the board of directors or one ormore of the executive directors;

● dependency in relation to IP (Intellectual Property) rights (know-how, patents,trademarks, copyrights, trademarks, licences, franchises etc) owned by eitherparty;

● dependency relating to borrowings ie advancing of loans amounting to no lessthan 51 per cent of total assets or provision of guarantee amounting to not lessthan 10 per cent of the total borrowings.

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Determination of arm’s length price

The Indian transfer pricing regulations require an arm’s length price in relationto an international transaction to be determined in accordance with the mostappropriate method from the following:

● CUP (Comparable Uncontrolled Price);

● RPM (Resale Price Method);

● CPLM (Cost Plus Method);

● PSM (Profit Split Method);

● TNMM (Transactional Net Margin Method).

Unlike the OECD guidelines, there is no order of preference prescribed, althoughin practice transfer pricing authorities do attempt to use traditional methods suchas CUP, RPM and CPLM, before accepting a profit-based approach. The choice ofthe most appropriate method is required to be made having regard to factors thatinter alia include nature and class of the transaction, the classes of associatedenterprises undertaking the transaction and the functions performed by them.

Burden of proof and assessment

The burden of proving that the international transactions comply with the arm’slength principle lies with the taxpayer. Furthermore, the Act requires every per-son entering into an international transaction to maintain prescribed informationand documents relating to international transactions. The documentationrequirements laid down by the Indian transfer pricing regulations are detailedand prescriptive, and failure to maintain prescribed documentation attractspenalties that can extend up to 4 per cent of the value of the internationaltransaction entered into by the taxpayer.

Furthermore, every taxpayer entering into an international transaction isrequired to file a report (referred to as an accountant’s report) along with a taxreturn, setting out prescribed details in respect of international transactions andassociated enterprises. The accountant’s report forms the basis on which thetransfer pricing authorities undertake an audit. Under prevailing regulations,taxpayers reporting international transactions with associated enterprisesexceeding 50 million rupees (approximately US $ 1,100,000) are subjected to atransfer pricing audit. To the extent of transfer pricing adjustments made as aresult of the audit, taxpayers lose any tax exemption to which they are otherwiseentitled. There are also potential penalties to the extent of one-time to three-timesof the incremental tax arising as a result of any adjustment. There is a separatepenalty of 100,000 rupees (approximately US $ 2,200) for not furnishing theaccountant’s report.

Indian transfer pricing regulations are in an evolving stage, with only two yearsof audits having been completed. At present there is limited administrative

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guidance and no judicial precedent available. Furthermore, it is pertinent to notethat Indian transfer pricing regulations do not have provisions for either advancepricing arrangements or safe harbours. However, taxpayers are provided a limitedsafe harbour to the extent that the transaction value of the international trans-action can vary to the extent of 5 per cent of the arm’s length price.

Indirect taxes

The Ministry of Finance (Department of Revenue) through the CBEC (CentralBoard of Excise and Customs), an apex indirect tax authority, implements andadministers excise (central excise), customs and service tax laws. Circulars, noti-fications and clarifications issued by the CBEC supplement these indirect taxlaws. Issues involving the interpretation of tax laws are decided by the judiciary,which is independent of the legislature.

Customs Duties

Customs Duties are levied on import of goods into India at the rates specified inthe Customs Tariff Act, 1975. The effective rates of Customs Duties may varypursuant to general and/or specific exemption or concession notifications issuedby the GoI (Government of India) in this regard.

Customs duties currently comprise the following:

● BCD (Basic Customs Duty): the current general peak rate is 12.5%;

● CVD (Countervailing Duty): this duty is equivalent to central excise dutyleviable on a like product manufactured in India. The current rate applicableto the majority of the industrial products is 16 per cent plus 2% education cess,taking the effective rate to 16.32%. This duty is calculated on the value of theproduct and BCD;

● ADC (Additional Duty of Customs): this duty is levied in lieu of the Sales Tax,VAT, local taxes and other charges leviable on like goods on their sale, purchaseor transportation in India. Presently, this duty is levied at 4% on most items,with a few exceptions. This duty is levied on the value of the product, BCDand CVD.

● Education cess: this cess is levied at 2% on the amount of BCD and CVD.

In addition, the GoI also levies anti-dumping and safeguard duties on specifiedproducts to protect domestic manufacturers. These duties are levied for speci-fied periods.

Value, for the purpose of levy of Customs Duty, is a transaction at an arm’slength price between unrelated parties plus freight and landing charges.

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Import-export policy

The import of goods into and export of goods from India is regulated by the ForeignTrade Policy (the Policy) issued from time to time by the GoI. The Policy remainsin force for five years and is amended from time to time. The Policy currently inforce is for the tax year period 2004–09. The majority of goods are now freelyimportable.

Cenvat (Central excise duty)

Cenvat is levied on goods manufactured and produced in India. It is generally onan ad valorem basis at the rate of 16.32% (a basic rate of 16% and education cessof 2%). The effective rates may be lower pursuant to general/specific notificationsissued by the GoI granting whole or partial exemption from duty. The duty, inmost cases, is levied on the basis of the value of the excisable goods.

Value, for this purpose, with effect from 1 July 1 2000, is the transaction value

● which is for delivery at the time and place of removal;

● where the buyer is not a related person;

● where the price is the sole consideration.

Cenvat is payable by the manufacturer but is, ordinarily, recovered from the buyeras part of the consideration for the sale of goods. Under the Cenvat Scheme, amanufacturer can avail themselves of the Cenvat credit or additional duties ofcustoms (ie CVD) paid on specified inputs and capital goods used in the manu-facture of excisable goods. This also applies to service tax paid on eligible inputservices and utilizes it in discharging Cenvat on finished excisable goods.

VAT/Sales Tax

From 1 April 2005, 21 states of India have replaced local Sales Tax with VAT. Allthe remaining states, except the States of Uttar Pradesh and Tamil Nadu andthe Union Territory of Pondicherry, have also introduced VAT with effect from1 April 2006. VAT is not much different from local sales tax regimes except thatit captures value addition at each level of distribution network. The State VATcontinues to be a tax on the sale of goods and does not include taxation of services.The standard rate of VAT is 12.5% and there is reduced rate of 4%. Besides that,there are exemptions and rates of 1% and 20% for specified products.

State VAT is levied on the movement of goods within a state. If the sale trans-action involves the movement of goods from one state to another (inter-state), thetax is levied under the CSTA (Central Sales Tax Act), 1956. This Act also coverstransactions of the import of goods into or the export of goods out of India. SalesTax/VAT is not imposed on the import of goods into the country or the export ofgoods out of the country. The CSTA is administered by the state governments andthe tax is levied at the origination of transaction (origin-based levy). The revenuecollected under the CSTA is retained by the state governments. The rates of tax

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under the CSTA depend on the VAT rate applicable in the originating state. Thestandard rate of CST is 4 per cent or the lower rate applicable in the state of theseller if the purchaser is purchasing the same for resale or for use in manufac-turing goods for sale or for specified purposes and both the seller and buyer areregistered dealers. Otherwise, the rate is the higher of 10 per cent or the rateapplicable in the state of the seller.

States also levy tax on transactions which are ‘deemed sales’, like works con-tracts and leases. Essentially, a works contract is for carrying out work involvingsupply of labour and material where the property in the materials passes duringthe course of execution of the contract. Lease is a transaction involving the trans-fer of rights to use goods.

In addition to Sales Tax, some states also levy additional tax/surcharge,Turnover Tax or Entry Tax. Sales Tax/state VAT is payable by the seller to theGoI. Ordinarily, Sales Tax/state VAT is recovered from the buyer as a part ofconsideration for the sale of goods.

Service Tax

Service tax is levied on the notified services by the Central Government. The rateof Service Tax is currently 10 per cent. However, the Service Tax rate is scheduledto increase to 12 per cent with the enactment of the Finance Bill, 2006. Educationcess at 2 per cent is levied on the Service Tax. The effective rate of Service Taxworks out to 10.2%, which would increase to 12.24%.

Service Tax is charged on the gross value of services and is generally payableon a receipt basis. It is an indirect tax – payable by the service provider but ordi-narily recovered from the recipient of services. The law requires separate mentionof Service Tax amount in the invoices.

Ordinarily, every person liable to pay Service Tax is required to register it withthe Service Tax authorities and comply with procedural requirements like payingtaxes, filing returns, etc. However, in the case of non-resident service providerswho do not have offices in India, this burden is shifted to the recipient of theservice with effect from 16 August 2002. Further, with effect from 16 June 2005,where any taxable service is provided by a non-resident even from outside Indiaand received by a resident having a place of business in India, such service is alsodeemed to be a taxable service and liable to be taxed in the hands of the recipient.In this regard, the GoI now proposes to create specific rules that will govern thetaxability of a specific service rendered from outside India and received in India.Draft rules in this regard have already been issued for comments from theindustry.

There is a basic exemption limit of 4,00,000 rupees (US $ 8,900), which meansthat Service Tax shall be exempted for service providers providing taxable ser-vices up to the aforementioned amount. A mechanism for credit of input ServiceTax and Cenvat on specified inputs and capital goods is also in place.

Any service for which payment was received in convertible foreign exchangein India and which was not repatriated or sent outside India was exempt fromlevy of Service Tax up to 14 March 2005 (except for the period 1 March –19 November 2003 when this exemption was withdrawn). The GoI has now

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notified the new ‘Export of Service Rules 2005’, which defines what constitutes‘export of services’. These rules have been effective from 15 March 2005. Conse-quently, the exemption from Service Tax on payments received in convertibleforeign exchange has now been removed with effect from the aforementioned date.When two or more services are bundled together, it would be classifiable underthe category that gives essential character to the service. Classification rules arein place from 14 May 2003. If, in case of composite activities, one or more of theactivities are liable to Service Tax and others are not, Service Tax would ordinarilybe payable only on the charges received for the services to which the tax is appli-cable. This is provided charges for each activity can be separately identified/determined and it is not incidental to the main service.

Service Tax/Cenvat incurred on input services/goods are available as creditwhich can be used as a set-off against output Service Tax liability. However, withrespect to common service/inputs allocation principles have not been well articu-lated in law. The language of the law is broad and generic and uses terms such as‘directly or indirectly’ and ‘in any manner’, which raise a number of issues regard-ing the scope of the specific category of service. Revenue authorities have beenissuing explanatory circulars from time to time in relation to specific issues. Yetthere remains considerable ambiguity in the applicability of the Service Tax lawto various services.

Service Tax is currently levied on 81 notified categories of services. A total of15 more taxable services will be covered by enactment of the Finance Bill, 2006.

Octroi Duty

Octroi Duty is a local authority levy, which is imposed on the entry of goods intoa municipal/local area for use, consumption or sale. This is only applicable in afew states.

Entry Tax

Some of the states impose Entry Tax on the entry of goods within state limits foruse, consumption or sale. Again, the rates vary from state to state. Generally,Entry Tax paid in a state is eligible for claiming as input tax credit against stateVAT/CST liability of that state.

Research and development cess

A research and development cess is a special levy at a rate of 5 per cent on allpayments made for the purchase of technology from abroad, including royaltypayments, payments for technicians, lump-sum payments, and payments fordesign and drawings. The cess is required to be paid by the importer before remit-ting any money towards payment of such imports.

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Repatriation of foreign exchange

The FEMA (Foreign Exchange Management Act), 1999 forms the statutory basisfor exchange control management in India. The RBI (Reserve Bank of India)administers the exchange management regulations for the GoI.

India does not have full capital account convertibility as yet. However, therehave been significant relaxations in the recent past in both current accounts aswell as capital accounts, related to the withdrawal of foreign exchange. Paymentsmade in connection with services procured in the ordinary course of business areregarded as current account transactions, provided such payments do not alterpayer’s assets and liabilities outside of India. Withdrawal of foreign exchange forcurrent account transactions is regulated as follows.

Completely prohibited

Prescribed Schedule

Drawal of ForeignExchange

Approving Authority

Prior approval if it exceedsthe prescibed limits

All othercurrent account

transactions

N.A.

Prior approval if it exceedsthe prescribed limits

No limits

Concerned Ministry/Department of Government

Reserve Bank of India (’RBI’)

No approval required

I

II

III

Figure 3.3.1: Withdrawal of foreign exchange for current account transactions

In the case of some of the transactions listed in Schedule II and III, prior approvalis not required if the payment is made out of funds held in the EEFC (ExchangeEarner’s Foreign Currency) account of the remitter. It is clarified by the RBI thatremittances for all current account transactions, other than those prescribed inaforesaid schedules, may be made without any specific approval. Some of the rel-evant current account payments are discussed below.

Dividends

Dividends can be remitted without any specific approval from the RBI.

Royalty payments under technical collaboration

Royalty payments under technical collaboration are covered under Schedule II asshown in the Figure below.

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Remittance under technicalcollaboration agreements where:

payment of royalty exceeds5% on local sales and 8% onexports: orlump-sum payment exceedsUSD 2 million.

Prescribed Schedule

Schedule II Prior approval of Ministry ofIndustry and Commerce

Nature of Remittance Approving Authority

•

•

Figure 3.3.2: Royalty payments under technical collaboration

However, no approval is necessary if remittance is made out of EEFC account ofthe remitter.

Under FDI (Foreign Direct Investment) guidelines, an Indian company can alsopay brand royalty (on use of trademarks and brand name of the foreign collabo-rator without technology transfer) under automatic route to the extent of 2% forexports and 1% for domestic sales.

In the case of technology transfers, the payment for the use of trademark andbrand name subsumes into the technical know-how royalty and therefore addi-tional brand royalties cannot be paid.

Consultancy services

Remittances for any consultancy service procured from outside India and notinvolving transfer of technology are covered in Schedule III. Remittance up toUS $ 1 million per project can be made without any approval of the RBI. However,no such approval is necessary if remittance is made out of the EEFC account ofthe remitter.

Import of goods

Payments in connection with the import of goods and services in the ordinarycourse of business are generally permissible and can be undertaken freely throughthe direct filing of required documents with the authorized dealer/banker. Theguidelines for imports contain specific provisions relating to the period of settle-ment, charging of interest, etc.

Repatriation of capital

Foreign capital invested in India is generally allowed to be repatriated, along withcapital appreciation, if any, after the payment of taxes due on them. Generally,the repatriation of capital may take place in the following scenarios:

● the winding up of the company in India;

● the sale of shares in the company to a third party.

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Netting

Foreign receivables and payables are not permitted to be netted off and the Indiancompany is obliged to realize the entire export proceeds and pay for the import ofgoods and services separately. Specific relaxation exists in the regulations forsome cases. The RBI also gives case-specific approvals based on industry practiceand internal norms.

Other remittances

1. No prior approval is required for remitting profits earned by Indian branchesof companies (other than banks) incorporated outside India to their headoffices outside India.

2. Remittances of winding-up proceeds of a project office of a foreign companyin India are permitted under the automatic route subject to fulfillment ofnecessary compliances.

3. Winding-up proceeds of a branch/liaison office of a foreign company in Indiaare permitted subject to RBI approval.

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Part Four

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4.1

Available Legal Structures

Titus & Co., Advocates

Foreign entrepreneurs can follow one of the several investment routes to set upcommercial establishments in India and take advantage of the rapidly growingeconomy, increasing size and purchasing power of the domestic market andwidening business opportunities being offered by the country.

In addition, India’s dynamic and competitive private sector accounting for over75 per cent of the country’s GDP (Gross Domestic Product) presents to overseasentrepreneurs considerable scope for joint ventures and collaborations.

Legal Structures

A foreign company interested in doing business in India can enter the countrythrough one of the following routes:

● open a liaison office;

● set up a branch office;

● incorporate a company.

Liaison offices

Liaison offices which act as channels of communication between the principalplace of business or head office and entities in India, maintain themselves out ofinward remittances received from abroad through normal banking channels.

A foreign company can set up a liaison or representative office in India afterobtaining prior approval of the RBI (Reserve Bank of India) under the ForeignExchange Management (Establishment in India of a Branch or Office or otherPlace of Business) Regulations, 2000.

A liaison office can be the preferred choice when the intention of the foreigncompany is limited to liaising with its customers in India and to promote exportand import. However, as no manufacturing, trading or any other commercialactivity is allowed by a liaison office, it can neither generate any revenue/incomein India nor repatriate any money out of India except winding up proceeds afterclosure of the liaison office.

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Permitted activitiesA liaison office is only permitted to undertake the following activities:

● representation of the parent company/group companies in India;

● promotion of export and import from/to India;

● promotion of technical/financial collaborations between parent/group compa-nies and companies in India;

● acting as a communication channel between the parent company and Indiancompanies.

In essence, a foreign company may, with the prior approval of the RBI, set up aliaison office in India, which will be allowed to function only as a non-trading andnon-revenue earning office. The option to open a liaison office is often viewed asthe first step towards exploring the investment climate and business opportuni-ties in India.

Tax leviedFor purposes of taxation, a liaison office is treated as a distinct taxable entity,separate from its non-Indian components. Since a liaison office cannot undertakeany commercial activity, it makes no profit and therefore no corporate tax is leviedon it. However, expenses of a liaison office which fall under transfer pricing reg-ulations (ie related party transactions) may be subjected to tax @ 41.82 per cent.A liaison office may also be liable to pay tax on ‘fringe benefits’ provided or deemedto have been provided by the office to its employees in India. Fringe benefitsinclude boarding and lodging expenses, travel expenses etc, which are providedor deemed to have been provided by an employer to its employee. Fringe BenefitsTax is levied @ 31.365 per cent on the value of the fringe benefits provided by aliaison office to its employees in India.

Branch offices

An Indian branch office of a foreign company can be set up with the prior approvalof the RBI under the Regulations. A branch office, as defined by Section 2(9) ofthe CA56 (Companies Act, 1956), in relation to a company means:

● any establishment described as a branch by the company;

● any establishment carrying on either the same or substantially the same activ-ity as is carried on by the head office of the company;

● any establishment engaged in any production, processing or manufacture.

A branch is basically an extended arm of a foreign company and can undertakevarious activities on behalf of the parent company. A branch, however, is notallowed to undertake any manufacturing activity independent of the parent com-pany. The foreign parent company is liable for all activities of its Indian branch.

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Due to restrictions in day-to-day operations and higher incidence of taxation,opening a branch office is not a popular route to enter India.

Permitted activitiesA branch office is only permitted to undertake the following activities:

● export/import of goods;

● rendering professional or consultancy services;

● carrying out research work, in which the parent company is engaged;

● promoting technical or financial collaboration between Indian companies andparent or overseas group companies;

● representing the parent company in India and acting as a buying/selling agentin India;

● rendering services in information technology and development of software inIndia;

● rendering technical support to the products supplied by parent/groupcompanies;

● representing foreign airline/shipping company.

Tax leviedFor purposes of taxation, a branch office is treated as a distinct taxable entity,separate from its non-Indian components. Profits made in India are liable tobe taxed at 40 per cent (plus a surcharge of 2.5 per cent) for the tax year ending31 March 2007.

Company

Indian laws allow foreign companies to set up permanent establishments in thecountry in the form of companies to run business operations. When a foreign com-pany has wider business plans and does not merely intend to establish its presencein India (through liaison or branch offices), then it would normally opt for incor-porating a company in India. This allows a foreign company the flexibility toengage in different business activities in India, exercise due control over the day-to-day affairs of the company, own properties in India and repatriate returns inthe form of dividends which are tax-free in the hands of shareholders.

Foreign investors can incorporate companies in India either as a WOS (whollyowned subsidiary) of the parent company (ie 100 per cent owned and controlledby the foreign parent company) or a JV (joint venture) company along with anIndian partner. The WOSs and JVs would be governed by the provisions of theCA56, which was enacted half a century ago to oversee the functioning of corpo-rations in India. The CA56 draws heavily from the Companies Act of the UnitedKingdom. The WOS and JVs incorporated in India are treated on a par with

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domestic Indian companies and are required to abide by all applicable Indianlaws.

Types of companiesIn India, a company can be incorporated either as private or public. It can thenbe further classified as a limited or unlimited liability company. A company canbe limited by shares or by guarantee. In the former, the personal liability of mem-bers is limited to the amount unpaid on their shares, whilst in the latter thepersonal liability is limited to a pre-determined amount.

The key distinguishing features of a private company and a public companyare:

1. A minimum of seven shareholders (subscribers) are required to form a publiccompany, whereas in the case of a private company only two shareholders(subscribers) can incorporate a company.

2. A private company must have a minimum paid-up capital of 100,000 rupees,whereas a public company must have a minimum paid-up capital of 500,000rupees.

3. There is no ceiling on the number of shareholders of a public company,whereas in the case of a private company the number of shareholders cannotexceed 50. The joint holders are counted as one shareholder for this purpose.

4. A public company can invite the public to subscribe to its share capital,whereas a private company is prohibited from doing so.

5. The shares of a public company are freely transferable, whereas transfer ofshares of a private company is subject to restrictions provided in its AoA(Articles of Association).

6. A public company can accept/renew deposits from the public, whereas a pri-vate company cannot, except from its members, directors or their relatives.

7. A private company can commence business immediately after incorporationbut a public company cannot do so till the certificate for commencement ofbusiness is granted to it by the RoC (Registrar of Companies).

Wholly Owned Subsidiaries and Joint Ventures

WOSs and JVs are the most sought after routes for foreign companies wanting toestablish a base in India. For this, an Indian company with limited liability isincorporated in India. The liabilities of the company may be limited to Indianoperations only. Depending upon the business sector, a foreign company caninvest in India either under the automatic route (ie without any regulatoryapproval) or under the pre-approved FIPB (Foreign Investment Promotion Board)route in terms of the FDI (Foreign Direct Investment) Policy of the GoI (Govern-ment of India).

Similarly, JVs can be set up in India subject to the regulatory framework andsectoral investment caps prescribed in the FDI Policy. The equity ownership

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between two partners of a JVC (joint venture company) can be in the ratio of 50:50where both parties have equal voting rights and powers, 51:49 where one of theparties has a slight voting edge and can generally resolve matters in its favour bysimple majority, or 76:24 where the majority party has ‘super majority’, which isneeded to pass special resolutions in terms of the CA56. Further, the JVs can beset up as financial collaborations (ie equity participation) or technical collabora-tions wherein one of the partners supplies technology and know-how to run thebusiness or as a combination of both financial and technical collaboration. Indianlaws allow enough flexibility to foreign partners to structure their investment inthe most preferred form.

The liberalized FDI Policy permits foreign investment in almost all the sectorsand also allows repatriation of profits in the form of dividends to the parent com-panies outside India. It is also possible for a parent company outside India toexercise control over the day-to-day affairs of the WOS or the JVC as Indian lawsallow non-residents to occupy key management positions in companies in India.

Procedure for incorporationA company can be incorporated in India by making certain prescribed filings withthe concerned RoC in the state in which the company is to be incorporated. TheRoC first approves the proposed name of the company and thereafter allows incor-poration of a company after approving its by-laws, ie the Memorandum of Asso-ciation (MoA’s) and Articles of Assocation (AoA’s) of the company.

The incorporation process takes around 30–45 working days. On receiving theCertificate of Incorporation (in the case of a private company) and the Certificateof Commencement of Business (in the case of a public company), the WOS or theJVC (as the case may be) can commence business operations in India.

Thus, a foreign company may consider establishment of a private limited com-pany in India as its WOS or JVC since it has perpetual succession. Unlike a branchor liaison office it does not require any further approval from any other regulatoryauthority for its continued existence or expansion of its activities.

Typical issuesSome of the typical issues for consideration in setting up a WOS or a JVC are asfollows:

1. Shareholding pattern and board constitution: A foreign investor can struc-ture the shareholding of a company and the composition of the board ofdirectors within the parameters set out in the CA56. Private companies enjoygreater flexibility in terms of shareholders’ rights and constitution of theboard of directors in comparison to public companies.

2. Exit mechanism: A foreign investor must also draw a suitable exit strategywith respect to the WOS or the JVC. The exit strategy may include winding-up, transfer of shares, put and call options, reduction of share capital etc.

3. Governing law/jurisdiction: Indian courts respect and honour the choice oflaw and jurisdiction expressly agreed between the parties. Where the partieshave actually expressed their intention on a matter, their intention will be

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effectuated. The only limitation on this rule is that the intention of the par-ties must be expressed, bona fide, and should not be opposed to the Indianpublic policy. However, in instances where the overriding balance of conve-nience and interest of justice are in favour of adjudication of dispute by anIndian court, the court will entertain the suit.

4. Dispute resolution: The focus of a foreign investor while drafting clausespertaining to dispute resolution should be on resolving differences througharbitration as it has a distinctive edge over ordinary process of litigation. Itis also necessary to ensure that the resulting judgement or award can beenforced in India as a decree of an Indian court. For example, a judgementis enforceable in India if it has been delivered by a superior court in a recip-rocating territory1 as notified by the GoI. Similarly, a foreign arbitral awardis enforceable in India if the arbitration award was delivered in a territorywhich is a party to, and has ratified the New York Convention of 1958 on theRecognition and Enforcement of Foreign Arbitral Awards, or the GenevaConvention on the Execution of Foreign Arbitral Awards, 1927.

Tax on WOSs and JVsThe profits earned by companies incorporated in India are subject to a lowertax rate of 33.66 per cent (including 30 per cent corporate tax, 10 per centsurcharge and 2 per cent education cess) for the tax year ending 31 March 2007,in comparison to branch offices of foreign companies. In addition, companies aresubject to Fringe Benefits Tax, Withholding Tax, Dividend Distribution Tax etcand are also required to comply with other tax regulations provided in the IncomeTax Act, 1961.

Conclusion

Taking advantage of the business opportunities that India offers, several Fortune500 companies have established a presence in the country through subsidiaries,joint ventures and technical collaborations. It is now time for others, especiallysmall and medium enterprises, to join the race, follow the route that suits themthe best and fruitfully tap the growing business opportunities in India.

1 All courts in Hong Kong, Singapore, Aden, Fiji, Trinidad & Tobago, New Zealand, Papua NewGuinea and Bangladesh have been notified as superior courts. In the United Kingdom, the house ofLords, Courts of Appeals, the High Court of England, the High Court of Northern Ireland, the Courtof Session in Scotland, the Court of Chancery of the County Palatine of Lanchester and of Durhamare notified as superior courts.

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4.2

Investment Facilities forNRIs / PIOs and OtherForeign Investors

Titus & Co., Advocates

To attract investment from Indian people living abroad the Indian Governmenthas over the years significantly relaxed the regulatory norms for FDI (foreigndirect investment), portfolio investment and real estate investment by NRIs(Non-Resident Indians) and PIOs (Persons of Indian Origin).

India also relaxed the investment procedure for other foreign investors as partof the ongoing economic liberalization and globalization process initiated by theGovernment about 15 years ago.

Presently, apart from the few restricted activities, India welcomes foreigninvestment in almost all sectors either under the “automatic route” or the “Gov-ernment approval route” subject to certain guidelines and investment caps. Todaythese sectoral investment caps too are being gradually lifted.

NRIs/PIOs

An NRI, according to the RBI (Reserve Bank of India) guidelines, is a person whois a citizen of India but resides abroad.

As regards PIO, for the purposes of opening and maintenance of various typesof bank accounts and making investment in shares and securities in India a for-eign citizen (not being a citizen of Pakistan or Bangladesh) can be a PIO if:

● he at any time held an Indian passport: or

● he or either of his parents or any of his grandparents was a citizen of India byvirtue of the Constitution of India or the Citizenship Act, 1955.

● the person is an spouse of an Indian citizen (or persons referred in the earliertwo categories).

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For the purpose of acquisition and transfer of immovable property a PIOmust not be a citizen of Sri Lanka or Afghanistan or China or Iran or Nepal orBhutan.

SPECIAL FACILITIES

The Indian government offers special investment and banking facilities to NRIs/PIOs which are as follows:

(i) Investment on repatriation basis: The government allows NRIs/PIOs toinvest in India on a repatriation as well as a non-repatriation basis. Thefacility to invest on a non-repatriation basis, it should be noted, is not avail-able to other foreign investors. NRIs/PIOs as stipulated by the RBI caninvest on a repatriation basis in:

• Government dated securities/treasury bills.

• Units of domestic mutual funds.

• Bonds issued by a Public Sector Undertaking in India.

• Non-convertible debentures of a company incorporated in India.

• Shares in Public Sector Enterprises being disinvested by the Indian gov-ernment, provided the purchase is in accordance with the terms andconditions stipulated in the notice inviting bids.

• Shares and convertible debentures of Indian companies under the FDIscheme (including Automatic Route & FIPB (Foreign Investment Promo-tion Board) scheme).

• Shares and convertible debentures of Indian companies through the stockexchange under the PIS (Portfolio Investment Scheme).

• Perpetual debt instruments and debt capital instruments issued by banksin India.

(ii) Investment on a non-repatriation basis: NRIs/PIOs on a non-repatriationbasis can invest into a wide variety of instruments which include:

• Government dated securities (other than bearer securities)/treasury bills.

• Units of domestic mutual funds.

• Units of Money Market Mutual Funds in India.

• Non-convertible debentures of a company incorporated in India.

• The capital of a partnership firm or proprietary concern in India,not engaged in any agricultural or plantation activity or real estatebusiness.

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• Deposits with a company registered under the Companies Act, 1956 includ-ing an NBFC (Non-Bank Financial Company) registered with RBI, or abody corporate created under an act of Parliament or State Legislature, aproprietorship concern or a partnership firm.

• Shares and convertible debentures of Indian companies other than underthe PIS.

(iii) Purchase of immovable property: NRIs/PIOs are allowed to acquire in Indiaimmovable property other than agricultural/plantation property or a farm-house out of repatriable or non-repatriable funds. There are no restrictionson the number of properties which an NRI/PIO can acquire and hold in India.He is also not required to file any document with the RBI in this regard.NRIs/PIOs can also acquire commercial or residential property by way of agift from persons living in India or another NRI or PIO. A foreign nationalof non-Indian origin resident outside India cannot purchase any immovableproperty in India.An NRI is permitted to sell commercial/residential property to a person res-ident in India or another NRI or PIO. A PIO, however, can sell his propertyonly to a resident and not to another NRI. As far as agricultural land, plan-tation property or farm houses are concerned, an NRI/PIO can sell/gift themonly to residents.

NRIs/PIOs are also allowed to repatriate sale proceeds of immovable propertysubject to certain conditions. The first being that the commercial/residential prop-erty must have been acquired by way of inward remittances through normalbanking channels or by debit to NRE (Non-Resident (External) Rupee)/FCNR(B)(Foreign Currency Non-Resident (Bank)) account. Secondly, the amount to berepatriated should not exceed the amount paid for acquisition of the property.And thirdly, the amount remitted should not exceed US $ 1 million in a calendaryear.

(iv) Banking facilities for NRIs/PIOs: The RBI allows NRIs/ PIOs to open andoperate the following bank accounts in India:

Non-Resident (External) Rupee (NRE) Account: Under the scheme, NRIs/PIOscan open authorized dealers savings account. The interest rate on these accountsis the same as paid on domestic savings deposit by Indian banks. For the NREterm deposit schemes ranging from one year to three years, the interest rates onrepatriable deposits may go up to 75 basis points over LIBOR (London InterbankOffered Rate). The method for determination of interest rates will also apply toterm deposits with a maturity period of more than three years. Individuals andentities from Bangladesh or Pakistan subject to prior approval of the RBI can alsoopen an NRE account under the scheme with authorized dealers.

Foreign Currency Non-Resident (Bank) Account: Deposits under this accountcan be made with authorized dealers in six specified currencies which include USDollar, Pound Sterling, Euro, Japanese Yen, Australian Dollar and CanadianDollar. The maturity for such deposits can vary from one year to five years. The

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interest rates which may either be fixed or floating, are required to be within theceiling rate of LIBOR minus 25 basis points for respective currencies except forJapanese Yen for which the prevailing LIBOR will be the cap.

Non-Resident Ordinary (NRO) Rupee Account: Under this scheme any personresident outside India (including NRIs/PIOs) can open savings, current, recurringor fixed deposit account with authorized dealers. These accounts are normallyoperated for crediting rupee earnings/income such as dividends and interest. Thecurrent interest rate for a savings account is 3.5 percent. The banks are free todetermine interest rates for term deposits. The authorized dealers can allowremittances up to US $ 1 million for bona fide purposes, per calendar year frombalances in NRO accounts subject to payment of taxes.

(v) Facilities for returning NRIs/PIOs: The RBI regulations allow returningNRIs/PIOs to continue to own and invest in foreign currency, foreign securityor any immovable property situated outside India, if such investments aremade from funds acquired during the stay abroad. They are also permittedto maintain with an authorized dealer in India a RFC (Resident ForeignCurrency) Account to transfer balances held in NRE/FCNR(B) accounts.Proceeds of assets held outside India at the time of return can also be creditedto the RFC account.

INVESTMENT ROUTES

Under the liberalized investment regime a foreign investor (other than a citizen/corporate entity of Pakistan or Bangladesh) has the general permission to investin India through purchase of shares, convertible debentures or preference sharesof an Indian company. These investments, however, are subject to the guidelinesissued by the Ministry of Commerce and Industry.

An investor can choose one of the following two FDI routes, depending upon thesector and size of the investment.

The automatic route

Under the automatic route, an Indian company can issue shares/convertibledebentures to a foreign company and receive inward remittances without priorapproval of any agency provided the investment is within the sectoral cap pre-scribed by the Ministry of Commerce and Industry.

Foreign investment in all items/activities is allowed under the automatic routeexcept the following:

● all proposals that require an industrial license – these include the items thatcan only be produced after obtaining the requisite license under the Industries(Development & Regulation) Act, 1951;

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● foreign investment being more than 24 per cent in the equity capital of unitsmanufacturing items reserved for small scale industries;

● all items that require an industrial license in terms of the locational policynotified by the government under the New Industrial Policy of 1991;

● all proposals in which the foreign collaborator had a previous venture/tie-up inIndia;

● all proposals falling outside the notified sectoral policy/caps or under a sectorin which FDI is not permitted and/or whenever any investor chooses to makean application to the SIA for not availing the automatic route.

Illustrative listThe Ministry of Commerce and Industry provides an illustrative list of sectorswhich can attract FDI up to 100 per cent under the automatic route. The list is asfollows:

● most manufacturing activities;

● non-banking financial services;

● drugs and pharmaceuticals;

● food processing;

● electronic hardware;

● software development;

● film industry;

● advertising;

● hospitals;

● private oil refineries;

● pollution control and management;

● exploration and mining of minerals other than diamonds and precious stones;

● management consultancy;

● venture capital funds/companies;

● setting up/development of industrial parks/model towns/Special EconomicZones;

● petroleum products pipeline.

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In the infrastructure sector, the following activities are allowed under the auto-matic route:

● electricity generation (except atomic energy);

● electricity transmission;

● mass rapid transport system;

● roads and highways;

● toll roads;

● vehicular bridges;

● ports and harbours;

● hotel and tourism;

● township, housing, built-up infrastructure and construction developmentprojects.

In the services sector, the following activities are allowed under the automaticroute:

● computer-related services;

● research and development services;

● construction-related engineering services;

● urban planning and landscape services;

● architectural services;

● health-related and social services;

● travel-related services;

● road transport services;

● maritime transport services;

● internal waterways services.

Furthermore, the Ministry of Commerce and Industry reviewed the FDI Policy inFebruary 2006 and came out with Press Note 4 (2006 series), allowing 100 percentFDI through the automatic route for the following activities:

● the distillation and brewing of potable alcohol;

● the manufacture of hazardous chemicals;

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● the manufacture of industrial explosives;

● the manufacturing activities located within 25 kilometers of the standardurban area limits that require industrial license under the Industries (Devel-opment & Regulation) Act, 1951;

● the setting up greenfield airport projects;

● the laying of natural gas/LNG (Liquefied Natural Gas) pipelines, market studyand formulation;

● investment financing in the petroleum and natural gas sector;

● cash and carry wholesale trading and export trading;

● coal and lignite mining for captive consumption;

● the setting up of infrastructure relating to marketing in the petroleum andnatural gas sector;

● the exploration and mining of diamonds and precious stones;

● power trading subject to compliance with regulations under the Electricity Act,2003;

● the processing and warehousing of coffee and rubber.

The government approval route

The following activities are not permitted under the automatic route and thusrequire the government approval for FDI:

● the petroleum sector (except for private sector oil refining, natural gas/LNGpipelines);

● investing companies in the infrastructure and services sector;

● atomic minerals;

● print media;

● broadcasting;

● postal services;

● courier services;

● the establishment and operation of satellite;

● the development of integrated townships;

● the tea sector;

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● asset reconstruction companies;

● single brand retail trading.

For investment in the aforementioned activities, an investor has to approach theSIA (Secretariat for Industrial Assistance), the Department of Industrial Policyand Promotion, the Ministry of Commerce and Industry, New Delhi for necessarypermission. In doubtful cases where it is not clear whether the sector is withinthe ambit of the automatic route, it would be advisable to obtain the approval ofthe SIA.

In certain sectors, FDI proposals are also required to be vetted by the concernedministries or agencies. For instance, an investor cannot set up an insurance com-pany without obtaining a license from the Insurance Regulatory and DevelopmentAuthority, although 26 per cent of FDI is allowed in this sector under theautomatic route. Similarly, an investor in the telecommunications sector isrequired to obtain the approval of the Department of Telecommunication.

The foreign investment proposals which are processed in an objectiveand transparent manner by the SIA are usually approved within four to sixweeks.

Prohibited sectors

The sectors which are completely banned for foreign investment in India are asfollows:

● chit fund companies2;

● Nidhi companies3;

● lottery business;

● atomic energy;

● gambling and betting.

Residual category

The FDI Policy of the government further provides that the foreign investment inthe residual category (ie such business activities that do not fall under the auto-matic route, the government approval route or the prohibited sector) will beallowed without any restrictions (ie up to 100 per cent) and approvals.

2 A chit fund company invites subscribers to contribute a fixed sum of money by way of periodicalsubscriptions and allows each subscriber in turn to take out the prize money through auction or anyother method. Chit fund companies are governed by the provisions of the Chit Funds Act, 1982.3 Nidhi companies, also described as Mutual Benefit Societies by the Companies Act, 1956, enablemembers to save money, invest their savings in such companies and secure loans at favourable ratesof interest from them.

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Conclusion

The GoI has significantly liberalized the FDI Policy over the years, resulting in alarge increase in inflow of foreign investment into the country. High economicgrowth and rapidly increasing demand for quality goods and services are expectedto make India an even more attractive destination for foreign investment.

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4.3

Mergers andAcquisitions

Titus & Co., Advocates

Mergers and acquisitions are considered to be well accepted growth strategiesadopted by companies seeking to achieve economies of scale, increase marketshare, diversify product range and explore new markets. Other considerations formergers and acquisitions include backward/forward integration of operations,access to tax advantages, managerial talent, additional financing, research anddevelopment capabilities, and the ability to compete favourably.

A merger (also referred to as an amalgamation in this chapter), in the Indiancontext, comes under the wide ambit of an ‘arrangement’ in terms of which theshare capital of a company is reorganized by an amalgamation of two or morecompanies. There may be an amalgamation either by the transfer of two or morecompanies to a new company or by the transfer of one or more undertakings to anexisting company. Pursuant to the amalgamation, the transferor company ceasesto have an identity and the rights and liabilities are amalgamated in the trans-feree company. Acquisition, on the other hand, is the purchase of assets orcontrolling interest in the share capital of an existing company by another existingcompany.

This chapter primarily focuses only on legal and regulatory considerations forM&A (mergers and acquisitions) in India.

Mergers and amalgamations

An amalgamation is regulated by the CA56 (Companies Act, 1956) and the Com-pany (Court) Rules, 1959 (Rules). A company may merge with another corporatebody, whether an Indian company or not, provided the surviving entity of themerger is a company within the meaning of the CA56. A scheme of amalgamationrequires the sanction of the High Court (Court). The process to obtain the approvalof the Court under the CA56 and the Rules is as follows:

1. Application to the Court for convening meetings of members/creditors

After preparing the scheme of amalgamation, an application is made to theCourt seeking directions for convening meetings of the members (or any class

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of them) and/or creditors (or any class of them) of the company to consider andapprove the proposal. The application may be made by the company or anycreditor or member of the company. Separate applications by way of Judge’ssummons are required to be made by the amalgamating companies to theCourt. If the registered offices of the amalgamating companies are situated inthe same state/territory over which the same Court has territorial jurisdiction,then one company may file an application and join the other company as a partysince there is an identity of interest between the transferor company and thetransferee company. A joint application may also be filed. Notice of the appli-cation is required to be given to the regional director. The Court is also expectedto take into consideration the representations, if any, made by the regionaldirector, before passing an order.

2. Members and creditors’ meeting

On hearing the application, the Court may (i) pass an order directing the amal-gamating companies to convene separate meetings of their respective members(or class thereof) and/or creditors (or class thereof), on the date, time, venueand quorum fixed for the meetings by the Court, and (ii) appoint chairmen topreside over the meetings. Notices of the meetings of members and creditorsare required to be advertised in such newspapers and in such manner asthe Court may direct, but not less than 21 days before the date fixed for themeetings.

At these meetings, the scheme of amalgamation should be approved by therequisite majority4. Pursuant to the meetings, the chairman of each meeting isrequired to file his report within the time stipulated by the High Court or if notime is stipulated, within a period of seven days from the date of the meeting.Within seven days of the filing of the report by the chairman, each company isrequired to file with the RoC (Registrar of Companies) resolutions passed atthe meeting of its members approving the scheme of amalgamation.

3. Final petition for confirmation of scheme of amalgamation

Within seven days of the submission of the chairman’s report, a final petitionshould be filed with the Court for confirming the scheme of amalgamation, andpraying for appropriate orders and directions under Section 394 of the CA56.The Court will fix a date for hearing the petition, and notice of the hearingwill be required to be advertised in the same newspaper(s) in which thenotice for the calling of the meeting of members and creditors was pub-lished. This should be done not less than 10 days before the date fixed for thehearing.

Whilst considering the scheme of amalgamation, the Court has to be satisfiedthat the applicant has disclosed to the Court by affidavit all material facts re-lating to the company, such as the latest financial position of the company, the

4 The requisite majority is three-quarters in value of the creditors, or class of creditors, or mem-bers, or class of members (as the case may be), present and voting either in person or, where proxiesare allowed, by proxy, at the meeting.

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pendency of any investigation proceedings by the CLB (Company Law Board)in relation to the company under certain provisions of the CA56. In addition,the Court has to be satisfied, among other things, that:

● the scheme put up for sanction of the Court is backed by the requisite majorityvote;

● the amalgamation scheme does not violate any provisions of law or is contraryto public policy and the scheme is fair, just and reasonable as a commercialproposition;

● the share exchange ratio is just, proper, and beneficial to the interests of theshareholders.

Once the aforesaid parameters are met and if the Court receives no adverserepresentation from the regional director, the Court may sanction the schemeand pass such orders and directions for the proper working of the scheme. Thisincludes the transfer of property or liabilities of one company to another (notincluding the power to enforce the transfer of contracts of service or of therights, duties or powers of an executor), the dissolution of the transferor com-pany without the procedure of winding-up, and the allotment of shares, deben-tures or other like interests, etc.

Thereafter, the amalgamating companies would be required to file the order(s)of the Court sanctioning the scheme of amalgamation with the RoC havingjurisdictions over their respective registered offices within 30 days. Upon filingwith the RoC, the order of the Court becomes effective and legally binding.

An order of the Court sanctioning a scheme of amalgamation, being in effecta conveyance, is an instrument liable to stamp duty which varies from state tostate.

Acquisitions

Acquisitions may either be in the form of acquisition of shares or acquisition ofassets. As acquisition of assets involves complexities and payment of stamp duty,companies usually prefer to acquire a company by acquiring its shares.

1. Foreign Investment Promotion Board and Reserve Bank approvals

As per the recent FDI Policy (Foreign Direct Investment) of the GoI (Govern-ment of India), a proposal for the acquisition of shares of an existing Indiancompany by a foreign company will neither require the prior approval of theFIPB (Foreign Investment Promotion Board) nor the RBI (Reserve Bank ofIndia) in sectors other than financial services (ie banks, non-banking financialservices and insurance), provided the following conditions are satisfied:

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i. The activities of the investee company are under the automatic route of theFDI Policy and do not attract the provisions of SEBI (Securities andExchange Board of India) (Substantial Acquisition of Shares andTakeovers) Regulations, 1997 (Takeover Regulations).

ii. The non-resident shareholding, after the transfer, complies with sectorallimits under FDI Policy.

iii. The price at which the transfer takes place is in accordance with the pricingguidelines prescribed by SEBI/RBI.

The onus of complying with the foregoing conditions lies both with the residentseller and the non-resident buyer.

The RBI further provides that the price at which shares can be acquired bya foreign company from a resident shareholder must not be less than:

● the ruling market price in case the shares are listed on stock exchange;

● the fair valuation of shares done by a chartered accountant as per the guide-lines issued by the erstwhile controller of capital issues in case of unlistedshares.

If the price of the acquisition of shares is less than the pricing guidelinesdescribed above, the parties will have to obtain the prior approval of the RBI,justifying the deviation from the pricing guidelines.

However, in terms of the Foreign Exchange Management (Transfer or issueof a security by a person resident outside India) Regulations, 2000 (Regula-tions), no approval of the FIPB is required for sale and transfer of shares of anIndian company by a person resident outside India to another person residentoutside India. This facility is subject to the condition that the transferee doesnot have a previous venture or investment in India in shares or debentures ora technical collaboration or trademark agreement in the same field in whichthe Indian company whose shares are being acquired is engaged. Two compa-nies are said to be engaged in the ‘same field’ if their activities fall under thesame four-digit NIC (National Industrial Classification Code) of 1987.

2. Compliance with the SEBI Act, 1992

Acquisition of the shares of a listed company (Target Company) will attract theprovisions of the SEBI’s Takeover Regulations, which have been recentlyamended to facilitate M&A transactions in India. The highlights of applicableTakeover Regulations are discussed below:

i. Acquisition of more than 5%, 10%, 14%, 54% or 74% shareholding or votingrights: when an acquirer acquires shares or voting rights which (takentogether with shares or voting rights if any already held by him) wouldentitle him to exercise more than 5%, 10%, 14%, 54% or 74% shares or vot-ing rights in a company, the acquirer is required to disclose at every stageof the acquisition, the aggregate of its shareholding or voting rights in the

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Target Company to the Target Company and the stock exchanges wherethe shares of the Target Company are listed.

ii. Acquisition of 15% or more shareholding or voting rights: when an acquireracquires shares or voting rights which (taken together with shares or votingrights if any already held by him or by persons acting in concert with him)would entitle him to exercise 15% or more of voting rights in a company,the acquirer is required to make a public offer (ie to purchase shares of aminimum 20% of the voting share capital of the Target Company frommembers of the public) to acquire shares.

iii. Consolidation of holding: under this stipulation, no acquirer who (togetherwith persons acting in concert with him) has acquired 15% or more but lessthan 55% of shares or voting rights in a company, will acquire additionalshares/voting rights entitling him to exercise more than 5% of the votingrights in any financial year ending on 31 March, unless he makes a publicoffer to acquire shares. It has been further stipulated that an acquirer who(together with persons acting in concert) has acquired 55% or more but lessthan 75% of shares or voting rights in a Target Company, may acquireadditional shares or voting rights without making a public offer to acquireshares.

The making of a public offer by an acquirer broadly involves the following steps:

(a) appoint a Category I Merchant Banker5 registered with the SEBI;

(b) make a public announcement of an offer (containing, inter alia, details ofthe minimum offer price) through the Merchant Banker (in one Englishlanguage national daily newspaper and one Hindi national daily newspa-per and one regional language daily newspaper with wide circulation, atthe place where the registered office of the Target Company is situated andat the place of the stock exchange where the shares of the Target Companyare most frequently traded) within four working days of the acquirer enter-ing into the agreement for the purchase of shares of the Target Company;

(c) send a copy of the public announcement to the SEBI through the MerchantBanker and to all the stock exchanges where the Target Company is listed;

(d) submit a draft letter of the offer to acquire shares of the Target Companyto the SEBI through the Merchant Banker within 14 days of the date of thepublic announcement;

(e) send the offer letter to all shareholders of the Target Company not earlierthan 21 days from submission of the draft letter to the SEBI.

5 There are four categories of Merchant Bankers depending upon net worth. Category I is thehighest category. A Category I Merchant Banker, with a minimum net worth of 50 million rupees,is permitted to perform all functions relating to the management of an issue.

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The offer will be opened not later than 55 days from the date of the publicannouncement and will remain open for a period of 20 days. The acquirer canacquire the shares of the Target Company if no other offers are received duringthe period the offer remains open. If other offers are received from the public,then in addition to the shares proposed to be acquired, the acquirer would berequired to purchase shares from the public (which may be up to the minimumoffer of 20% of the voting shares of the Target Company depending on the per-centage of offers received from the public).

3. Stamp duty

Acquisition of shares attracts payment of stamp duty under the Indian StampAct, 1899 or the applicable state stamp acts. However, if the shares to be trans-ferred are dematerialized before the transfer, the stamp duty can be avoidedsince stamp duty is not payable on transfer of shares in a dematerializedform.

Role of the Competition Commission

The CA2002 (Competition Act, 2002)6 provides a regulatory framework withrespect to competition and prescribes creation of the Competition Commission forimplementation of the CA2002. The CA2002 lays down detailed conditions withrespect to regulation of combinations and the circumstances in which a merger oracquisition would constitute a combination of enterprises. These conditionsinclude value of assets, turnover of enterprises etc.

Once the Competition Commission fully comes into operation, parties involvedin a merger or acquisition would be required to give notice to the Commissionabout the existence of a combination and disclose the details of the proposed com-bination. After all the provisions of the Competition Commission are notified, itwould investigate the effect of the combination on competition in terms of theprovisions of the CA2002 and require the parties to show cause if the combinationis likely to cause or has caused an appreciable adverse effect on competition withinthe relevant market in India. The Competition Commission may also, upon itsown knowledge or information relating to a merger or acquisition, inquire intowhether such a combination will cause an appreciable adverse effect on competi-tion in India.

Conclusion

Mergers and acquisitions have been on an upswing in the Indian marketplace,with the country witnessing a significant increase in the number of deals in therecent past. Indeed, the unleashing of the economy makes India one of the most

6 As the Government of India has not notified all provisions of the Competition Act, 2002, the legis-lation at present is only partly operational.

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sought after markets for global M&As. There have been major M&A deals in awide range of sectors including telecommunications, FMCGs (fast moving con-sumer goods), cement and building materials, oil and gas, automotive, pharma-ceuticals and healthcare etc.

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4.4

Employment Issues

Titus & Co., Advocates

Although the labour reforms in India have failed to keep pace with the reforms inother sectors of the economy, industrial strikes have come down significantly afterthe initiation of the economic reforms programme in 1991, reflecting a markedimprovement in industrial climate over the years. The trade unions in India arenot as militant as they used to be in the past, mainly because the post-liberalizationwork force, by and large, wants to profit from reforms and not confront them.

Labour legislations

As far as the Indian labour laws are concerned, they were designed primarily toprotect the interest of the working class without discouraging industrialization.These laws were aimed at bringing about harmony between employees andemployers, with a view to accelerating the growth of the economy in general andindustry in particular.

The Indian labour laws encompass a whole gamut of social welfare legislationsinvolving issues relating to employment – the rights of an employee, industrialand labour disputes, social security and social insurance, trade unions, generalwelfare of employees, working conditions, working hours and leave, minimumwages, provident fund, insurance, gratuity, bonuses and maternity benefits.These labour laws not only describe the rights and entitlements of an employeebut also lay down various compliances for employers. These compliances includeregistration of a factory or establishment, making prescribed filings with the con-cerned labour authorities and maintaining different types of registers, recordsand returns concerning the employees. Any failure to comply with such compli-ances exposes the responsible director or officer of the factory or establishment tocertain liabilities, which may be in the form of monetary fines or imprisonment,depending upon the nature and extent of non-compliance.

These laws seek to achieve industrial amity by providing for conciliation of dis-putes between employees and employers. As per the provisions of the statutes,the state can refer the unresolved disputes between employees and employer totribunals for adjudication. To encourage resolution of disputes in an amicablefashion, it has also been provided that stoppage of work, after a reference has beenmade by the state to the tribunal, would be illegal. These provisions have helpedin arresting the growth of industrial unrest and enhancing a sense of security

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among entrepreneurs (see Table 4.4.1 below).

Table 4.4.1

STRIKES

Year Number Man days lost (in million)

1999 540 10.62

2000 426 11.95

2001 372 5.56

2002 295 9.66

2003 255 3.21

2004 236 4.83

Source: Economy Survey 2005-06, GoI Publication

These laws are also aimed at preventing exploitation and oppression of labour byemployers. The applicability of these labour laws primarily depends on the num-ber of employees working in a factory or establishment. However, thereare certain labour laws, like the Employees’ State Insurance Act, 1948 andEmployment Provident Fund and Miscellaneous Provision Act, 1952, which oncetriggered continue to apply to a factory even though the number of employees fallsbelow the specified limit or till such time as the factory is closed down by theemployer. The salient features and relevant issues involved in various Indianlabour legislations are discussed below.

The IDA (Industrial Disputes Act, 1947)

The IDA was enacted to secure industrial peace and harmony by providing amechanism for investigation and settlement of industrial disputes through col-lective bargaining agreements, conciliation and arbitration. An employer isrequired to comply with the provisions of IDA, irrespective of the number of work-men employed ie even in the case of a single employee, the IDA will apply.

The IDA provides a mechanism for investigation and settlement of industrialdisputes without resorting to strikes and lock-outs. It also contains provisions forsafeguarding the interest of the work force as well as employers, with the overallobjective of maintaining industrial satisfaction.

It defines ‘industrial dispute’ as any dispute or difference between employersand employers, or between employers and employees, or between employees andemployees, which is connected with the employment or non-employment or theterms of employment or the condition of labour of any person. An industrial dis-pute is said to have arisen when some demand is made by a considerable sectionof employees and is rejected by the management, or vice versa. Certain individualdisputes relating to dismissal, discharge, retrenchment or termination of servicesof an employee are also covered under the IDA.

An employee will be said to be a ‘workman’ under the IDA if he is employed todo any manual, unskilled, skilled, technical, operational, clerical or supervisorywork for hire or reward. However, this does not include a person who is employed

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mainly in a managerial or administrative capacity, or who being employed in asupervisory capacity draws wages exceeding 1,600 rupees per month (approxi-mately US$ 35.5) or exercises functions mainly of a managerial nature.

Pursuant to the IDA, where the employer and the workmen fail to arrive at asettlement through negotiations, the Conciliation Officer intervenes as a mediatorto reconcile the difference of opinion and help the workman and employer reacha successful settlement. Accordingly, where a settlement is arrived at between thecompany and its workmen as a result of conciliation proceedings, the memoran-dum of settlement becomes binding on both the company and its workmen.

IDA also provides for a reference of the industrial dispute to arbitration by awritten agreement between the employer and the workmen at any time before thedispute has been referred to a Labour Court or Tribunal.

However, where an industrial dispute is not settled by negotiations or concili-ation, and the workmen and the employer do not agree to refer the industrialdispute to arbitration, the State Government can refer the dispute to the LabourCourt or Industrial Tribunal for adjudication. The award of the Labour Court orthe Industrial Tribunal is binding on both the employer and the employee and theaward is not subject to any further appeals. However, a writ petition before theHigh Court and thereafter an appeal before the Supreme Court of India can befiled to challenge the award of the Labour Court.

RetrenchmentRetrenchment refers to the termination of services of an employee by an employer,for any reason except as punishment/disciplinary action. Retrenchment does notcover the following:

● voluntary retirement;

● retirement on reaching the age of superannuation;

● termination as a result of non-renewal of contract of employment;

● termination due to continued ill health.

An employee who has been in continuous service for at least one year can beretrenched when certain specified conditions are fulfilled, such as:

● One month’s written notice of retrenchment with reasons has been given, orthe employee is paid wages in lieu of the period of notice.

● He is paid compensation equivalent to 15 days’ average pay for every completedyear of service or any part of it exceeding six months.

In case of retrenchment, it would be obligatory for the employer to follow the ruleof ‘last come first go’, which means that the employer would retrench the personlast employed in that category, unless there is an agreement to the contrary or ongrounds of inefficiency, unreliability or habitual irregularity. The employer, how-ever, will have to prove the existence of such valid reasons in the tribunal or courtif the retrenchment is challenged by the retrenched employee. However, with

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respect to the non-workmen category of employees, an employer can follow the‘hire and fire’ rule in accordance with the provisions of the employment agreemententered into with the employee.

The FA (Factories Act, 1948)

The FA is applicable to all ‘factories’. A ‘factory’ has been defined to mean ‘anypremises including the precincts thereof – (i) wherein 10 or more workers areemployed on any day of the preceding 12 months and a manufacturing process iscarried on with the aid of power; or (ii) wherein 20 or more workers are employedon any day of the preceding 12 months and a manufacturing process is carried onwithout the aid of power’. The FA will thus become applicable to every employerif 20 or more persons are employed. Every employee of the factory will be entitledto benefits under the FA once the FA becomes applicable to the factory. The FAplaces an obligation on the occupier of a factory to ensure the safety and welfareof workers whilst they are working in the factory.

The TU ACT (Trade Unions Act, 1926)

The TU Act provides for the registration of trade unions (including the associationof employers) with a view to rendering the lawful organization of labour to enablecollective bargaining. It also enshrines the main objects behind establishment oftrade unions in India ie to regulate the relation between workmen and employer,employer and employer, workmen and workmen, and imposing restrictive condi-tions on the conduct of any trade or business. It also provides for various checkson rampant trade unionism. There is also a provision for registration of tradeunions. It is effectively controlled by the State Governments, which are requiredto deal with everyday problems and industrial unrest.

The PB Act (Payment of Bonus Act, 1965)

The PB Act applies to all factories and establishments in which 20 or more personsare employed on any day during an accounting year. It entitles all eligible employ-ees to receive a minimum bonus of 8.33 per cent (linked with profits or produc-tivity) from his employer in an accounting year.

The bonus has to be paid annually within eight months of the close of theaccounting year by an establishment. The establishment is also required to pre-pare a balance sheet and profit and loss account of the year and calculate the ‘grossprofit’, ‘available surplus’ and ‘allocable surplus’ as per the method and formulagiven in the PB Act.

The SEA (Shops and Establishments Act)

These are state laws and every state or union territory has enacted its own SEAand has framed the rules for its enforcement. A typical SEA covers all establish-ments irrespective of the size, turnover and persons employed and applies to allpersons employed, whether directly or through an agency or contractor, and

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whether for wages or not, in or about the business of an establishment, includingthe apprentices. It prescribes guidelines with respect to working hours, workingconditions, overtime, leave, maintenance of records etc.

The ER Act (Equal Remuneration Act, 1976)

Remuneration is defined as the basic wage or salary and also includes paymentsin kind. To provide an equal field for all workers, including those in the informalsector, the ER Act requires employers to pay all workers remuneration (whetherin cash or kind) which is not less than the amount paid to workers of the oppositesex employed to perform the same or similar work. The ER Act also seeks to doaway with discrimination against employees working in similar conditions. Beingsupported by penal provisions and checks in the form of inspectors with powersof entry, examination of workers and inspection of registers, the ER Act is a potentweapon against discrimination among employees.

The ESI Act (Employees’ State Insurance Act, 1948)

The main objective of the ESI Act is to provide workers medical relief, sicknesscash benefits, maternity benefits to women workers, pensions to the dependent ofthe deceased workmen and compensation for fatal and other employment injuriesincluding occupational diseases through a contributory fund. However, if the ESIAct is applicable to an establishment, the provisions of the Workmen Compensa-tion Act, 1923 and Maternity Benefit Act, 1961 will not apply.

The MW Act (Minimum Wages Act, 1948)

The MW Act was enacted with a view to providing minimum statutory wages forscheduled employment and obviating the chances of exploitation of labourthrough payment of low wages. The term ‘wage’ under the MW Act includes allremunerations capable of being expressed in terms of money, house rentallowance etc, but it does not include the payment made towards provident fundsor insurance funds. The State Government is empowered to fix minimum rates ofwages for different classes of employees – skilled, unskilled, clerical, supervisoryetc – employed in any scheduled employment which is to be reviewed and revisedfrom time to time.

The Payment of Gratuity Act, 1972

Gratuity is a sort of award, which an employer pays out of his gratitude to anemployee for his long and meritorious services, at the time of his retirement ortermination of his services. The gratuity is also payable on resignation or death.Normally a gratuity is paid after five years of continuous service. The five-yearcondition does not apply in case of death and disablement. For every year of com-pleted service, an employee becomes entitled to 15 days of wages as gratuity. Thewage last drawn is taken into consideration whilst computing the amount ofgratuity.

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The WCA (Workmen’s Compensation Act, 1923)

The WCA entitles every workman (including those employed through a contractorbut excluding casual employees) and/or their dependants, engaged for the purposeof the business of a company, compensation for suffering an injury in any accidentarising out of and in the course of his employment. The WCA applies to railwaysand other transport establishments, factories, establishments engaged in making,altering, repairing, adapting, transport or sale of any article, mines, docks, estab-lishments engaged in construction, the fire brigade, plantations, oilfields etc.

The MBA (Maternity Benefit Act, 1961)

The MBA is applicable where 10 or more persons are employed or were employedon any day of the preceding 12 months. There is neither a wage ceiling for coverageunder the MBA nor is there any restriction as regards the type of work a womanis engaged in. Every woman employee, whether employed directly or through acontractor, will be entitled to the benefits of the MBA if she has actually workedfor a period of at least 80 days during the 12 months immediately preceding thedate of her expected delivery.

The IESO Act (Industrial Employment [Standing Orders] Act, 1946)

The objective of the IESO Act is to define ‘service rules’ or ‘service conditions’ forworkmen. It requires employers of certain industrial establishments to clearlydefine, with sufficient precision, the conditions of employment, ie standing ordersor service rules, and to make them known to the workmen employed by them. Italso provides for punishment of workmen in a disciplinary action if the act com-mitted by him or her is defined as misconduct, under the standing orders.

The EPFMP Act (Employees’ Provident Fund and MiscellaneousProvisions Act, 1952)

The EPFMP Act is a central legislation instituting a compulsory contributory fundunder various schemes viz. Employees’ Provident Fund Scheme, 1952, Employees’Pension Scheme, 1995 and Employees’ Deposit Linked Insurance Scheme, 1976and is applicable to every establishment employing 20 or more persons.

Conclusion

The Indian labour laws and practice over the years have evolved to adjust to theforces of liberalization and globalization. The Indian work force has also maturedwith time and is not oblivious of the ongoing economic reforms programme. In anycase, most of the labour laws do not apply to multinational corporations becausethey usually offer better salaries and working conditions than prescribed by thestatutes. They can also regulate the terms of employment through a carefullydrafted employment contract which should include salary, code of conduct, termsof services etc. Foreign investors, in practice, can enjoy greater flexibility in termsof the hiring of employees.

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4.5

Export and ImportIssues

Titus & Co., Advocates

As the world’s second most populous country, India offers vast trading opportu-nities to global entrepreneurs who can come here to set up manufacturing unitsand feed the growing domestic market. This, however, is only one part of theunfolding Indian story. More significant is that the country is making sincere andserious efforts to become a manufacturing hub for global exports. The governmentis seeking to achieve this objective by implementing the SEZ (Special EconomicZone) Policy on a large scale.

The government, after much debate and discussion, operationalized the policyby notifying the SEZ Rules on 10 February 2006. The policy evoked good responsefrom public and private sector companies, and foreign companies and investors.One of the reasons for this unprecedented response is that the units in the SEZswill also be allowed to sell their products in the DTA (Domestic Tariff Area) afterpayment of requisite custom duty. Thus, an entrepreneur in SEZ can look forwardto better infrastructure, less red tape and the global market (including thegrowing Indian market).

India has already signed free trade agreements with several countries, includ-ing Thailand, Sri Lanka and Singapore and is proposing to have more suchpacts with other nations and groupings like the ASEAN (Association of SouthEast Asian Nations) and the EU (European Union). These agreements will opendoors wider for entrepreneurs setting up units in India, either in SEZs or on themainland.

More importantly for India, the SEZ Policy, in addition to providing positivebusiness opportunities for domestic and global entrepreneurs, will help the coun-try in generating additional employment, creating more wealth and reducingpoverty at a faster pace.

Indian exports

Indian exports have grown steadily since the onset of the economic liberalizationprogramme in 1991. The opening of the economy has helped India in overcomingimpediments that used to hamper export efforts in the past. Indian exportersnow have more freedom to import raw material, procure capital at competitive

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rates from domestic and international markets and concentrate on core businessactivities.

India’s exports have risen to a record level across all major commodity groupsand destinations during 2005–06 and the trend is continuing during this currentfinancial year. Exports are estimated to have reached US$ 102.7 billion duringthe financial year 2005–06 and are likely to increase to US$ 120 billion during2006–07. A number of commodities have witnessed very high growth rates acrossdiverse sectors and destinations during 2005–06. The export of project goods wentup by 79%, petroleum products 64%, transport equipment 61%, oil products 54%,coffee 49%, carpets 30%, engineering goods 24.61%, basic chemicals, pharmaceu-ticals and cosmetics 25%, processed food 22%, textiles 17%, spices 19% andagricultural and allied products 17%.

India’s top 10 export destinations, based on their percentage share of its totalmerchandise exports during 2005–06 were the United States (with a share of16.75%), the United Arab Emirates (8.36%), the People’s Republic of China(6.54%), Singapore (5.42%), the United Kingdom (5.01%), Hong Kong (4.34%),Germany (3.42%), Belgium (2.78%), Luxembourg and Japan (2.39% each), and theRepublic of Korea (1.77%).

Foreign Trade Policy

The EXIM (Export-Import) Policy, as it used to be known, is prepared by the MCI(Ministry of Commerce and Industry) and lays down the ground rules for thedevelopment of foreign trade. It was later re-named the FTP (Foreign Trade Pol-icy) by the present Minister of Commerce and Industry, Mr Kamal Nath (Com-merce Minister). The policy is important because it spells out various exportpromotion schemes and provides a direction to the country’s trade. Although theFTP has a life span of five years, it is modified by the MCI every year throughannual supplements. This annual exercise helps the MCI to take stock of thecountry’s trade and respond to unforeseen developments.

The country’s first FTP (2004–09) was announced by the Commerce Ministerin 2004. It was formulated with the objective of:

● doubling India’s percentage share in global merchandise trade within a periodof five years;

● using trade as an effective instrument of economic growth by giving a boost toemployment generation.

The MCI has been trying to achieve these objectives through policy initiativesannounced from time to time. The important initiatives and the various exportpromotion schemes are discussed in the following paragraphs.

Special Economic Zones

The SEZ Policy, which came into effect with the notification of the SEZ Rules inFebruary 2006, seeks to provide significant and sizeable tax benefits, a duty

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free environment and a single window clearance mechanism to domestic and for-eign entrepreneurs interested in participating in the scheme. The fundamentalobjective of the SEZ Policy is to create an internationally competitive and stress-free environment for the production of goods and services for exports. The SEZsare also expected to attract FDI (Foreign Direct Investment), facilitate transferand infusion of technology and generate employment.

The concept of SEZs is not a new one and can be traced back to the EXIMPolicy 2000. It took almost six years for the government to formulate a compre-hensive SEZ policy, frame laws, get them approved by Parliament and finallyoperationalize the scheme.

The SEZs are primarily enclaves of units operating in well defined areas withinthe geographical boundary of a country where certain economic activities are pro-moted by a set of policy measures that are not generally applicable to the rest ofthe country. In addition, SEZs offer high quality infrastructure and other facilitiesfor duty free import of capital goods and raw material.

The GoI (Government of India) has made the SEZ Policy attractive for domesticas well as foreign investors by offering liberal and long-term tax incentives to thedevelopers of the SEZs and the units to be located in those zones. Under the ITA(Income Tax Act, 1961), a SEZ unit can avail several tax exemptions right fromthe stage of development of the SEZ up to the point when it begins to earn profits.

Multinational companies such as Nokia and Flextronics have begun to pour insizeable investments in SEZs. The GoI has recently cleared the proposal of theDubai-based real estate conglomerate, Emaar Group to set up 10 SEZs in Haryanaat an estimated investment of US $ 1.5 billion. The government has also given agreen signal to the Reliance Industries project to jointly set up a SEZ with theHaryana Government at an estimated cost of $ 5.5 billion. The GoI has so farcleared 165 SEZ proposals from different companies and many more are in thepipeline.

Export Oriented Units

An exporter undertaking to export entire production of goods and services (exceptthe sale allowed in the DTA), may set up a unit under the EOU (Export OrientedUnit) Scheme, the EHTP (Electronic Hardware Technology Park) Scheme, theSTP (Software Technology Park) Scheme or the BTP (Bio-Technology Park)Scheme. Units set up under these schemes are allowed to import or procure fromDTA all types of essential goods without payment of duty. These units are alsoallowed duty free import of capital goods without any regard to the age of plantsand machinery.

The units set up under the schemes have been extended various fiscal incen-tives which include exemption from payment of Income Tax as per the provisionsof Section 10A and 10B of the ITA and freedom to manufacture items reserved forsmall-scale industries. The units can also benefit from other facilities like per-mission to retain entire export earnings in the EEFC (Exchange Earners ForeignCurrency) Account and 100 per cent FDI through the automatic route. A unit setup under any of the schemes is not required to furnish bank guarantees at thetime of import or go for job work in DTA provided it has a turnover of 50 millionrupees or more, has been in existence for at least three years and has an unblem-ished track record.

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Advance Authorization Scheme

The MCI operates an Authorization Scheme (previously known as the AdvanceLicence Scheme) under which exporters can procure inputs from abroad withoutpayment of duty. These inputs are required to be physically incorporated intoproducts to be exported. The exporters procuring goods under the scheme areexempted from payment of basic customs duty, additional customs duty, educa-tion cess, anti-dumping duty and safeguard duty.

The Advance Authorization for duty-free import is issued on the basis of thestandard input/output norms, which are notified by the DGFT (Director Generalof Foreign Trade). The authorization can also be issued on the basis of ad hocnorms or self-declared norms. It can also be issued either to a manufacturer-exporter or merchandise-exporter tied to supporting manufacturers:

● for physical exports (including exports to SEZs);

● for intermediate supplies;

● to the main contractor for supply of goods;

● to the supply stores on board to outgoing vessels/aircraft, subject to certainconditions.

The Advance Authorization, and the materials imported under the scheme, arenot transferable, even after the completion of export obligation. The Authorizationholder, however, has been given the option to dispose of the product manufacturedout of the duty free inputs once the export obligation is completed.

The exporters importing goods under the Advance Authorization scheme arerequired to fulfil export obligations prescribed in the Handbook of Procedures.

Importing in small quantities

Export production requires the use of many inputs in small quantities. Eventhough such inputs are allowed for import without payment of customs duty underthe Advance Licence Scheme, exporters generally do not import them due to lackof economies of scale and often source them locally at a higher price. The existingDuty Exemption Schemes have been of little help in such cases because of designlimitations. The government therefore modified the procedure for such importsby clubbing together the salient features of the Advance Licence Scheme (whichallows imports of inputs before exports) and Duty Free Replenishment Certificate(which allows transfer of import entitlements) into a new scheme called the ‘DutyFree Import Authorization Scheme’.

The current scheme offers facility for import of the required inputs beforeexports and allows the transfer of scrips once the export obligation is complete.The new scheme came into effect from 1 May 2006.

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The EPCG (Export Promotion Capital Goods) Scheme

The EPCG scheme allows exporters to import capital goods for pre-production,production and post-production at 5 per cent customs duty, subject to some exportobligation, which varies for different units. For instance, for agro units, import ofcapital goods at 5 per cent customs duty is allowed, subject to fulfilment of anexport obligation equivalent to six times the duty saved over a period of 12 yearsfrom the date of issue of authorization. For small-scale industrial units, import ofcapital goods at 5 per cent customs duty is allowed subject to fulfilment of exportobligation equivalent to six times the duty saved over a period of eight years fromthe date of the issue of the authorization.

The DEPB (Duty Entitlement Passbook) Scheme

The DEPB Scheme provides for neutralization of the incidence of customs dutyon the import content of the export product which is extended through grant ofduty credit against the export.

Under the scheme, an exporter is allowed to apply for credit, as a specifiedpercentage of the FOB value of exports, made in convertible currency or the pay-ment made from the Foreign Currency Account of the SEZ unit in case of supplyby the DTA to SEZ unit. The credit is availed against such export products andat such rates as may be specified by the DGFT for the import of raw material,intermediates, components, parts, packaging material etc. The credit can also beutilized by exporters for payment of customs duty on any item which is freelyimportable.

The MCI is proposing to replace the DEPB with another scheme, as the formeris not considered as WTO compatible. However, the existing scheme will continueuntil the government finalizes an alternative scheme.

Starred Export Houses

In a bid to encourage exports, the MCI accords special treatment to exporters whoachieve a certain threshold. The exporters are given the status of One Star ExportHouse to Five Star Export House, depending upon the total FOB export perfor-mance during the current, plus the previous three, years. The threshold limit forqualifying as the One Star Export House is 150 million rupees, Two Star ExportHouse 1 billion rupees, Three Star Export House 5 billion rupees, Four StarExport House 15 billion rupees and Five Star Export House 50 billion rupees.

Merchants, manufacturer exporters, service providers, EOUs, units located inSEZs, Agri Export Zones (AEZs), EHTPs, STPs and BTPs are eligible to apply forstatus as Starred Export Houses.

The Starred Export Houses are eligible for the following privileges:

● authorization/licence/certificate/permission and customs clearances for bothimports and exports on a self-declaration basis;

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● fixation of input-output norms on a priority basis;

● exemption from compulsory negotiation of documents through banks; theremittance, however, would continue to be received through banking channels;

● 100 per cent retention of foreign exchange in the Exchange Earners’ ForeignCurrency account;

● exemption from furnishing of Bank Guarantee in schemes under the policy;

● Two Star Export Houses and above are permitted to establish export ware-houses, as per the Department of Revenue guidelines.

The Focus Market Scheme

The ‘Focus Market Scheme’ is aimed at increasing penetration of India’s exportsin new markets, which had remained neglected because of high freight cost andan undeveloped network. The aim of this scheme is to neutralize the disabilitiesthat prevent exporters from approaching certain important markets.

The Focus Market Scheme is primarily aimed at tapping and enlarging India’sshare in markets in Latin America and Africa. Under the scheme, an exporter isallowed duty credit facility at 2.5 per cent of the FOB value of exports on all prod-ucts to the notified countries.

The Focus Product Scheme

The ‘Focus Product Scheme’ is aimed at giving a boost to the manufacture andexport of certain industrial products which could generate larger number of jobsper unit of investment compared to other products.

As far as benefits are concerned, under the Focus Product Scheme an exporteris allowed duty-credit facility at 2.5 per cent of the FOB value of exports on 50 percent of the export turnover of notified products, such as leather goods, stationeryitems, fireworks, sports goods and toys, and handloom and handicraft items.

Conclusion

Foreign investors can take advantage of various trade facilitation measures andinitiatives undertaken by the ministry of commerce and industry to set up man-ufacturing units in STPs and SEZs to service the growing domestic market andfeed the global market. Moreover, an increasing number of free trade agreementsand preferential trade pacts that the country has signed or is in the processof signing will open greater business and trade opportunities for foreignentrepreneurs to have manufacturing bases in India.

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4.6

Intellectual Property

Titus & Co., Advocates

As a signatory to several international pacts like the agreement on TRIPS (TradeRelated Aspects of Intellectual Property Rights), the Berne Convention and theConvention on Bio-diversity, India is fully committed to providing adequate pro-tection to IP (Intellectual Property) rights. The domestic laws that protect variousfacets of IP include The Patents Act, 1970, The Trade Marks Act, 1999, TheDesigns Act, 2000, The Copyrights Act, 1957 and The Biological Diversity Act,2002.

Foreign investors coming to India to set up a company, enter into a JV (JointVenture) or open a branch office etc would benefit from an awareness of variousIP laws. The important legislations dealing with IP are as described below.

The TM99 (Trade Marks Act 1999)

A trademark is a name, phrase, sound or symbol used in association with servicesor products in trade which often connects a brand with a level of quality on whichcompanies build their reputation. Trademarks do not necessarily have to be reg-istered in India. If a company creates a symbol or name it wishes to use exclu-sively, it can simply attach the TM symbol, signifying an unregistered trademark.Trademarks in India can be registered following the norms and procedure laiddown in the TM99. Registered trademarks have a ® symbol over them. As per thelaw, a trademark is a visual symbol in the form of a word, a device or a labelapplied to articles of commerce, with a view to indicating that they are manufac-tured or otherwise dealt in by a particular person or a particular organization asdistinguished from similar goods manufactured or dealt in by others.

The TM Act which was approved by Parliament in 1999 came into effect onSeptember 15, 2003. As per the preamble it was “An Act to amend and consolidatethe law relating to trade marks, to provide for registration and better protectionof trade marks for goods and services and for the prevention of the use of fraud-ulent trade marks.” Some significant changes are:

● the recognition of three-dimensional trademarks, which allows shape of goods,packaging and combination of colours to be registered as a mark; the conceptof a well known trademark was also introduced;

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● the registration of ‘collective marks’ owned by an association of persons (egtrade associations, professional bodies, unincorporated associations etc)allowed;

● the extension of grounds to seek protection from infringement.

These changes have widened the scope of trademark laws and provide better pro-tection of trademarks and related IP rights. The duration of protection of trade-marks is 10 years. However, trademark registration is renewable indefinitely onpayment of the requisite fee, for a period of 10 years at a time. It takes 12 monthsto register a trademark in India.

Procedure to obtain Trade Mark registration

An investor has to undergo the following procedure to obtain a registered trade-mark or a service mark:

1. A trademark application is drafted and filed with the Trade Marks Registry.

2. The application can either be accepted absolutely, conditionally or rejectedcompletely by stating the grounds for doing so.

3. The application, if accepted, is advertised in the Trade Marks journal.

4. Once advertised, the application is open to opposition.

5. If the application is opposed, the applicants are given a hearing, to provetheir stand.

6. If the application remains unopposed, it proceeds towards registration andthe registration certificate is issued.

Essential details

In order to prepare and file a trademark application in India, the following detailsare needed:

● full name of the applicant with complete address;

● trade description of the applicant, ie manufacturer or distributor;

● copy of the mark to be registered (not necessary for a word mark);

● precise specification of goods or services to be registered under the mark;

● date signifying the beginning of the use of the mark in India; alternatively, aconfirmation with regard to the usage of the proposed mark in India is required;

● authorization of an agent (Power of Attorney) signed by the applicant; however,authorization is not required at the time of filing of the application and can befiled with the office of the Trade Marks Registry subsequently.

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Licensing in Trademark

A trademark can be licensed to another party by entering into an agreement calledthe TM Agreement (Trade Mark Licensing Agreement), wherein the licensorassigns the Licensee the exclusive right to use the trademark for a prescribed timeperiod. The licensee can use the mark as per the TM Agreement between thelicensor and him/herself. The licensing of the mark should not cause confusion ordeception among the general public ie should not destroy the distinctiveness ofthe mark. The trademark should continue to distinguish the goods connected withthe proprietor of the mark from those connected with others and also the connec-tion between the goods and the proprietor should continue. A licensee has no rightto use the trademark after the expiry of the term of the TM Agreement or afterthe license has been revoked or cancelled.

The TM99 has made provisions for the ‘permitted use’ of a trademark by aperson other than the registered proprietor and registered user of the mark. Atthe same time, it has also tried to ensure that proper control over the quality ofthe goods is exercised and the use of the mark by the licensee is not deceptive inany respect.

Patents Act 1970

An invention is a creation of intellect to produce something new, useful and indus-trially applicable. To encourage more people to use their labour and capital forinventions, it is essential that they be given some form of protection, and com-mercial gains. Such protection is provided to the inventors in the form of a patent.A patent is the legal right granted to the inventor to exclude anyone else frommanufacturing or marketing a product invented by them. A patent can also beregistered in a foreign country through the PCT (Patent Cooperation Treaty).TRIPS has made it obligatory for its signatory members to provide the same pro-tection to foreign nationals as they provide to their citizens. A patent confers andsecures certain substantive rights to an inventor, like the right to grant licences,right of assignment, etc.

Patents give protection in the form of non-disclosure of technology or a processby the owner or holder for a specified period. During the protection, this technol-ogy can be used through licensing/assignment/compulsory licensing. Transfer oftechnology is the transfer of a patent with respect to a particular product.

For transferring technology, the licensor has to enter into an agreement withthe licensee called the Technology Transfer Licensing Agreement. The agreementshould properly indicate the objects of the licensed products, the territory forwhich the agreement has been entered into, the time period, exclusivity of theagreement, proof of up-front payment, a running and minimum royalty, etc.Under this agreement, the licensee authorizes the licensor the use of patentedtechnology, subject to certain terms and conditions whilst safeguarding theirinterest. This gives the licensee the power to exercise regular checks on the useof the patented transferred technology by the licensor. Moreover, through thisagreement, a licensee derives economic and/or commercial returns.

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Recent changes

● product patenting introduced to bring the Indian Patents Act in consonancewith the TRIPS Agreement. The term of patent protection has been increasedto 20 years;

● all computer programmes are in combination with hardware, and all computerprogrammes with technical application to software industry in particular arenow patentable.

These changes were made to bring India’s patent laws in line with the TRIPSAgreement. With these amendments, the Indian patent legislation now stands onan equal footing with the global ones.

Procedure to obtain a patent in India

The registration procedure involves the following:

1. A patent application may be made, either alone or jointly with another, bythe inventor, assignee, legal representatives of the deceased inventor orassignee.

2. The territory, where the applicant or the first mentioned applicant in caseof joint applicants for a patent, normally resides or has domicile or a placeof business, or the place from where the invention actually originated, deter-mines where the patent application can be filed.

3. A first examination report stating the objections, if any, is communicated tothe applicant or his or her agents. Normally, all the objections must be metwithin 15 months from the date of the first examination report. An extensionof three months is available, but the application for extension must be madebefore the expiry of a normal period of 15 months.

4. Notice of opposition must be filed within four months of notification in theGazette of India.

5. When the application is found to be suitable for acceptance, it is publishedin the Gazette of India (Part III, Section 2). It is deemed to be laid open tothe public, for opposition, on the date of publication in the Gazette of India.

Necessary documents required

The following documents and information are needed to prepare and file a patentapplication in India:

● international application, if any, as published;

● international preliminary examination report;

● request;

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● search report;

● demand;

● written report;

● response to written opinion;

● complete specification (in duplicate);

● abstract of the invention;

● drawings, if any;

● authorization of the agent, signed by the applicant.

Designs Act, 2000

An article is distinguishable from others not only because of its utility but alsobecause of its visual appeal by virtue of its particular shape, configuration, patternor ornamentation. Therefore, the design of an article or its packaging has greatcommercial importance and needs to be protected. These designs are protectedunder the Designs Act. A design is a shape, configuration, pattern or ornamenta-tion or composition of lines or colours applied to an article, in any form, by anyindustrial process or means. However, it does not include any mode or principleof construction or anything which is, in substance, a mere mechanical device, nei-ther does it include any trade or property mark or artistic work.

Salient features of the Design Act, 2000

● the protection of the design has increased to 10 years, extendable by a periodof five years;

● the scope of definition of the ‘article’ and ‘design’ has been enlarged and thedefinition of the ‘original’ introduced;

● the international classification system has replaced the earlier Indianclassification.

India is a signatory to the Paris Convention, 1989. Therefore, design applications,by any person residing outside India, can be made within six months from thedate of the first application made in another convention country. However, theconvention followed in India is based on a reciprocal basis ie if the said countrydoes not offer similar registration rights to Indian citizens for their designs intheir country, then citizens of that country are not eligible to apply for registrationof designs in India.

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Procedure for the registration of a design

The procedure for registration of a design in India consists of the following steps:

1. Submission of application with the Controller of Patents & Designs, DesignOffice

2. Acceptance/objection/refusal of the application by the Design Office

3. Removal of objections/appeal to Central Government

4. Decision of the Central Government

5. Registration of the Design

Necessary details/documents

To file a design application in India, the following documents and information arerequired:

● name, address and nationality of the applicant;

● name of the article to which the design is applied;

● classification of the design;

● photographs or drawings of the article in its entirety from different angles inquadruplicate, depicting the front, rear, sides, top, bottom and perspectiveview;

● power of authority.

Judicial Precedents

Effective enforcement mechanisms in the form of judicial remedies are availableto protect IP rights. Two-fold judicial remedies available for protecting IP rightsinclude: (i) civil actions seeking injunction orders against the infringer coupledwith damages, and (ii) criminal sanctions in the form of fines and imprisonmentin case of infringements. There is now a substantial body of case law, developedover recent years, where damages have been awarded as an additional deterrentto infringers.

1. Civil law precedents

Indian courts strictly enforce IP rights of the owner and/or holder. Some impor-tant judgments relating to the IP infringement, wherein the Civil Courts havealways shown their enthusiasm to protect the interest of lawful owner/holderof IP rights, are listed below:

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(i) Trade mark infringement

• Global repute in a trademark has been recognized, even if the trademarkor copyright is not registered in India, and passing off has beenrestrained. India recognizes the concept of a ‘well known trademark’ andthus ensures protection under the TM99. For example, the Delhi HighCourt restrained the misuse of the marks ‘CAT’ and ‘Caterpillar’ forfootwear in Caterpillar Inc. vs. Mehtab Ahmed [2002 (25) PTC 438].

• Indian courts have awarded pecuniary penalties for infringementand passing off of trademarks beyond statutory provisions in cases ofundue commercial exploitation by infringers. Distinguishing betweencompensatory and punitive damages, in Time Incorporated vs. LokeshSrivastava [2005 (30) PTC 3], the Delhi High Court awarded 500,000rupees as punitive damages and also awarded 500,000 rupees as com-pensatory damages for loss of reputation and goodwill to the plaintiff.

(ii) Software piracyIn another landmark decision, delivered in Microsoft vs. Yogesh Papat[2005 (30) PTC 245], the Delhi High Court calculated actual loss ofbusiness caused to the plaintiff by the defendant selling pirated softwareas ‘freeware’ with assembled computers. The court considered the violationof the plaintiff’s trademark and copyrights and awarded damages of 1.97million rupees for the violation of the plaintiff’s rights by the defendants.This is the highest award for damages given by an Indian court for trade-mark and copyright infringement.

2. Criminal remedies

Effective remedies are also available under Indian penal statutes to punishinfringers and check increasing cases of data theft.

(i) Trademark infringement – TM99 provides imprisonment for a minimumof six months to three years and a fine of approximately US $ 1,100 toUS $ 4,500 to any person who infringes the trademark rights of any lawfulowner/holder of a trademark. The offences under this act are cognizable.

(ii) Copyright infringement – under the Copyright Act 1957, unauthorizedcopying, selling, hiring or distributing copyright material is an infringe-ment of copyright. Under Section 63 of the act, the known infringement orabetment to infringement of copyright is a criminal offence, punishablewith imprisonment ranging from six months to three years along with afine of approximately US $ 1,100 to US $ 4,500.

(iii) Patent infringement – whenever the rights of the patentee are infringed,his or her rights may be secured back through judicial intervention. Thepatentee has to file a suit for the infringement of his or her rights. Theprocedure followed in conducting such suits is governed by the provisionsof the Code of Civil Procedure, 1908, and the period of limitation for

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instituting a suit is three years from the date of infringement. The reliefwhich may be awarded in such suits are:

• interlocutory/interim injunction;

• damages or account of profits;

• permanent injunction.

(iv) Design infringement – under the Designs Act, 2000, the remedy availablefor infringement of a registered design is damages along with an injunction.The act lays the remedy in the form of payment of a certain sum of moneyby the person who pirates a registered design.

Conclusion

Following global trends India also updated its laws to safeguard investment inintangible property involving intellectual endeavour. India’s TRIPS-compliantTrade Marks Act, Copyright Act, Patents Act, Designs Act and other statutesprovide adequate protection to IP rights holders, whether Indians or foreigners.

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4.7

Company Dissolution andLiquidation

Titus & Co., Advocates

Winding-up is the process to end the existence of a company by passing its man-agement to liquidators to realize the value of assets to the maximum extentpossible, pay off the debts, discharge other liabilities and distribute any surplusamong the shareholders.

Described in detail in CA56 (Companies Act 1956), dissolution is the last stageof a company which technically will continue to exist till its affairs have beencompletely wound up and its name removed from the register of companies by theRoC (Registrar of Companies).

Types of Winding-up

The CA56 prescribes two modes for winding-up a company which are as follows:

● Voluntary winding-up – The shareholders or the creditors of a company want-ing to go in for dissolution can opt for voluntary winding-up. Under this mode,no petition is made to court for the winding-up of a company. The process ofwinding-up begins with the passing of a resolution by the shareholders in -themanner prescribed in Section 484 of the CA56 and ends with dissolution of thecompany.

● Compulsory winding-up – Although the term ‘compulsory winding-up’ is notdefined in the CA56, it has been construed to mean the winding-up of a companyby court or tribunal. A company may be compulsorily wound up by a court ofcompetent jurisdiction for its failure to follow certain key provisions of theCA56. This procedure for compulsory winding-up is extremely formal and hasbeen prescribed in the Companies (Court) Rules, 1959. The government isproposing to come out with a new set of rules for the compulsory winding-up ofcompanies. However, till the fresh regulations are put in place, the old rulesare sufficient.

In both cases, the proceedings for winding-up must be conducted in the NCLT(National Company Law Tribunal). However, as the tribunal has not become

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functional, the proceedings are being regulated by the High Court of the state inwhich the registered office of the company is located.

Voluntary winding-up

Depending on the solvency status of a company, the voluntary winding-up maybe further divided into the following two categories.

Members’ voluntary winding-upThe members may opt for the voluntary winding-up of a perfectly solvent companyfor several reasons such as completion of the task for which the company wasincorporated, the inability of the company to run profitably due to circumstancesbeyond its control, redundancy on account of changes in government policies orany other justifiable reason.

Creditors’ voluntary winding-upThe creditors may seek winding-up of a company if they are unable to recovertheir money from the company and also if there is no likelihood of the companydoing well financially in future. This step is initiated when the net worth of acompany turns negative and there is no prospect of recovery. Under these cir-cumstances, irrespective of the reasons, it may be prudent for a company to stopfurther losses by going in for voluntary winding-up.

The procedure of voluntary winding-up

As far as the procedure for voluntary winding-up is concerned, the members caninitiate the process by passing either an ordinary resolution (by simple majority)or special resolution (by super majority), as per the requirement. In the case offixed duration companies, the members can pass the winding-up resolution bysimple majority after the completion of the term prescribed in the Memorandumof Association, AoA (Articles of Association) or on the occurrence of a specifiedevent.

Voluntary winding-up is a comparatively simple process and foreign entre-preneurs may invest in fixed duration companies if they want to keep an easy exitroute open. They may do so by incorporating relevant clauses in the Memorandumof Association and AoA of the company. This option, however, may not be relevantfor those entrepreneurs who want to make long-term investment or set up man-ufacturing bases in the country.

In other cases, the voluntary winding-up proceedings can only be initiated bya special resolution which has to be passed by super majority. All special resolu-tions, as per the provisions of Section 189(2) of the CA65, are required to beapproved by at least three times the number of votes cast against the resolutionie 76 per cent of the votes cast.

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Compulsory winding-up

Sometimes it may not be possible for a company to comply with the formalitiesrequired for voluntary winding-up of a company. Under compelling circum-stances, a company may file a petition for compulsory winding-up in the court ofcompetent jurisdiction.

The circumstances under which a tribunal may compulsorily wind up a com-pany are mentioned in Section 433 of the CA56. Some of the important ones arelisted below:

● If a special resolution has been passed by the company deciding to wind up itsoperations.

● If the company has defaulted in filing statutory reports or holding statutorymeetings. (According to section 165 of CA56, every company limited by sharesand every company limited by guarantee and having a share capital, shall,within a period of not less than one month nor more than six months from thedate on which the company is entitled to commence business, hold a statutorymeeting of the company. A statutory report setting out all the matters listed insection 165(2) (3) of CA6 is required to be prepared by the Board of Directorsof the company and has to be forwarded to every member of the company atleast 21 days before the statutory meeting. After getting the statutory reportcertified by the directors and auditors and dispatching it to the members of thecompany, the report has to be forwarded to the Registrar of Companies for thepurpose of registration).

● If, within a year of incorporation, a company does not commence its businessoperations or, suspends its business.

● If the number of members in a public company falls below seven, or in a privatecompany, below two persons.

● If the company fails to pay debts. A debt is defined as a determined or definitesum of money payable immediately or at a future date. If the company owes toa creditor a sum exceeding 100,000 rupees and has not paid it for over threeweeks after a demand to pay has been made to the company, if a decree of anycourt or tribunal finds it so, or if the tribunal opines that the company is unableto pay its debts, then an order for winding-up can be passed against it.

● If it is just and equitable in the view of the tribunal.

● If the company has not filed its annual accounts and balance sheets with theregistrar for any five consecutive financial years.

● If the company acts against the interest of the sovereignty and integrity ofIndia, security of the state, or friendly relations with foreign states, publicorder, decency and morality.

● If the tribunal opines that under the provisions of section 424G of the CA56, itshould be wound up.

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Who can bring winding-up petitions

An application for winding-up can be brought before the court or tribunal by thefollowing:

● the company;

● any creditor or creditors, including contingent or prospective creditors;

● any contributory or contributories (under section 428 of CA56, a contributorymeans every person liable to contribute to the assets of the company in theevent of its being wound up, and includes the holder of any shares which arefully paid up; and for the purposes of all proceedings for determining, and allproceedings prior to the final determination of the persons who are to bedeemed contributories, includes any person alleged to be a contributory);

● the registrar;

● in cases falling under Section 243 of the CA56, a person authorized by the Cen-tral Government;

● Central or State Government if the company is working against the interest ofthe sovereignty, integrity, security of the nation, or against friendly relationswith neighbouring states, public order, decency and morality.

Winding-up of foreign companies

The procedure for winding-up unregistered companies, given in the provisions ofPart X of the CA56, applies to foreign companies, whatever be the number of theirmembers. A foreign company incorporated in a foreign country may be wound-upin India if it has an office and assets there, and if a pending foreign liquidationdoes not affect the jurisdiction to make a winding-up order. Where a foreign com-pany is already being wound-up in the country of its domicile, the winding-up inIndia will be ancillary to the foreign liquidation, and the liquidator’s powers inthis country are restricted to dealing with assets in this country.7 A subsequentwinding-up in the foreign country does not affect prior proceedings taken in India,and the liquidator’s discretion is not fettered.8

Where a body corporate outside India ceases to continue business in India, itmay be wound-up as an unregistered company, notwithstanding that the bodycorporate has been dissolved or otherwise ceased to exist as such under or byvirtue of the laws of the country under which it was incorporated.

Where a foreign company ceases to carry on business in India, its substratumis gone or it carries on ultra vires business, it may be wound-up on ‘just and equi-table’ grounds.9

7 Re Russian and English Bank Ltd, 1932 (2) Company Cases 4248 1958 (28) Company Cases 2049 1972 (42) Company Cases 197 Bombay

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The essential conditions pertaining to the winding-up of a foreign company areas follows:

a. If it is dissolved or has ceased to carry on business or is carrying on businessonly for the purpose of winding-up its affairs.

b. If it is unable to discharge debts.

c. If the tribunal opines it would be ‘just and equitable’ for the company to bewound-up.

● winding-up can only be made through the tribunal ie voluntary winding-up isnot permitted;

● reasons for winding-up a foreign company:

● a petition for winding-up may be presented to the tribunal for an order ofwinding-up;

● the tribunal may pass the winding-up order after inviting objections againstthe winding-up petition;

● after receiving the order from the tribunal, the foreign company is required tofile the order with the concerned RoC for dissolution of the company.

Remittance of winding-up proceeds

The Foreign Exchange Management (Remittance of Assets) Regulations of 2000deal with the remittance of winding-up proceeds of foreign companies. Under theregulations, the RBI (Reserve Bank of India)’s prior permission is required for theremittance of winding-up proceeds of a branch or office (other than project offices)in India of a person resident outside India. Persons who desire to remit such assetsneed to make an application with the following documents:

● a copy of RBI’s approval to set up the branch/office in India;

● a copy of RBI’s approval to sell immovable properties, if any, held by the branch/office;

● the auditor’s certificate;

● the no-objection or Tax Clearance certificate from the Income Tax Authority forremittance;

● confirmation from the applicant that there are no legal proceedings in any courtin India pending and that there is no legal impediment to remittance.

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Priority of claims

Under voluntary winding-up, the company appoints a liquidator whose job is torealize the value of the company’s assets and disburse the amount so realizedamong different stakeholders in accordance with the provisions laid down in Sec-tions 529, 529A and 530 of CA56. The liquidator acts as an agent or administratorof the company.

In case of compulsory winding-up, the tribunal or court appoints an officialliquidator for winding-up the affairs of the company. The official liquidator, whofunctions under the direction of the tribunal or court, is responsible to the CentralGovernment for all acts done during the course of winding-up the company. Theliquidator’s main task is to realize the assets of the company to the extent possible.

The order of disbursement of realized assets, as provided in different sectionsof the CA56, is as follows:

1. Workmen and secured creditors: The legitimate dues of workers are paripassu with secured creditors. The wages include ad hoc interim relief ifawarded by any industrial court, retrenchment compensation, accrued hol-iday remuneration, compensation under the Workmen’s Compensation Actand gratuity. These dues have been accorded overriding preferential treat-ment by Section 529A of the CA56.

2. Cost of liquidation: The next priority is given to cost of liquidation. It includeslegal charges incurred by the liquidator on litigation; remuneration of thesolicitor(s); Income Tax on income accruing after the commencement of thewinding-up proceedings; liquidator’s remuneration; rents; incidentalcharges concerning the winding-up process; and preservation charges for thecompany’s property.

3. Unsecured creditors: The unsecured creditors, which include debenture-holders, rank parri passu according to their claims.

4. Equity shareholders: The surplus left after discharging the liabilities of out-siders is disbursed among preference shareholders and equity shareholdersin proportion to their equity.

After the procedure of winding-up is completed and the order for dissolution isobtained from the tribunal or court, the same has to be filed with the registrar.After receiving the order and if there is no reason for any suit to be broughtagainst the liquidator for acting in a manner prejudicial to the interest of thecompany, the registrar strikes off the name of the company from its registers,completing the process of dissolution.

Conclusion

The procedure for winding-up a company is quite cumbersome in India and cantake years. The problems connected with the winding-up of a company were

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discussed in detail by the Expert Committee on Company Law headed byDr J J Irani.10 The committee made a strong case for streamlining the winding-up process by adopting international best practices. Among other things, it sug-gested adoption of the UNCITRAL (United Nations Commission on InternationalTrade Law) Model Law on Cross Border Insolvency and the establishment of apanel of administrators and liquidators to reduce disputes and expeditewinding-up.

The GoI (Government of India) is considering the recommendations of the IraniCommittee and is likely to incorporate various suggestions whilst formulating anew company law. The government has been working on the new legislation andis likely to come up with a draft shortly to replace the CA56.

Meanwhile, the establishment of the NCLT as a specialized body, dealingexclusively with all company law-related issues, disputes and problems, willimprove matters significantly. The proposed tribunal will deal with winding-uppetitions and the companies will no longer be required to approach the overworkedHigh Courts for orders.

10 The Ministry of Company Affairs in December 2004 appointed an Expert Committee headed by DrJ J Irani to advise the government on new Company Law. The report of the committee submitted inMay 2005 is under consideration of the government.

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4.8

Dispute Resolution

Titus & Co., Advocates

Resolving commercial disputes through ordinary courts of law can be frustratingbecause the process takes an unreasonably long time and involves large amountsof money. At a time when critical decisions are required to be taken in real time,protracted litigation can jeopardize corporate reputations, harm commercialinterests and adversely hit the concerned company’s bottom line. The way out ofthis imbroglio is to go in for out-of-court settlement of disputes. The ADR (Alter-nate Dispute Resolution) mechanism provides an opportunity to companies toresolve their differences through a mechanism that is efficient, speedy and cheap.The other big advantage is that under the ADR mechanism the disputing partiesare not required to adhere to the cumbersome judicial procedure prescribed in theCivil Procedure Code, 1908 and the Evidence Act, 1872. The parties can settletheir disputes through the persons of their choice whose integrity and indepen-dence they trust.

Several ADR methods are prevalent in India. Among the ADR methods andsystems in vogue, arbitration and conciliation are the most widely used. The otherADR systems, which include mediation, negotiation, facilitation and mini-trialare also slowly and gradually gaining currency in India.

Arbitration

Arbitration provides a potent alternative to litigation in a court of law. Importantreasons for preferring arbitration in the transnational context include hassle-freecommencement of proceedings, neutrality of arbitrators and freedom from thehair-splitting rules of evidence. The advantages also include expeditious issuanceof an award and simplified enforcement of the award. Besides, the process of arbi-tration ensures privacy and is generally protected by the laws of privilege andconfidentiality. This is of great significance in commercially sensitive disputesinvolving, for instance, know-how, lists of clients, the development of businessstrategy and other commercially confidential matters. Parties may also requestfor a non-speaking award from the arbitrators to maintain confidentiality.

The law relating to arbitration in India is contained in the Arbitration andConciliation Act, 1996 (Arbitration Act). The new legislation is an improvementover the Arbitration Act, 1940. The 1996 Act, with a few significant interpolations,is based entirely on the Model Law on International Commercial Arbitration

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adopted by the UNCITRAL (United Nations Commission on International TradeLaw) in 1985. This ensures a certain degree of uniformity with the arbitrationlaws of other countries.

The Arbitration Act is divided into four parts. Part I deals with laws relatingto domestic arbitration and international commercial arbitration held in India,Part II deals with the enforcement of foreign awards under the New York con-vention or the Geneva convention, Part III conciliation and Part IV containssupplementary provisions.

The Model Law is not a comprehensive piece of legislation and the Indian Actinherited various weaknesses of the former. Moreover, several problems havearisen during the course of the interpretation and application of the ArbitrationAct. Hence, it becomes imperative for an investor to have a clear understandingof the various provisions contained in the legislation and act accordingly.

Arbitration in India

Arbitration as a mode for settlement of disputes has been in vogue in India formany years. Almost all business transactions carry arbitration clauses. Govern-ment contracts usually provide for compulsory arbitration in respect of disputesarising thereunder. A sizeable number of public sector undertakings also followthe same procedure.

Several merchant associations provide for in-house arbitration facilitiesbetween their members and their customers. Stock exchanges in India also pro-vide for in-house arbitration for resolution of disputes. The Board of Directors ofeach stock exchange constitutes the appellate authority for hearing appeals fromthe award of the arbitral tribunals.

Arbitration Agreements

The foundation of arbitration is the agreement between the parties to submit thedispute to arbitration. An Arbitration Agreement is defined in the Arbitration Actas an agreement between the parties to submit to arbitration, all or certain dis-putes which have arisen or may arise between them in respect of a defined legalrelationship, whether contractual or not. It must be in writing and may be in theform of an arbitration clause in a contract or in the form of a separate agreement.A good Arbitration Agreement is one that minimizes complications in the eventof a dispute cropping up. However, in practice, parties often fail to carefully draftone.

Before finalizing an Arbitration Agreement, it is imperative that the terms bethoroughly discussed and negotiated to avoid any misunderstanding in future. AnArbitration Agreement must primarily address key issues such as place or seat ofarbitration, laws applicable to arbitration, number of arbitrators, language,interim measures, enforceability of the award, to name a few, in order to safeguardthe interest of the parties to the agreement.

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Arbitration mechanism

The arbitrators shall be appointed by the parties as agreed between them. If theparties fail to reach an agreement, the Chief Justice of India, Chief Justice of aHigh Court or their nominees may appoint the arbitrator. This is a significantaddition not contained in the Model Law. An arbitrator can be challenged only ifcircumstances give rise to justifiable doubts concerning his independence andimpartiality or in case the arbitrator is not qualified to the satisfaction of theparties.

The rule concerning substance of dispute is an important provision as far asinternational commercial arbitration is concerned. The arbitral tribunal is obligedto apply the rules of law designated by the parties as applicable to the substanceof the dispute. However, in absence of any agreement as to the applicabilityof laws between the parties, the tribunal can apply rules of law it considersappropriate.

The act clearly enumerates the grounds on which the court can entertain theapplication for setting aside an award. These include incapacity of a party, inva-lidity of an Arbitration Agreement, the violation of principles of natural justiceand the exceeding of terms of reference by the arbitrator.

The arbitral award has been given the status of a decree of court and madeenforceable under the Code of Civil Procedure, 1908. Therefore, an award is notrequired to be converted into a decree.

Enforcement of foreign awards

As mentioned previously, the act recognizes awards made under the New YorkConvention or the Geneva Convention. The provisions regarding enforcement offoreign awards are almost the same as for the awards made under the two con-ventions. It is obligatory for a party applying for enforcement of a foreign awardto produce before the court:

● the original award or duly authenticated copy thereof;

● the original agreement for arbitration or a duly authenticated copy thereof;

● such evidence as may be necessary to prove that the award is a foreign award.

Where the award or agreement is in a foreign language, the party seeking toenforce the award is required to produce a certified translated copy in English.Where the court is satisfied that the foreign award is enforceable, the award shallbe deemed to be a decree of that court.

International arbitration

An international commercial arbitration has been defined as an arbitrationrelating to disputes arising out of legal relationships, whether contractual or

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not, considered as commercial under the law in force in India and where at leastone of the parties is:

● an individual who is a national of, or habitually resident in, any country otherthan India;

● a body corporate which is incorporated in any country other than India;

● a company or an association or a body of individuals whose central managementand control is exercised in any country other than India;

● the government of a foreign country.

From the above definition it is clear that, unlike domestic arbitration, an inter-national arbitration must essentially be commercial in nature in order to fallunder the purview of the act. However, the word “commercial” has been inter-preted liberally by the Indian courts taking in its sweep all kinds of businessesand transactions. Where the place of arbitration is outside India, the award istreated as a ‘foreign award’ and its recognition and enforcement is dealt with sep-arately in Part II of the act. The act recognizes awards made under the New YorkConvention or the Geneva Convention.

Conciliation and mediation

Conciliation is a facilitative process in which disputing parties engage a neutralthird party to act as a conciliator in their dispute. The conciliator has no authorityto make any decision which is binding on the parties, but uses certain procedures,methods and skills to help them arrive at a settlement of their dispute by agree-ment. The basic objective of a conciliator is to assist the parties, in an independentand impartial manner, in their attempt to amicably settle their disputes.

The Arbitration Act provides that conciliation proceedings can be initiated bya party inviting the other party to conciliate under its provisions. Once the otherparty accepts, in writing, the invitation to conciliate, the conciliation proceedingsstart.

The terms ‘conciliation’ and ‘mediation’ are, by and large, used interchange-ably. However, in some countries a sort of distinction is made between themaccording to the initiative taken by the third party. In most cases, a mediator playsa more proactive role than a conciliator in a conciliation process.

Conciliation/mediation offers a much more flexible alternative for a wide vari-ety of disputes, reserving the freedom of parties to withdraw from the proceedingswithout prejudice to their legal position inter se at any stage of the proceedings,maintaining confidentiality of proceedings and ensuring quick resolution of dis-putes in a cost effective manner.

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Other ADR systems

The following alternative systems of dispute resolution other than arbitration,conciliation, mediation, and negotiation are also used:

1. Mini-trial: A non-binding procedure in which the disputing parties are pre-sented with summaries of their cases to enable them to assess the strengths,weaknesses and prospects of the case and then an opportunity to negotiatea settlement with the assistance of a neutral expert.

2. Partnering: A collaborative and non-binding process that focuses on the co-operative solving of problems that participants have in common. Properlyapplied, it yields reconciliation as opposed to either compromise or concession.

3. Neutral Fact Finding: When the resolution of a dispute requires certainexpertise and the issue becomes a stumbling block, either of the parties mayagree on a fact-finder, a neutral third party or the court may select a neutralexpert to investigate the issue in question to submit a non-binding report ortestify in court. The impartial expert usually investigates the matter pre-sented to him and subsequently files a report which establishes the facts inthe matter.

Flaws in the arbitration system

As stated earlier, the Arbitration Act is based almost entirely on the Model Lawon International Commercial Arbitration adopted by UNCITRAL and hence suf-fers from the same demerits as the Model Law. A major flaw plaguing both theModel Law as well as the Arbitration Act is the provision of a judicial remedy forthe removal of an arbitrator in case they are believed or found to be biased. Inpractice, this provision may amount to questioning the fairness of the arbitrationsystem as a whole.

According to the Laws of Arbitration, the grounds for objecting to an awardunder relevant provisions of the Arbitration Act are common to both domesticawards as well as international arbitration awards. The principle of minimal courtinterference may be good in the case of international arbitration awards. How-ever, as far as Indian awards are concerned, the principle of minimal courtinterference is not enforced as strictly because often the arbitration awards inIndia are given by persons who are not well acquainted with law.

The object of reducing the work load of courts at times is defeated as partiesfeel the necessity of approaching courts for the appointment of arbitrators, forinterim measures of protection, for substitution of arbitrators, to challengeinterim orders passed by arbitral tribunals or to challenge or enforce arbitralawards.

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Conclusion

The ADR systems may not provide a perfect setting for the resolution of commer-cial disputes expeditiously and to the satisfaction of the warring groups. Thereare several loopholes in the ADR mechanism which can be exploited by one partyto delay resolution of dispute to the detriment of the other party. Although theArbitration and Conciliation Act, 1996 tried to address various shortcomings ofthe earlier act, it is not free from weaknesses. There are problems with the newact also. Often parties pursuing vested interests or acting with ulterior motivescan raise frivolous disputes to delay implementation of a perfectly justified arbi-tration award. The delay becomes frustrating and painful, especially when thestakes are high and the urgency to amicably resolve a dispute is pressing.

However, what cannot be disputed about the ADR is that it is a much betterand swifter way to resolve commercial disputes. It is far superior to approachingthe court of law and going through the due legal process which involves time andmoney in abundance. What the smart companies should try to do is to have aproper arbitration agreement either as part of the contract or as a separate agree-ment for satisfactory resolution of disputes. This is probably the best way toprotect the commercial interest of a company from protracted litigation in future.A proper and well thought out Arbitration Agreement is undoubtedly the bestinsurance against financial losses that may arise on account of delay in the adju-dication of commercial disputes.

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4.9

Contract Issues, ConsumerProtection and PropertyIssues

Titus & Co., Advocates

The Indian Contract Act,1872 provides a legal framework to preserve and protectthe sanctity of a commercial agreement formed between two or more parties toundertake a permissible commercial activity.

The Contract Act

A contract which may involve several parties has been described by the ContractAct as “an agreement enforceable by law.” An agreement is defined as “everypromise and every set of promises forming the consideration for each other.” Anagreement will be a contract if it is:

● made by the free consent of the parties competent to contract; consent is saidto be free if it is not obtained by coercion, undue influence, fraud, misrepresen-tation or mistake;

● for a lawful consideration and object (a contract to do something unlawful egmurder, extortion, smuggling etc is not a valid contract);

● not expressly declared to be void by law.

The Contract Act recognizes the following types of contracts:

1. Valid contract: These are the agreements enforceable by law. Such a contractcreates an outstanding obligation or legal liability.

2. Voidable contract: A voidable contract becomes valid only on fulfilment ofcertain specified conditions. A voidable contract remains valid untilrescinded. The main difference between a valid contract and a voidablecontract is that unlike the former, the latter cannot be enforced freely. Avoidable contract can only be enforced under specific circumstances.

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3. Void contract: A void contract is unenforceable under law and cannot giverise to any legal liability.

Every contract has to pass through several stages, beginning with the negotiation,during which the parties discuss and negotiate proposals and counter proposals.They also discuss the consideration resulting finally in the acceptance of the pro-posal. In order to convert a proposal into a promise, the acceptance must beabsolute and unqualified, and expressed in a usual and reasonable manner. Anagreement is not a contract if there is no intention of the parties to create a legalrelationship. The acceptance has to be communicated by the offeree or his autho-rized agent to the offeror. The proposal when accepted gives rise to an agreement.An agreement enforceable by law becomes a contract as per the provisions of theIndian Contract Act.

Refusal to perform

The refusal of a party to a contract to perform its part of the contract gives anoption to the non-defaulting party to put an end to the contract and regard itselfdischarged, or to treat the contract as still in existence and affirm its continuance.

A refusal to perform any part of the contract, however small, is a refusal toperform the contract in its entirety if the same affects a vital part of the contractand prevents the non-defaulting party to get in substance what it had bargainedfor. Therefore, if a party commits a material breach or manifests an intention tocommit such a breach, it will excuse the other party from the obligation to proceedfurther.

In case the non-defaulting party opts for the rescission of a contract, three legaleffects follow:

1. It releases the non-defaulting party from its obligation to perform its part ofthe contract. Such party can bring an action without showing that it couldhave performed its obligations.

2. The acceptance of the breach by the non-defaulting party also releases thedefaulting party from its obligation to perform the contract.

3. The non-defaulting party can sue for damages. Its rights to damages are notdefeated by actual or possible supervening events. Subsequent events mayaffect the amount of damages but not the right to damages. Such party canclaim damages at once even though its right to future performance of thecontract is only contingent.

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Issues under the Contract Act

1. Limitation of liability

Parties to a contract may limit their liability to a fixed percentage which canbe monetarily assessed, and which is mutually agreed upon and acceptable toall the concerned parties. Parties to a contract may agree and fix the damagespayable as liquidated damages, or it may be fixed by statute as in case of dam-ages against a party to a dishonoured bill of exchange.

2. Waiver and promissory estoppel

The act permits the party to a contract to waive or abandon its right. Underthe law, the general principle of waiver allows a party to a contract to volun-tarily dispense with or remit wholly or in part the performance of the promisemade to him or her, or he or she can accept any promise which he or she thinksfit. Neither a consideration nor an agreement is necessary. Waiver may be oral,in writing or inferred from conduct. Similar to a waiver is the doctrine ofpromissory estoppel or equitable estoppel, whereby a party who has repre-sented that he or she will not insist upon his or her strict rights under thecontract will not be allowed to go back from that position, or will be allowed todo so only upon giving reasonable notice.

3. Limitation of time for enforcing rights

In terms of the Limitation Act, 1908, any suit instituted after the prescribedperiod of limitation has to be dismissed, even if limitation has not been set upas a defence. Thus, an agreement which provides that a suit should be broughtfor the breach of any terms of the agreement within a time shorter than theperiod of limitation prescribed by law will be void to that extent.

4. Restraint of trade clause

In terms of Section 27 of the act, an agreement which has for its object arestraint on trade, is prima facie void unless it falls distinctly within prescribedexceptions. Section 27 is based on public policy and deals with agreements bywhich a person is precluded altogether for a limited time or over a limited areafrom exercising his or her profession, trade or business. All covenants in agree-ments relating to reasonable restraint or partial restraint have to fall squarelywithin the framework of Section 27 to be saved from being declared void.

5. Choice of governing law

Parties to a contract are entitled to agree to the law that shall apply to theircontract, including the place and mode of resolving disputes that may ariseduring the course of the contract. Parties may desire to choose a neutral law, the

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choice of which may depend not upon the main transaction but an underlyingtransaction which may have a connection with a different system of law.

In cases where there is no expressed intention of the law applicable, the courtmay examine the real and common intention of the contracting parties by eitherimplying a term into the contract or by applying the extraneous standard of areasonable man. Furthermore, under Indian laws, a contract or any clause tothat effect cannot oust the jurisdiction of Indian courts. This enables a party tosue in India, irrespective of whether the contract says otherwise.

6. Restraint of judicial proceedings

The agreements in total restraint of judicial proceedings are void. However, anagreement by which a party is only partially restrained is not void. Therefore,where parties to an agreement agree that, in case of any dispute, the suit maybe brought at a particular place only, the agreement would not be void, if thecourt at that place has the jurisdiction to try the suit. A contract by which twoor more persons agree that any dispute between them with regard to somespecified subject shall be referred to arbitration only is valid. In such a case, asuit cannot be brought in a Court of Law with regard to the dispute concerningthe specified subject.

7. Reasonableness and equity

A contract can be varied or re-negotiated to the extent provided for in the con-tract or to the extent provided for in the enabling statute under which thecontract was concluded. Any material alteration without obtaining free consentof the other contracting party in the terms of the contract which varies therights, liabilities or legal position of the parties ascertained by the contract inits original state will not be valid and will be unenforceable.

Consumer protection

The Consumer Protection Act, 1986 was enacted with the intention of safeguard-ing the interest of consumers. The act provides for expeditious settlement ofconsumer disputes and matters connected therewith.

It is a beneficial statute designed to redress grievances of the categories of con-sumers mentioned in the act. As per the act, the ‘consumer’ is a person who buysany goods or hires or avails of any services for a consideration. The definition ofthe consumer does not include those persons who obtain such goods for resale orfor any commercial purpose.

To provide fast and simple redressal of consumer disputes, the act provides forsetting up of quasi-judicial authorities at district, state and central levels. Thesequasi-judicial bodies are expected to observe the principles of natural justice, pro-vide relief of a specific nature and award, wherever appropriate, compensation toconsumers. Penalties for non-compliance of the orders given by the quasi-judicial bodies have also been provided in the act.

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The act also provides for establishment of consumer councils such as the centralconsumer protection council under the minister in charge of consumer affairs inthe Central Government and the state consumer protection councils under theministers in charge of consumer affairs in the State Governments. Several StateGovernments have notified rules to operationalize the act at state and districtlevels.

The act, as per the statement of objects and reasons, primarily seeks to promoteand protect the rights of consumers such as:

● the right to be protected against the marketing of goods and services which arehazardous to life and property;

● the right to be informed about the quality, quantity, potency, purity, standardand price of the goods or services, so as to protect the consumer against unfairtrade practices;

● the right to an assured – wherever possible – access to an array of goods atcompetitive prices;

● the right to be heard and to be assured that consumers’ interests will receivedue consideration at appropriate forums;

● the right to seek redressal against unfair trade practices, restrictive tradepractices or unscrupulous exploitation of consumers;

● the right to consumer education.

Property laws

The Transfer of Property Act, 1861 regulates transfer of immovable property thattakes place by the acts of parties ie the voluntary transfer of property betweentwo contracting parties. With the exception of certain instances, it does not reg-ulate the transfer by operation of law such as sale by the order of the court, auctionor forfeiture. Also, transfers under the act are required to be inter vivos – whereboth parties are living. Transfer by wills or inheritance are not governed by theact.

Transfer of property

Transfer of property takes place by a contract which is subject to the provisionsof the Indian Contract Act, 1872. Thus, the parties entering into a contract fortransfer of property should be competent to enter into a contract. What this meansis that the parties should have attained the age of majority, which is 18 years,they should be of sound mind and they should not have been disqualified to enterinto contract by some other law applicable to them.

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Transactions not permitted

The act prohibits certain kinds of transfers. The transfers disallowed by the actare lis pendens, transfer by person with no interest in property, fraudulent trans-fers etc.

The principle of lis pendens is laid down in Section 52 of the act. It is based onthe legal maxim that in a pending litigation no new fact should be introduced.Thus, a property which is the subject of an ongoing suit cannot be the subject ofa transfer. Also, a person cannot transfer a property without owning the title ofthat particular property. Section 53 of the act bars fraudulent transfers. In caseof fraudulent transfers, the act empowers creditors to sue if a transfer is beingmade with the intent to defeat or delay their claims. The creditors are permittedto file a suit in a representative capacity or for the benefit of all creditors.

Sale of property

Sale of property is the absolute transfer of ownership and all rights associatedwith it in exchange for a price paid or promised or for consideration or part-paidand part-promised. Thus a sale of property entails transfer of complete ownershipand presence of two parties between whom the transfer takes place. Furthermore,there has to be a consideration of price. The price may be paid or promised, orpart-paid and part-promised. Registration of the instrument of transfer is essen-tial for the sale of any property above the value of 100 rupees. For property belowthat value, transfer may, or may not be registered. Tangible property above thevalue of 100 rupees may be sold through registered deed.

Liabilities and rights of seller

The seller has to disclose any material defect in the property or title that the buyercould not find on examination. He or she is bound to produce documents of theproperty on request; answer relevant questions put to him or her by the buyer;execute a proper conveyance upon payment at the proper place and time; takecare of the property and related documents as if it were his own till the deliveryafter sale; give possession of the property as required by the buyer; and pay allthose encumbrances and public charges that accrue in respect of the property untilthe date of the sale.

The seller is entitled to rents and profits of the property till the ownership ispassed on to the buyer. He or she has the charge upon the property even if it is inthe hands of the buyer till the entire purchase money is paid.

The duties and rights of the buyer

The buyer has to reveal any material fact (even those that would increase thevalue of the property considerably) regarding his interest in the property that theseller may not be aware of. It is the duty of the buyer to pay the amount due tothe seller in the manner directed by him. He or she has to bear any loss to the

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property in his or her ownership not caused by the seller. He or she is also requiredto pay all public charges after the ownership has been passed on to him or her.

Conclusion

The acts dealing with contract, consumer protection and transfer of property areimportant legislations having a bearing on trade and commerce in India. It wouldbe advisable for entrepreneurs to have at least some idea of these laws.

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4.10

Legal Impediments

Titus & Co., Advocates

Although the Indian government has greatly improved the investment climatesince the launch of the economic liberalization and globalization programme15 years ago, it has not been able to completely dismantle the barriers hamperingfree flow of FDI (Foreign Direct Investment) and Foreign Institutional Invest-ment. These roadblocks and challenges, however, are not insurmountable and canbe overcome by foreign entrepreneurs with sound business acumen, adequatedrive and some patience.

Anyone who has closely observed India’s march to economic freedom sinceJuly 1991 would vouch that these obstacles will be removed sooner than later.However, the option before an investor today is either to wait until India’s roadto investment is free of all possible barriers or venture out on that road regardless,after taking reasonable precautions.

Amidst these alternatives, what a company wanting to participate in the Indianresurgence needs to do is to view the obstacles as challenges and work out aneffective business plan to overcome them successfully. Many of the Fortune 500companies and SMEs (small and medium-sized enterprises) that have opted forthe latter are now running profitable businesses in India.

Some of the major impediments that an investor is likely to encounter in Indiaare as follows.

Entry restrictions

The GoI (Government of India) has slowly and gradually opened various sectorsto FDI. There are several sectors where 100 per cent FDI is allowed under theautomatic route. At the same time, there are sectors that are only partially opento FDI.

The GoI has also banned FDI in certain sectors, for reasons such as public order,national security and national interest. The sectors in which foreign investmentis prohibited include the following:

● atomic energy;

● lottery business;

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● gambling and betting;

● agriculture (excluding floriculture, horticulture, development of seeds, animalhusbandry, pisciculture and cultivation of vegetables, mushrooms etc undercontrolled conditions and services related to agro and allied sectors) and plan-tations (excluding tea plantations).

The GoI has made some concessions with regard to retail trade of single brandproducts. It has allowed FDI up to 51 per cent in the retail trade of single brandproducts with prior government approval. The initiative is aimed at attractinginvestment in production and marketing of quality goods.

Sectoral caps

A foreign investor is required to keep his investment in the Indian companiesbelow a prescribed threshold. These restrictions are prescribed by the GoI in itsFDI Policy. For instance, FDI is only permitted up to 26 per cent in the insurancesector, subject to the licensing requirement of the IRDA (Insurance and Regula-tory Development Authority) of India. Similar restrictions are imposed in sectorslike FM broadcasting, defence industries and print media. The GoI has alsoimposed a 49 per cent cap on investment in asset reconstruction companies.

As far as the telecommunications sector is concerned, the GoI has allowed FDIup to 49 per cent in basic, cellular, value added services and global mobile personalcommunications by satellite. The foreign investment can go up to 74 per cent,subject to the approval of the FIPB (Foreign Investment Promotion Board). Incertain sectors like airports, atomic minerals and the exploration and mining ofdiamonds, FDI is also allowed up to 74 per cent.

The GoI may have valid reasons for imposing sectoral FDI caps, but they docreate operational problems for foreign as well as domestic investors. Forinstance, if an insurance company needs additional capital of 100 crore rupees,the foreign investor will be required to contribute 26 crore rupees, whilst theIndian partner will have to provide 74 crore rupees to maintain the mandatoryFDI:Indian investment ratio. The inability or even unwillingness of the Indianpartner to come up with larger sums may create problems for the JV (jointventure).

The sectoral caps also create problems relating to ownership and control. It isironic that a foreign investor, with deep pockets, larger resources and more expe-rience, has to play the role of a junior partner in the JV.

The SSI (Small Scale Industry) sector

The SSI (Small Scale Industry) units enjoy certain privileges in India. Theserelate to taxes and the items reserved for exclusive production by SSI units. TheGoI has permitted FDI up to 24 per cent in SSI units, provided they are notengaged in the production of something prohibited under the FDI Policy.

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The SSI units are also allowed to issue shares or convertible debentures toforeign investors in excess of 24 per cent, provided they give up the SSI status, donot engage in the manufacture of items reserved for the SSI sector and keep theforeign investment within the prescribed sectoral cap.

The FDI Policy, therefore, restricts the entry of FDI in the SSI sector.

Remittances

There are various restrictions on remittances, especially with regard to fees androyalties, which a foreign investor can charge for passing technology to an Indianbusiness partner. The remittances are governed by the Foreign Exchange Man-agement (Current Account Transactions) Rules, 2000, issued by the RBI (ReserveBank of India) in exercise of the powers conferred by the FEMA (Foreign ExchangeManagement Act), 1999. Under the present regulations, the payment of a tech-nical fee and royalty is allowed under automatic route, subject to the followinglimitations:

● the lump sum payments shall not exceed $ 2 million;

● the royalty payable should not be more than 5 per cent for domestic sales and8 per cent for exports;

● the royalty limits will be net of taxes and will be calculated according to stan-dard conditions;

● the royalty will be calculated on the basis of the net ex-factory sale price of theproduct, exclusive of excise duties, minus the cost of the standard bought-outcomponents and the landed cost of imported components, irrespective of thesource of procurement, including ocean freight, insurance, custom duties, etc.

The approval of the MCI (Ministry of Commerce and Industry) would be neededfor remittances more than $ 2 million and royalty in excess of 5 per cent of localsales and 8 per cent of exports.

Tax rates

India has been witnessing frequent changes in tax rates. As per the tradition, thefinance minister of the country presents a budget on the last working day ofFebruary every year proposing changes in rates of several taxes. The rates arealtered primarily with a view to raising additional resources. The government alsotakes into account various economic, social and political factors whilst revisingthe tax rates. The changes, however, can adversely affect the business plans ofcorporates.

For instance, the GoI reduced the peak customs duty to 12.5 per cent from15 per cent and increased the service tax rate from 10 per cent to 12 per cent inFebruary 2006. These changes have a bearing on the cost of goods imported andthose produced indigenously.

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The effective import duty, after taking into account additional customs dutyand education cess, works out to be around 37 per cent on most of the items. Asthe GoI is committed to lowering the customs duty to ASEAN (Association ofSouth East Asian Nations) levels, there is a strong likelihood of rates going downfurther in the near term and imports becoming cheaper.

As far as service tax is concerned, the GoI wants to earn more revenue fromthis tax, as services account for about 54 per cent of the country’s GDP (GrossDomestic Product). There is a possibility of the service tax rate going up furtherin the near future. The increase in service tax will make domestic goods moreexpensive.

The finance ministry also keeps on experimenting with new taxes. The latestin the list is the Fringe Benefits Tax. These taxes impose additional burdens onthe industry.

The GoI has been talking about the need for a stable fiscal regime and alsoappears to be working towards it. However, until such a regime is firmly in place,investors will have to live with sudden changes in tax rates.

Multiplicity of laws

There is no dearth of laws in India. An investor is expected to have a fair knowl-edge of various important commercial laws and ensuing legal obligations. Theimportant laws that have a bearing on trade and commerce are listed as follows:

● Indian Contract Act, 1872;

● Foreign Trade (Development and Regulation) Act, 1992;

● Foreign Exchange Management Act, 1999;

● Income Tax Act, 1961;

● The Companies Act, 1956;

● Indian Partnership Act, 1932;

● Arbitration and Conciliation Act, 1996;

● The Monopolistic and Restrictive Trade Practices Act, 1969;

● Consumer Protection Act, 1986;

● The Sale of Goods Act, 1930;

● Customs Act, 1962;

● Central Excise Act, 1944;

● Central Sales Tax Act, 1956;

● Sales Tax (VAT in certain states) laws and local levies of relevant states;

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● Negotiable Instruments Act, 1881;

● Insurance Act, 1972;

● General Insurance Business (Nationalisation) Act, 1972;

● Trade Marks Act, 1999;

● The Copyrights Act, 1957;

● The Railways Act, 1890;

● Industrial Disputes Act, 1947;

● Trade Unions Act, 1926.

The above is only an illustrative list. There are several other laws concerning useof land, pollution control etc, which an investor has to keep in view whilst under-taking any manufacturing or trading activity. Many laws, like the Urban Land(Ceiling and Regulation) Act, 1976, are archaic and have lost their relevance, butas long as they are on the statute book, investors have no choice but to abide bythem.

In addition, an investor is also required to deal with the countless agencieswhich often do not work in tandem, causing delays and cost overrun.

Judicial delays

Though the idiom ‘justice delayed is justice denied’ sounds like a cliché, it veryaptly describes the Indian judicial scene. Indian courts are flooded with civil andcriminal cases and it can take years to settle a dispute. The delay can be frus-trating for both the litigating parties, more so when the disputes are of a com-mercial nature and the need for quick resolution is pressing.

The GoI has been trying to address the problem of mounting cases by settingup specialized tribunals. The NTT (National Tax Tribunal) is being set up toadjudicate tax-related disputes. It is hoped that the NTT will develop some kindof expertise and ensure expeditious resolution of disputes. The NTT will havebranches in all states. The appeal against the ruling of NTT shall lie in theSupreme Court.

The GoI has also decided to set up an NCLT (National Company Law Tribunal)to deal exclusively with company law-related issues and disputes. The NCLT, asa specialized body, will help in improving corporate culture and facilitate M&As(mergers and acquisitions). It is also likely to expedite the process of winding-upof companies. The GoI, however, has yet to set up the tribunal.

These tribunals will definitely ease some pressure on regular courts. However,that may not be enough. All these tribunals cannot be a substitute for an efficientand credible judicial system, necessary to provide comfort and confidence to for-eign investors.

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Labour laws

India needs to thoroughly update its labour laws, which remain predominantlysocialist. At present, a manufacturing unit is required to follow up to 45 differentlabour laws, many of which are either redundant or completely out of touch withthe liberalization and globalization paradigm.

These archaic laws often give rise to serious problems. They have skewed theproduction structure of the Indian manufacturing industry, which despite abun-dant labour prefers to invest in labour-saving technology. The Contract LabourAct of 1970 bars companies from hiring temporary workers for their core businessactivities. In practical terms, such regulations impair the capacity of a companyto meet any sudden spurt in demand.

The GoI needs to abandon redundant regulations, consolidate existing laws,improve dispute resolution and reduce unnecessary interference by the state orits agencies in business activities.

Poor infrastructure

Physical infrastructure, which includes airports, ports, roads, rail etc is fairlyweak and worn out in India. This is immediately apparent on arrival at any Indianairport. The road network is also poor and good highways are few. India’s portsare yet to be adequately modernized. The turnaround time is high and ships haveto wait for days before loading and unloading. The country also suffers from apower shortage. The problem becomes acute in summer months when the demandfor power goes up.

The GoI is not oblivious to these problems and has taken various initiatives toimprove the physical infrastructure under the PPP (public-private partnership)route. It has appointed a private company to modernize Delhi Airport. The ambi-tious NHDP (National Highway Development Project) is underway and hasstarted yielding results. Similarly, the private sector is becoming involved in thedevelopment of ports. Many private companies are participating in the generationand distribution of electricity. The sector is also engaged in the running of thegoods train and the operation of container services.

Investors are also taking keen interest in the development of infrastructurefacilities in India. However, much more effort is needed to improve the physicalinfrastructure of a vast country like India. Although the infrastructure sector perse offers many opportunities for long-term investment, for entrepreneurs settingup manufacturing units, poor infrastructure is an important issue and cannot bebrushed aside.

Poor infrastructure affects the productivity of the economy as a whole. It alsohas a telling effect on key economic parameters like GDP and per capita income.It reduces the comparative advantage of those industries that are heavily depen-dent on efficient infrastructure facilities for performance and growth.

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Corruption

Even though corruption is an offence under the Prevention of Corruption Act, 1988it has become a major problem in India. Transparency International’s CorruptionPerceptions Index (2005) has placed India in 88th position. India, however, isgenerally much less corrupt than countries like Russia, Philippines, Pakistan,Nepal, Iraq and Bangladesh according to the index.

The increase in corruption can be attributed to several factors, such as cum-bersome procedure, poor computerization, excessive discretionary powers, fre-quent interaction between businessmen and government officials, low wages ofgovernment employees, increasing consumerism etc.

The GoI is conscious of the need to reduce corruption and has taken variousinitiatives in the recent past. Courts and the media have also been playing a con-structive and proactive role in exposing and containing corruption. The incidenceof corruption is likely to decrease in future, with government departments optingfor a system of online filing of applications and granting of approvals.

Conclusion

India is a developing country and is suffering from problems typical of a nationtrying to quickly and efficiently join the league of developed nations. The GoI, onits part, has been trying to improve the business climate by further relaxing theFDI Policy and streamlining procedures. These efforts will yield results in themedium term and will certainly make India a better place to live, work and invest.

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Part Five

Business Culture

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5.1

People

Purvi Sheth,Vice-President, Shilputsi Consultants

India is the seventh largest country in the world, and the second most populous.Recently, the country has been awakened by changes and economic freedom neverwitnessed before in its 59-year history of political independence.

The country is beginning to appear in the front ranks of emerging markets,leveraging potential and hidden strengths. It is a country known to be culturallycomplex and politically democratic but is now witnessing mammoth economicchange.

Today, India is perceived to be one of the more exciting markets, not justbecause of the revenue potential it offers thanks to its large population, but alsobecause of the capabilities it provides at all levels of business management.

India’s true spirit lies in its people. The country itself fosters a relatively opensociety, personifying its rich historical background, sociological diversity and cul-tural peculiarities. There is no one single India.

India – the metaphor for diversity

The Indian population

As per the census figures of 2004–2005, the population of India is about 1.09 bil-lion and the projected population by 2011 is 1.1 billion people. Of this, the urbanpopulation comprises only 0.3 billion. Hence, a large part of India remains semi-urban and rural.

Average life expectancy at birth in India is 65.4 years. It is believed that a largepart of the Indian population is in its middle age.

The total number of working population in 2001 was 402 million people. How-ever, a large part of the Indian population remains engaged in primary agricul-tural activities. In recent years, there has been significant growth of the secondaryand tertiary sectors.

Most youth in rural areas aspire to jobs in cities or semi-urban areas and movethere for better prospects. Many men leave their families in villages and migrateto the cities in search of a lucrative means of making a living.

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In cities, both large and small, corporate India employs a large part of the urbanworking population. Besides, fields like medicine, education and even filmmakingare becoming more corporate.

Language

Contrary to popular belief, the national language is not ‘Indian’. Hindi is the offi-cial national language and is written in devanagiri script. India also speaksseveral other languages and dialects. Each state has its native language. How-ever, 18 languages have been specified in the constitution – including Bengali,Gujarati, Hindi, Kannada, Malayalam, Marathi, Oriya, Punjabi, Sanskrit, Tamil,Telugu and Urdu.

The universal language in business and at the workplace is English. Hindi isspoken and at least understood in most parts of the country, although there is amuch higher level of familiarity with it in the Northern regions. Peninsular Indiais mostly acquainted with English and very comfortable in the native languagesof the states there.

The GoI (Government of India) uses English as a principle language of com-munication, especially with business. However, Hindi is used in correspondenceas well as in formal communication.

The urban population understands multiple foreign accents and is familiarwith terminology from different parts of the world. Most commonly understoodphrases are from the United States and British English.

At the workplace in cities, English is the main language of communication.Educated professionals speak the language fluently. It might be interpreted aspatronizing or condescending to ask a manager if they understand English. Fromrecruitment interviews to stock markets to business news channels, English isthe language that is normally used. Leading newspapers and magazines, bothpolitical and business, are in English.

Every region has a distinctive noticeable accent that permeates into spokenEnglish there. People sometimes tend to slip into regional native languages orHindi in their interactions. These lapses are often inadvertent and a manifesta-tion of their comfort level with their ‘mother tongue’, though most people aresensitive to others present who do not understand the language.

Education

In 2002–03, there were a total of approximately 1,100,000 educational institutionsin primary, middle and higher secondary education. Of this, a large number(approx 651,000) are primary education institutions.

India has 304 universities that are of national importance. High quality edu-cation is available in metropolitan cities, mini metros and state capitals. Theeducation curriculum is affiliated to universities and can be at diverse levels ofdifficulty and standard.

Many people in the urban areas manage to graduate or reach post-graduationlevels. Foreign education is also very desirable and affluent, middle-class Indians

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frequently travel abroad for higher studies. This is viewed as a step up in socialas well as professional hierarchies.

In India, the average level of exposure to management techniques and moderntheories of business is extremely high. Most leading international managementinstitutes either have partnerships or associations with domestic training insti-tutes or business houses, where they conduct management programmes in India.

Management graduates seek employment in ‘global’ and ‘multinational’ com-panies where prospects of global exposure, higher salaries and internationalpostings are greatest.

The popular bias continues to be in favour of technical, commercial and/ormanagement streams. Social sciences and humanities subjects have gained accep-tance in the recent past and although there are several courses offered in thosefields, well known colleges and institutes focus on the most commercially orientedcourses.

Religion

The Indian constitution specifies India as a secular state and professes no singlereligion. All forms of religion and places of worship co-exist. Some 80 per cent ofthe population follows Hinduism and, as per the 2001 census, Islam constitutesaround 15 per cent of the total population, making it the largest minority.

Other religions like Buddhism, Christianity, Jainism, Sikhism and Zoroastri-anism account for a good part of other minority populations. Religions likeJudaism are represented in small proportions also.

In general, India is, religion-wise, a tolerant country. In the workplace, minori-ties and Hindus work together and no overt biases or preferences occur as ageneral rule. Harassment on the basis of religion or bias due to faith is more orless unheard of in corporate India.

Devout people may prefer to pray on certain days in their workplace. This pri-vacy is normally easily granted in a professional setup. Places of worship liketemples, mosques and churches can be found all over the country but some com-panies reserve small spaces dedicated for prayers on their premises.

Most managers are naturally sensitive to disparities in food habits, dressingstyles etc of co-workers of a different creed. People are considerate and avoidinconveniences to colleagues whilst following any religious practices, for examplefasting, on their work premises. Company policies include holidays for festivalsof various religions and equality and fairness is the backdrop for any concessionsgranted for religious reasons.

Businesses should remain neutral on their stances of religion and faith and itis advisable not to bring up religious differences and opinions in the professionalenvironment.

Gender

In 2004–05, India had a ratio of 934 females per 1,000 males. Male life expec-tancy, however, is slightly lower than that for females. In 2001, the literacy rateof men was 75.3 per cent, whereas for women it was 53.7 per cent. Some rural and

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underdeveloped areas of India still tend to take a negative view on gender equalityand female emancipation. In certain regions, the male child is believed to be theperpetuator of the race as well as the future patriarch and income generator ofthe family.

Corporate India has seen several successful women rise to the top echelons ofthe organizational hierarchy in recent years. Today, women are representedacross industries, sectors, geographies and management levels. Indian women arenot only reaching leadership levels, but are key decision makers in boardrooms,both in India and internationally.

For several decades, women have been studying, up to post-graduate levels andbeyond. Fields like research, medicine, physics and biotechnology see manywomen rising to the top. In sectors like education, social services, arts and theatre,Indian women are also highly successful, both nationally and at the global level.

In India, women participate and engage in various economic activities and theirpresence or impact is taken very seriously. Female Indian entrepreneurs runcompanies both large and small, and several lead large global corporations. It ishard to generalize undercurrents of gender-related tensions, but it is common formen to have female superiors and be perceivably comfortable with it.

In urban and semi-urban areas, gender inequality in the workplace is rare andin some places absent in day-to-day functioning. Women are treated with respectand in the professional setup some level of personal distance can be maintained,although workmates interact freely at all times.

In India, women shake hands and dine with their male colleagues and oftenwork till late hours into the night, especially in cities. Private space and freedomis enjoyed by both sexes and personal relationships and familial interactionbetween colleagues of both genders is very natural and casual. In the semi-urbanareas the professional male-female relationships are restricted to being formal.

Today, Indian women are marrying outside their communities and evenreligion.

Indian urban society is transforming into a post-modernist liberal social systemand women are working outside the home and running households simultane-ously, breaking the traditional notion of being a passive homemaker.

The caste system and social structure

The caste system was once made up of four varnas. The highest caste were theBrahmins, who were privileged, whilst the lowest were the Shudras, the ‘untouch-ables’, who performed the most menial of tasks. Other castes were the warriorsand traders. Castes were an outline for personal identity and formed the basis forsocial hierarchy. With time, this system became more rigid and abuse of power aswell as cruelty to the lower castes plagued the system. It degenerated considerablyand steps had to be taken in the independent Indian constitution to give all castesthe same rights and duties and allow for certain concessions for the oppressed.

Today, practising the caste system or discriminating on the basis of caste islegally forbidden. In cities and urban areas, caste-ism is not practised anymore.Most people are even unaware of others’ varna status, mingling with each other

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freely. It is considered impolite to ask peoples’ caste in social and professionalsituations.

In certain rural areas and interiors of the country, the caste system dominatesthe social system. Discrimination on the basis of caste continues there and thedepressed caste is frequently ill-treated. Legislation and media focus in theseinstances have helped their decline, although the country is not rid of it entirely.

Since the system and its accompanying malaise has been deeply embedded inthe Indian social structure, a positive discrimination was planned to help upliftthe ‘backward classes’ who had not had the opportunity and right of entry to con-temporary facilities. This meant the reservation of places in educational institu-tions for the historically under-favoured, since they haven’t had the good fortuneof accessing modern education and other benefits of the developing nation. Severallegislative initiatives have come about, including a proposal for employment quo-tas in the corporate world, but this bill is under contention.

Business culture

Indian corporate culture has evolved over a period of time. The workplace todayis the amalgamated culmination of Western influence on Indian ethos. Most largeglobal business conglomerates co-exist with mammoth diversified Indian groups,as well as smaller entrepreneurial setups.

Every business and organization will have a unique culture that embracesIndian society and its norms, global practices and regional differences. There isnot one homogeneous Indian management culture.

Talent acquisition

Availability of skilled manpower across segments and sectors within the countryas well as talented Indians in different parts of the world that are willing to comeback to their home country, supplies a unique skill conglomerate that representsIndia.

Most job seekers and aspirants at junior and mid-levels look for salary hikesand benefits of growth, learning and potential for future avenues. At senior levelsthe motivators, apart from high salaries, are stability and span of control. Indianmanagers usually look for international exposure and impact on the global busi-ness in jobs.

Indian managers make discerning choices in their employment. Today, with anumber of sectors open to foreign investment as well as rewarding financial mar-kets, professional managers are faced with many choices and demand a commen-surate price for themselves.

Large talent pools are available across industries, functional specializations aswell as leadership and supervisory levels. People with international education andexperience are also widely available. They can be accessed through networks,industry associations, search consultants or even advertisements.

In interviews, it is not considered intrusive to ask about family details or ageand resumés contain personal information like marital status. Interviews are

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regarded as formal, the interaction taken seriously and most candidates are notshy. At middle and junior levels, extensive questioning may be required to under-stand exact responsibilities and skill sets. For top management, the style is lessformal and on a more casual level. It is common for women to be interviewed bymen (or vice versa).

Managing people

Indian managers view their workspace as a place that comes close to home. Rela-tionship with superiors is formal, especially in semi-urban areas and certaintraditional industries. Bosses are usually not called by their first names but areaddressed as ‘Mr’ or ‘Ms’. Peer level interaction is more casual and people developpersonal affinities, often involving families.

The post-modern organizational setup is different. Newer industries like IT(Information Technology) and ITES (IT-enabled services), with a younger workforce, is more casual and the supervisor is treated with respect but the interfaceis less formal.

Work relationships are identified by familial relationship formats. Superiorsand bosses are thought of as the ‘head of the family’, whilst peers are regarded inthe same way as siblings. Age is respected and revered.

Communication is generally direct,. Empathy is required in interaction andbody language is a good indicator of people’s thoughts and feelings. Languagepropriety and decency is essential, especially in the presence of women. However,in liberal work environments, it is forgivable to use inappropriate language up toa point. Touching is considered a sign of intimacy and not acceptable until a highlevel of familiarity is established.

Managers are motivated by affiliation and a sense of identification withthe organization. Power, recognition and achievement are large drivers forperformance.

Conclusion

The differences and divides in social structures, behavioural patterns, power andwealth as well as socio-political economic systems constantly influence the wayIndian people are perceived. It is difficult to make generalizations about Indiansociety as the nation is a complex and curious mix of races, cultures, ideas andbeliefs.

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5.2

Language andCommunication

Deepak Mahtani,Managing Director, Winning CommunicationsPartnership Ltd

There is no doubt that the international language of commerce is English, andthis is true in India as well.

However, as any visitor to India would have experienced, the English usedin India is quite different from that used in the UK or the United States. Itwas George Bernard Shaw who remarked: ‘The United States and the UnitedKingdom: two countries divided by a common language.’

English exists in India today because of British rule. One of the legacies leftbehind alongside the schools, the legislature, railroads and parliamentary struc-tures, is the language of English. It is because of the English language and acombination of centuries of a strong emphasis on mathematics and sciences thatIndia is on the world stage in terms of IT skills and BPO (Business ProcessOutsourcing).

Many businessmen and women quickly drop their guard once in India becauseso much seems to be in English – the signs, the street names, and the billboardslook very familiar and people in the streets of Mumbai or Bangalore speakEnglish. This would not be the case if they were travelling to China or Japan orBrazil. It is important for visitors to realize that they should not drop their guardbut rather keep their cultural sensitivities in tact, in spite of appearances.

It is both true and false that all Indians speak English. With a population ofover 1 billion, there are differing degrees of competence in English. India has thesecond largest number of English speakers in the world after the United States.Some 15 per cent, or 150 million people, speak English. Some of the graduatesfrom the venerable Indian universities and colleges read and write English flu-ently. However, their spoken English and comprehension levels may vary greatly.

Others in various professions may have been abroad to the United States orEurope for a year or longer and would therefore have great fluency in the Englishlanguage. Now with the proliferation of satellite and cable television, more andmore Indians are being exposed to American English or British English, withpopular serials and Hollywood blockbusters.

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However, to assume that they speak English to the same level of fluency andaccuracy of a native English speaker is to flirt with danger. Most people doingbusiness with India quickly discover that language and understanding are thekey to ensuring success in India.

As with many things in India, there is much diversity in the languages of India.Whilst there are 18 official languages recognized by the Indian constitution, thereare over 1,600 minor languages and dialects, according to the 1991 census. Hindiis the national language and most Indians will learn Hindi plus the local languageof their state. To this they add English, thereby becoming tri-lingual. Very fewIndians learn to speak any other foreign languages, although some companiesare today training their staff in some of the European and Chinese languages,given the growth of both their domestic economies as well as their internationalbusiness.

Given the extremes in India, one also finds extremes in the English language.You will come across urban professionals, educated in some of the best institu-tions in India, who have become prolific writers, novelists, politicians and jour-nalists. You will also regularly come across taxi drivers, waiters, receptionists,shop-owners who earn their daily keep through contact with tourists and visitorsto India with limited vocabulary, little grammar but great pride in saying ‘I speakEnglish’ with a wide smile.

In between these two often colliding extremes is what many call Indian Englishor ‘Hinglish’, a new adaptation to the language to suit their own culture. You mayhear some interesting expressions such as ‘prepone’, which an Indian proudly toldme quite plainly was the opposite of ‘postpone’. He had a smile on his face whenhe said ‘You English never came up with it but we Indians improve your languagefor you.’

Other expressions may be akin to ‘old English’ – that which we were accus-tomed to in the 1950s and ’60s. I recently received an email “announcing the saddemise of my uncle” which I had to think twice to realise his uncle passed away.Or on your first visit to India you might be asked ‘What is your good name?’, whichsimply means your family name (and does by no means indicate that your firstname is bad!)

Some may refer to a group of women as ‘of the fair sex’. ‘Please do the needful’or ‘please expedite’ are some other common expressions.

There are still occasions, perhaps in an attempt to impress foreigners, whensome Indians may speak in very flowery language. This can lead to interestingresults. I was recently at a high-level business meeting where the host of a gov-ernment delegation, realising that the programme was running behind scheduleand his own speech would add a further delay, began with: ‘Ladies and gentlemen,I am sorry to cockroach on your time further’. At this some 50 or so delegatesstarted muttering under their breath, looking at the floor for cockroaches! Ofcourse, what he meant was ‘encroach’.

Once you have become accustomed to these linguistic challenges, there comethe more important and potentially more serious ones related to cross-culturalcommunication.

The obvious communication issues are accents, names and pronunciation.There are certain rules of common sense that help. Speak clearer not louder, and

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slower not faster (I tend to reduce my own speed by 20 per cent with a speakerof another culture as a habit). Asking them to repeat if you have not heardsomething, rather than saying ‘I can’t understand your accent’ lends to a betterrelationship with your Indian counterparts. Also remember that they, too, havethe same problem with many accents, names and pronunciation. Do not be sur-prised if an Indian slips into both the British and American pronunciation oftomato or potato in the same telephone call. He or she is constantly required toswitch, depending on which client and geography he/she is working with at amoment’s notice.

The first serious challenge is the fact that some cultures adopt a very directstyle of language, whilst others have a more indirect one. The United States hasa very direct style of communication. Americans say what they mean and meanwhat they say, with seemingly little regard as to how it is received. This may comeover as very confrontational and aggressive to less direct cultures. Compared tothe Americans, the British are not as direct, but to Indians, they still say it likeit is, albeit perhaps in a more roundabout way.

India is, on the whole, a country that is less direct and less confrontational interms of language and communication. This comes over as a lack of assertivenessor not being willing to respond in a concise or direct way.

Whilst it would not be a problem to say: ‘You’ve messed this up’ or ‘This isshoddy and unprofessional’ in the US or the UK, Indians on the whole will adopta language that is less direct and confrontational, by saying ‘We may have to dothis again’ or ‘We should find a better way of doing this’.

Whilst a Westerner may simply say, ‘I’ve got a problem’, an Indian may, moreoften than not, say something along the lines of: ‘Would you mind sparing15 minutes for me?’

The second challenge is the how the language fits the context. The same words,phrases and statements have different meanings in different contexts. I have beenin numerous meetings with both Westerners and Indians present, both in Indiaand overseas, where it becomes obvious that both parties are understanding verydifferent things at the same meeting, for example ‘that could be difficult’ to anIndian means ‘that’s impossible’ whereas to other nationalities it may simplymean that it would be a challenge.

Another example of misunderstanding could be with timeframes. Time orien-tations across cultures are very different indeed, as any Swiss person workingwith a Spaniard will tell you, and vice versa. ‘Short term’ and ‘long term’ arephrasess used quite regularly.

In most of Western Europe and the US, executives in the IT and finance indus-tries were asked what timeframe they would give for short term and long term.They viewed short term as weeks, months, or six months maximum. Long termwas deemed as anything more than that.

Executives in India working in the same industries were asked the same ques-tion and replied that they saw short term as anything from six months to twoyears and long term as anything between from two to five years.

Surprisingly a Swedish company wanting to test run some products in threeIndian cities instructed their Indian partners to hire 50 sales staff for a short-termtrial period. The Swedes finished their short term in three months and decided to

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pull out, leaving the Indians with 150 sales staff for another three months withnothing to do!

It seems clear then that when it comes to language and communication, espe-cially when one is dealing with time, deadlines and deliveries, it is essential to bevery clear in specifying exact dates and times. The use of any time-bound phrasessuch as ‘immediate’, ‘asap’ and ‘prompt’ need to be qualified so there is a commonunderstanding as to what these imply.

The third challenge is the simple use of ‘yes’ and ‘no’.I have trained thousands of Westerners in cultural awareness of Indians.

Almost all, with very little exception, say that Indians generally do not say ‘no’.It is true that many Indians find it very difficult to say no as it is too direct, dis-rupts harmony and is counterproductive to a good relationship. One piece of adviceI give expatriates is to never ask a closed question – a question with a simple ‘yes’or ‘no’ answer – as this can lead to a dead end. It is better to use open questions,so rather than asking: ‘Will you be able to deliver by 15 June?’, to which the answerwill invariably be ‘yes’, take a more indirect approach and ask ‘When do you feelyou will be able to deliver?’

Body language is also something to consider. The differences in internationalbody language has been the subject of many specialist books over the years andthe lack of understanding across cultures has possibly been the single largestcause of loss of contracts when doing business.

Visitors to India will notice that Indians have a typical shaking of the headaction or ‘the Indian nod’. This is not the ‘yes nod’ as seen in Western societies. Itis a circular ‘figure of eight’ nod. Many take a group of Indians in a meeting or atraining context smiling broadly, agreeing with everything you are saying andnodding in this way as a very positive sign of complete understanding and agree-ment. However, the Indian nod does not mean ‘yes’ or ‘no’, but simply ‘I’m enjoyingthis conversation, a relationship is being built, so please carry on – I am listening.’Do not mistake this for agreement.

Due to the fact that the Indian language is more indirect, words often do notmean exactly what they should. Whilst it is relatively safe to trust verbal com-munication in the West, more attention needs to be paid to non-verbal communi-cation in India. Often what is not said is as important as what is said. Sometimesone needs to ask two or three leading questions to get to the correct understandingand action. Some managers often say ‘we need to read between the lines’ whencommunicating with Indians.

It is said that humour is a great ice-breaker and I would tend to agree with this.However, humour has its own context and what sounds humorous in one culturedoes not necessary translate or assume the same context. I have been in manymeetings when a joke made by a British colleague falls on deaf ears with theAmericans, French and German. It is therefore no surprise that often Indians maynot understand or respond to your humour. In some cases, it may even causeoffence or they could assume you are laughing at them.

Tied into humour are idioms. The English language is full of idiomatic expres-sions. Again in their context, they are fully appreciated and understood. However,taken out of context, they could be interpreted more literally. Thus, often withIndians, when the English use expressions such as ‘this will be the best thing since

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sliced bread’, the Indians may be thinking ‘Why are the English so hung up abouttheir bread?’ and ‘Can we say “the best thing since naan or chapatti”’?

Another area of caution is that of sarcasm and cynicism. Again, in a particularcultural context this is understood, but many an Indian businessman has walkedout of a meeting assured of a deal with their British counterparts when they said‘Now, that’s an interesting idea!’ in a tone of voice which in fact meant exactly theopposite.

Accents and pronunciation can be a source of frustration to get right, especiallywhen on teleconference calls. The key to this is to ask them to repeat and spellnames or other concepts that may not be clear, and remember it works both ways.Some Western accents are very strong and can even cause difficulty between theWelsh, Irish, Scottish and English.

Much of the communication tends to be more formal in India. This is due to theway language is taught and learnt, often very formally and by rote. Expect yourIndian colleagues to call you by your last name or Mr Bob (Mr + First name) evenif you have tried to insist to be on a first name basis. They will often do this toavoid over familiarity which would undermine their own status with their col-leagues. The ‘Indian’ in them will find it very difficult.

Having outlined some of the key differences, here are a few solutions. Keep yourlanguage clean and simple – jargon free. Do not embellish your words – eitherspoken or written – any more than is necessary. Keep it simple, understandableand as far as possible fool-proof, so no misunderstanding or misconception takesplace. Confirm timescales with specific dates and times.

Above all, even if you get it wrong, remember if you have a strong relationshipwith your Indian colleagues, it will be easier to overlook many of these differences.

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5.3

Management andLeadership Style

Deepak Mahtani,Managing Director, Winning CommunicationsPartnership Ltd.

One of the key challenges for foreign companies and managers doing business inIndia is trying to understand Indian leadership and management styles. In someareas, especially in the technology sectors of IT oursourcing and software, theinfluence of Western multinationals operating within India have made someIndian companies mirror Western culture.

However, despite appearances, the majority of the work force in India still oper-ates under a more traditional Indian management structure. This is especiallytrue of many of the family-owned and -run companies and is more noticeable thefurther one moves away from the big cities in India. Status, age, position, and rankstill continue to be important in terms of authority and respect as seen in theworkplace. Decisions still tend to be made at the very top of the leadership chain.

It is interesting to read of the current buy-out of Corus by Tata Steel, and thisis fairly typical in terms of Indian management. Corus produces four times asmuch steel as Tata Steel, has a higher market value and turnover, and logic wouldsay that Corus should be the buyer. However, Corus found in its negotiations thatfamily-controlled firms such as Tata Steel were not willing to sell.

Authority levels in India may be different from Western experience and expec-tations. Even though someone in India might share the same title or position withyou, his or her actual authority levels may be lower than yours in terms of signingoff an agreement, passing on information and the like. It is therefore essential toensure you know what your counterpart’s authority actually allows him or her todo. Remember, do not be fooled by appearances.

In spite of the recent economic resurgence of India since 1991, some 80 per centof all Indians have Hinduism as their core belief. As a result, many Indians stilltoday operate with their age-old traditions. Although it has been outlawed by twosuccessive governments, and many modern Indians in the big cities will quicklytell you it does not exist, one of the key beliefs in the caste system is that of status,which still pervades the mentality and mindsets of many Indian managers.

Whilst the system may have less of an influence that it did in the past, itsimpact is evident in the hierarchy found in India today.

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From airport authorities to immigration officers to border controls, civil ser-vants and even hotel staff, hierarchy still holds sway in India. Whilst John Smithmay have created the concept of ‘division of labour’ for the West, Mahatma Gandhionce said: ‘It is the strict adherence to the division of labour ordained by birth thathas made Indians the shortest lived, most resourceless and most exploited nationon earth.’ It is this hierarchy that leads to much of India’s bureaucratic proceduresand paperwork that no one seems to be able to escape.

Figure 5.3.1 below illustrates the legacy many Indian companies have receivedand are still often struggling to move away from.

Trade Group

family

sons,nephews

traditional.organized

Source: Indian Leadership Style, Richard LewisFigure 5.3.1 The legacy of many Indian companies

The characteristics of this organizational structure are:

● family members hold key positions;

● policy is dictated by trade groups;

● groups work together, develop close personal relations (through intermarriage)and come to each other’s support in difficult times.

This then translates in a number of observable behavior patterns:

● tight control at top;

● limited delegation;

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● managers value status and power;

● staff await and expect direct, personal instructions;

● ability to cope with uncertainty;

● a fertile ground for creativity.

Even in the more cosmopolitan cities like Bangalore and Mumbai, beneath thefacade of the billboards and young cinema-goers are age-old obligations and sym-bols of loyalty. As Daraius Ardeshir, managing director of Nestlé India said whilstexplaining the difficulties marketers face when looking behind the facade ofIndian modernity, ‘Indians are capable of living in several centuries at once. WhenI visit my father’s house I still kneel and touch my forehead to his feet.’

In most Indian companies, everyone knows their place in society and in busi-ness. There is a strict adherence to hierarchical structures and a reverence forthose in senior positions. This is sometimes demonstrated by junior staff standingto attention when their bosses or foreigners enter a room.

As someone who even appears senior, you will be afforded the best service in or-der to keep pleasing you, as is evidenced in this brief dialogue which seems to bea common experience of many …, from Cross-Cultural Dialogues by Craig Storti.

Dialogue

Writing a Report

Ms. Colson: How is the evaluation going, Ram?

Ram: It is finished, ma’am. We can start on the report anytime now.

Ms. Colson: Good. How long do you think it will take?

Ram: Ma’am?

Ms. Colson: To write the report.

Ram: I couldn’t say, ma’am.

Ms. Colson: You don’t know how long it will take?

Ram: When would you like it, ma’am?

Ms. Colson: Well, I want to give you enough time to do a good job.

Ram: You can be sure we will do a good job, ma’am.

In Ram’s culture, it is the boss’s job to give direction and the employee’s job toplease the boss. It would be presumptuous of Ram to say how long the report willtake, for that would be usurping Ms Colson’s right as the boss to set deadlines. Inany case, a good boss would know how long such a report should take and wouldspecify accordingly. What is more, Ms Colson is paid a generous salary to makedecisions like this and should not try to pass on the responsibility to Ram.

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Ms Colson is starting out from the point of view that employees are the bestjudges of their work and will perform better with minimum interference. Theboss’s job is to orchestrate matters so the work can be done in the time theemployee says he or she needs. In short, employees are given much more respon-sibility for their work. One study of authority patterns in organizations in Indiafound that 85 per cent of subordinates surveyed believed they worked better underclose supervision. It is hard to imagine many Westerners feeling the same way.

The cultural root of Ms Colson’s attitude is probably that visceral reactionagainst rank, authority, and hierarchy in most of Europe and the US, with a biasfor individualism and self-reliance. The ideal boss is still thought of as the onewho gives workers their freedom and generally does not care what they do so longas they get the job done.

A German manager of a company I work with visited India for the first time afew years ago. He was surprised to see a person serving coffee and tea on everyfloor of the fourstorey building. Assessing this as a waste of manpower, he thenimported and installed a new coffee dispensing machine, serving lattés, cappuc-cinos, and tea on every floor of their office building. A number emailed him tothank him for this investment. On his next visit there, he was shocked that thesame four people who had been serving were standing by the machines, politelyasking with a big smile ‘What would you like, sir?’, and mechanically pressing thebuttons. He was told by the Indian manager that this was necessary, given thenature of Indian society, and to sack them would be to take away their livelihood.

Due to the hierarchy in India, there is always a need for a boss or several bossesand they demand – and sometimes do not deserve – respect from those workingfor them. The boss is always right, so many Indian workers or team members willnot disagree or correct their superiors even if they know they are incorrect.

In contrast to Western hierarchical relationships – which tend to bebased on a fixed status and power relationship, governed by contractualagreements and an ideology of essential equality – Indian hierarchicalrelationships are oriented toward firmly internalized expectations inboth superior and subordinate for reciprocity and mutual obligations ina more closely emotionally connected relationship.Alan Roland, In Search of Self in Indian and Japan, PrincetonUniversity Press, 1988

Workers are generally told what to do and how it is to be done. This is one of thekey criticisms of Westerners doing business in India.

Also significant is leadership style. In contrast to many Western cultures thathave adopted a participative or empowering leadership, which stresses activeparticipation, initiative, idea generation and a greater delegation of responsibilitythroughout the organization, Indian leadership style tends to be more directive.This is common to India and most of Asia. Directive leadership stresses the direc-tion given by senior managers to those junior to them. It looks to the boss forinstructions, knowledge, wisdom and strategy, and does not encourage much ini-tiative or feedback.

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One common refrain from many Westerners in India is that there are not toomany chiefs, and not enough Indians, but rather there are too many managersbut not enough leaders.

This, of course, is not the full picture as evidenced by the CEOs of some ofthe largest IT conglomerates in India today, such as Infosys and Wipro, to namebut two. However, these would be the exception to the rule rather than the rulethemselves.

…Private companies suffered from problems typical of government sectorcompanies in India … Salaries were low compared to non-governmentsector companies. The principal reward that people looked forward to wasthe acquisition of new titles and perquisites by promotion into highergrades. The company had many levels of managers so that people couldbe rewarded as they progressed upwards in their careers. Power to makedecisions was related to rank. Decision making was encumbered by theplethora of levels that information had to flow through. The directors andgeneral managers sat atop tall organizational pyramids. … And thus,level-by-level, the pyramids built up. The pyramids were organized byfunctions with a ‘functional’ director, appointed directly by the govern-ment, on top. People within one pyramid did not work easily with peoplewithin others. … [no] one could respond quickly to the changing needs ofcustomers.Arun Maira

Unless India produces more leaders who are able to lead rather than follow, itseconomy and long-term growth will be undermined. However, it is encouraging tosee that it has a growing number of excellent examples and role models.

One such example is that of Mr Etalluvalapil Sreedharan, who has become ahero by doing the seemingly impossible. Much of the infrastructure in India suf-fers due to the old style of management where bribes and corruption, a hierarchyof rule and command created delays, which led to half-finished projects in roads,airports and railways. The 10-mile metro in Kolkata took some 22 years to build,with a budget revised 14 times. As managing director of the DMRC (Delhi MetroRail Corporation), Mr Sreedharan built Phase One of Delhi’s three-stage metroproject last December – a total network of some 33 miles, strictly on budget andnearly three years ahead of schedule. This caused the Prime Minster ManmohanSingh to call Mr Sreedharan ‘a role model for future generations.’

Another such person who has challenged traditional Indian management andleadership style is Sam Pitroda, by calling into question many of the stereotypes,bureaucracy, hierarchy, bribery and corruption to government level.

India desperately needs to create technological leaderships at all levels.While the information technology entrepreneurs have been justifiablycelebrated in the country, we need similar stories in other fields. It isheartening to know that some segments of India’s politics and adminis-tration have begun to understand the importance of technology. Theyhave also begun to understand that if they do not keep up with the

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pace, technology would make them redundant. In the 1980s when weintroduced computerization of railway reservation system, certain quar-ters of India’s establishment reacted with unvarnished anger. Theythought it spelled doom for hundreds of thousands of railway employees.Little did they realize that while technological intervention can be dis-ruptive in the short term, in the long term its benefits far outweighthe loss.Sam Pitroda

These role models need to increase in number and impact for India to change. Theexample of the IT companies have given many Indians and the growing middleclasses their ‘big break’. A strong consumer culture is pervading through India,not only in the five big cities, but throughout India. This boost of belief in oneselfand the ‘I can make it’ mentality is overtly tangible today.

There is every indication that a political will to change does exist. The Presidentand the Prime Minister have seen how, in many ways, the private sector andindustry has led the way to bring India into the market as a serious global player,something the GoI (Government of India) has been unable to do.

I was studying different dimensions of knowledge society, how will it bedifferent from the industrial economy. In the knowledge economy, theobjective of a society changes from fulfilling the basic needs of all-rounddevelopment to empowerment. The education system, instead of goingby text book teaching, will be promoted by creative, interactive selflearning – formal and informal – with focus on values, merit and quality.The workers, instead of being skilled or semi-skilled, will be knowledge-able, self-empowered and flexibly skilled. The type of work, instead ofbeing structured and hardware-driven, will be less structured and soft-ware-driven. Management style will emphasize more on delegationrather than giving command. The impact on the environment and ecologywill be strikingly less compared to the industrial economy. Finally, theeconomy will be knowledge-driven and not industry-driven.President Abdul Kalam, Inauguration of International Conference onDigital Libraries, 24 February -2004.

Whilst progress may be slow, India often does things very differently from othercountries. As Yogesh Deveshwar, chairman of India’s largest tobacco firm ITC,said: ‘We are building a cathedral. They see us chipping away at the stone, andwonder at such a wasteful activity.’

In conclusion, perhaps the tiger analogy often linked to Asia (Japan, Taiwan,Singapore, Thailand and South Korea) is less appropriate to describe India thanan elephant – if someone is standing in front of one, they would do better to eithersit astride or step aside.

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5.4

Business Interaction

Deepak Mahtani,Managing Director, Winning CommunicationsPartnership Ltd.

Many a business person starting to do business with India is confronted with anumber of challenges. The way business is conducted is different from what onewould expect. Having done business with Japan or South Korea does not neces-sarily guarantee success when trying to do business in India.

The reason for this is that there are some key differences in the way Indianstackle business, based largely on the country’s history and religion. Whilst manythings are changing in terms of business culture, with more professionals andcompanies trying to adopt Western business culture, the majority of Indian busi-ness still lags behind.

India has a long tradition spanning over 7,000 years and its culture isengrained more deeply than many would care to admit or acknowledge. WillIndia ever change? In his book India Unbound, Gurcharan Das, former CEO ofProctor & Gamble, wrote: ‘…India is more likely to preserve its way of life and itscivilization of diversity, tolerance, and spirituality against the onslaught of theglobal culture. If it does, then it is perhaps a wise elephant.’

And it is these cultural distinctives that make India a challenging country inwhich to do business.

The key concept to grasp is that India does business through relationships.Extended family, arranged marriages, the relationships between family and busi-ness, the interdependence of culture, religion, work and life are only a fewexamples.

This legacy of the family is one of tradition. From independence in 1947 up until1990, 80 per cent of India’s output was controlled by 20 large conglomerates –mostly family-owned and managed businesses with names like Tata, Birla,Mahindra, Bajaj and others permeating every industry sector. These names arestill around today. It is unlikely that this family-centric approach will decline inany major form for the foreseeable future.

It is estimated that family businesses make up some 70 per cent of the totalmarket capitalization in India today and 75 per cent of total employment. Indiansare born into groups (families, clans, castes, sub-castes and communities, be theysocial, cultural or religious). They live with a sense of ‘belonging’ to these specified

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groups, which give them both security and identity. They act as social security,marriage bureaus, money exchanges and job agencies, etc.

It is said that an Indian’s greatest fear is to be left alone to fend for himself.This is, of course, very different from the Western individualistic culture.

It is within this social context and sense of relationship that business is con-ducted best. Many companies and indeed some of the largest in India todayemploying 20,000+ employees often appear as an ‘extended family’, with mutualrespect and responsibilities being manifested at every level of the organization,between senior managers and middle managers, managers and employees andcolleagues to colleagues. This is one of the main reasons that relationships arecritical in doing business in India.

Whilst much Western business is done in a task-oriented way, it would be wisefor anyone trying to do business to focus more on personal relationships.

This involves knowing family history, company history and referring to it.Remembering family names, ages, and job titles is very important. You may besurprised by what appears to be Indian curiosity when asked ‘How much do youearn?’ or ‘What kind of house do you live in?’ These are not intended to be probingquestions, but purely aimed at building a relationship. The Indian mindset is ‘ifI can trust you as a person, I can trust you with my business.’

This is often why you may be invited for endless cups of tea or meals with yourIndian hosts. Business deals may seem to take longer than you are used to. How-ever, to an Indian, the view seems to be: ‘if I know who I am working with, I canleave the business to take care of itself.’

Initial contacts or meetings often may take place over lunch or dinner, usuallyin a neutral place such as a restaurant or hotel lobby. If an Indian invites you tohis or her home, it is a great honour and you should accept if you can.

Contacts or Referrals

Another key to unlocking success in India is working with contacts or referrals.Cold calling works to some limited extent in the Western business world. How-ever, the rate of success of cold calling in India is next to nil. Instead, success isaided very much by who you know or who has recommended you. This is not tosay that appointments are impossible to come by in India – people generally aretoo polite to refuse – but you may not see the right person at the right level forany decision or buy-in.

Using your local contact and going under his or her recommendation will saveyou much time and effort. They know the local customs, ways of doing businessand can help you navigate an otherwise sometimes frustrating environment.

Status and Authority Levels

It is very important to know who your counterparts in India are. What authoritylevel/s does he or she have to agree terms and conditions with, sign agreementswith, etc. Many a Western business person has experienced a very positive

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meeting, with all the right signals and many promises, but then received no busi-ness at the end of the day.

The myriad of inter-relationships and interpersonal contacts that people havemean that it is always preferable to go with a referee, someone who knows thelocal scene or is an agent. Even if it costs a few percentage points less in terms ofprofit margins, it does tend to save a great deal of time and sometimes endlessmeetings with a string of people.

Due to the importance attached to status and hierarchy, it is essential to getyour own credentials right. Some business people going to India make separatecards indicating their position, their qualifications and any letters after theirname. Often a letter of recommendation from head office or a senior manager orCEO can suffice. This is especially so if the perception of your Indian counterpartis that they perceive you to be young and inexperienced in a culture where ageand experience derived with years of service are still important. It is a rare occur-rence that (apart from a handful of IT and finance companies) people in seniormanagement are aged below 50 years.

Whilst much Indian business interaction in the office environment seems for-mal, the importance of an informal setting cannot be overlooked. It is often ininformal settings (over a cup of tea or meal), that problems are raised, real deci-sions are made, and true and honest feedback on project deadlines and timetablesis received.

Negotiation – everything is negotiable

Another key to business interaction in India is understanding negotiation or whatmany Westerners call ‘haggling’. It is said that Indians have negotiation in theirblood. They are a nation of traders and marketers. Every young Indian grows upwith the concept that ‘everything is negotiable’. Sometimes children as young atfive years old can be seen bartering for sweets. This practice continues throughouttheir lives.

Negotiation is a way of life and an Indian quickly learns that if one does notnegotiate, he or she ends up the loser. Negotiatation arises with rickshaw drivers,taxis, and shopowners. It is expected and is not restricted to price. Indians nego-tiate what table they sit at in a restaurant, which floor of a hotel they stay in, howfar from the elevator they are located – the list goes on.

For the businessman in India, the biggest frustration will be an aversion tonegotiate and accepting things at face value. What you see is not necessarilywhat you get. Indians also negotiate time and deadlines. What begins as a time-frame of four weeks will be negotiated to six or eight until gradually a commonagreement.

Many foreign business people say that the Indians are some of the hardestnegotiators in the world and truly do ‘drive a hard bargain’.

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Conflict

Due to the strong relational basis of society, conflict and conflict resolution is verydifferent to what many Westerners are accustomed to. In many Western societies,conflict is a part of work and business. In fact, it is part of the creative cycle.

In India, however, Indians tend to avoid conflict at all possible cost, as it is seenas bringing shame and loss of face to an individual, a company or indeed an entirenation. Conflict is handled within the context of the relationship with an intentionto preserve the relationship and the harmony within it.

This is best illustrated with two examples:A French company I dealt with had a good relationship with their Indian part-

ners, whose managing director was known to me. After a few years, however,things became difficult. The French managing director called on a Friday, tellingme that his Indian counterpart had not returned his calls, did not see the impor-tance of the deadline and as a result was going to sue the Indian company. Aftercalming him down, I told him that this is not how things are resolved in India.Having told him to give me the weekend, I spoke to the Indian MD, informed himof the French MD’s anger and that urgent steps needed to be taken. We had athree-way telephone conference on the Monday talking warmly about the lastseven years of work, how they worked well together, and into that context intro-duced the current problem. By the end of the discussion, having re-establishedthe relationship, we managed to move on.

A colleague of mine who travels regularly to India recounted a story of being ina traffic jam in Bangalore. His private car was taking him and his two overseasguests from the hotel to Electronics City. In heavy traffic, his car hit the taxi infront. Already running 30 minutes late, the foreign guests were becoming impa-tient. The two drivers got out of their cars, inspected the damage, exchanged afew words and pointed in a direction. A few metres later, they turned off the mainroad and stop off at a tea shack. By this time, the two guests were furious anddemanded their host did something, but the Indian said: ‘It will be sorted out.’ Afew minutes later, the two drivers walked back to the cars and my colleague’sdriver just put a few hundred rupees in the taxi driver’s hands for the repairs andgot back on the road. There were no lawsuits, no insurance claims, conflicts werehandled within the relationship, seeking, above all, to maintain harmony.

If at all possible, it is better to try to work out differences within the relationshipand maintain harmony with colleagues. Do not instantly say: ‘I’ll take you to court’or ‘You’re breaking the contract.’ These concepts of court and contract are verydifferent in India.

Some of the key differences in Indian business interaction can be summed upas the following:

● Values:– success brings increased status;– creativity is admired;– positive attitude to experimentation;– honesty is not a major issue as a value, but is relative;– fatalism is widespread;

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– risk-taking is common and seen as positive;– strong work ethic.

● Relationships:– accepting hierarchical system with its duties obligations;– boss must be humanistic;– loyalty to a group;– honour to both family and group is defended;– strong family orientation.

● Negotiating Style:– given authority (but may choose not to use it);– negotiation is seen as a game of life;– indirect;– non-confrontational.

Keeping these factors in mind will enable your business interaction in India tobring successful results. Indians are often said to be some of the most hospitableand friendly people. You will not only engage in good, effective business, but alsodevelop some good friends who will challenge your own views and ideas and openyour mind to new horizons. Perhaps this is the richness of India being able toassimilate the old and the new, the good and the bad, the rich and the poor. Theextremes do not seem to contradict or clash as much in a country such as India.

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Part Six

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6.1

Trends in the IndianPharmaceutical Market

KPMG

The Indian pharmaceutical sector is currently undergoing unprecedented change.This can be attributed largely to the country’s introduction of product patents onJanuary 1st, 2005. Under the new patent regime, many multinationals are mak-ing a comeback on the Indian centre stage; the attractions being India’s traditionalstrengths in contract manufacturing and as an outsourcing location for R&D,particularly for clinical trials and other services.

Today the sector has increasing direct investment from MNCs and is placingmore emphasis on the biotech segment and brand development. For the future,R&D and acquiring skills from one another/consolidation of the fragmentedIndian pharmaceutical sector will become imperative.

Global pharmaceutical outsourcing is also gaining popularity and Indian com-panies are well poised to exploit this opportunity with its technical skills, regu-latory skills, cost advantage and global relationships.

India is fast becoming a leading destination for CRAMS (Contract Researchand Manufacturing) with advantages like cGMP (Current Goods ManufacturingPractice) and FDA (US Federal Drugs Agency) compliant facilities, manufactur-ing capabilities, R&D base, superior information technology capability, cost effi-ciency and pool of skilled personnel.

Key Trends

● Indian Pharma industry is on a global acquisition drive and is becoming a sig-nificant player of the global pharmaceutical market in the generics space.

● Global pharma value chain is being redefined by Indian players through build-ing collaborative networks and becoming outsourcing partners of the MNCpharma majors.

● The draft New Drug Policy, which intends to bring additional 354 drugs underprice control, has been opposed by the pharmaceutical industry. The matter isnow referred to a Committee which is expected to give its report by end ofSeptember 2006.

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● Many Indian pharma companies are now unlocking the value of their NCEs(New Chemical Entities, ie a new compound or drug), which are currently underdevelopment, through out-licensing them to a pharma MNC or de-mergingthem into a separate company. Private equity funding is also being consideredas alternate funding mechanism.

● There is an increasing visibility in the CRAMS space, which is being consideredas the next emerging and scalable opportunity for the Indian pharma industry.

● In the generics space the pricing pressure continues, however, Indian compa-nies have been able to win rights on blockbuster drugs.

● With the advent of product patent regime and increasing affordability, MNCpharma companies are planning to accelerate launch of their patented productsin India.

● The R&D spends of Indian pharma companies are increasing, albeit at a lowerrate of growth. There are now around 10 -12 companies conducting research onnew molecules as opposed to 3-4 companies few years ago.

Snapshot of the year

Indian pharma industry leveraged many global as well as domestic opportunitiesand emerged as global player in the international arena. While the key exclusivitywins in the generic space further boosted Indian pharma industries already lead-ing role in global generics production, global acquisitions made helped them inmaking their mark in the international markets. Through these global acquisi-tions, Indian pharma players consolidated their positions in the existing markets,shored up their product portfolios and entered into new geographies.

The CRAMS space also saw Indian pharma companies striking significantdeals. In the NCE / NDDS space Indian pharma companies unlocked significantvalue through de-mergers / private equity funding and out-licensing.

Indian domestic pharma market too performed well with 9 per cent growth invalue terms and 7 per cent in volume terms. There is a marked difference instrategies adopted by Indian pharma companies and MNC pharma companiesoperating in India. While Indian companies focused on global acquisitions andexploring in-licensing & marketing alliances, MNC players are planning to grad-ually bring their block buster drugs to India with the advent of product patentregime.

Key Industry Considerations

Pricing pressure - Generics, one of the largest segments of the Indian pharmaindustry, has been facing intense pricing pressure on the back of slowdown in thepatent expiries, advent of authorized generics and increased competition amongnew and existing players. With the entry of small and medium sized firms, theprice erosion to the tune of 85-90 per cent has become an industry norm.

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Low R&D spends - Introduction of Patent Act in 2005 restricts the use of reverseengineering, which was the main driver of growth of the Indian pharma industry.For Indian manufacturers to fulfill their ambitions to become significant playerson the world stage, significant investment in R&D is required; at 2 - 4 percent ofsales, these are currently far below the global spend levels of 10 to 20 percent.

Price Controls - the draft New Drug Policy intends to bring an additional 354drugs under price control. This would lead to increasing the DPCOs span of controlover 50-60 percent of the market as compared to the current 25 per cent.

Drug prices in India are amongst the lowest in the world, further price controlswill adversely impact profitability the industry. After prolonged discussions, theGovernment has agreed to refer the matter to a Committee, which is expected togive its report on the matter by end September 2006. As an interim measure,to bring down prices, industry has agreed to restrict both wholesalers’ anddistributors’ margins.

Opportunities Leveraged

Generics: In the generics space, after long time, Indian companies won exclusivityrights on blockbuster drugs. Ranbaxy received 180 day exclusivity (80 gm.) onZocor (Simvastatin) and Dr. Reddy’s became the authorized generic for Merck forZocor. Dr. Reddy’s also launched Allegra with two other players in the market.Sun Pharma also enjoyed semi exclusivity on Ultracet. Indian pharma industrycontinued with its dominant position, with 35% share of the global DMF filings,and participated in every possible generic (patent expiry) opportunity.

CRAMS: One of the important trends observed is, long term relationships beingbuilt between Indian pharma companies and Pharma MNCs, leading to a pre-ferred vendor status for the Indian companies This is a key success factor in theexploitation of this opportunity. Significant deals were entered into across theCRAMS segment including custom synthesis, Intermediates, APIs and Formula-tions. Nicholas Piramal, who pioneered this concept, has entered into an agree-ment with a Fortune 500 company for the supply of formulations. DishmanPharma has built a long term sustainable business model by having collaborationagreements with various Global Pharma majors.

Special Economic Zones (SEZs): The new SEZ Act is expected to take India’smanufacturing competitiveness to the next level. Indian pharma industry whichis becoming a global player in the international arena through its exports focusedapproach was also in the lead among various industries for capturing this emerg-ing opportunity. As many as 15 Pharma SEZs received an in - principle nod fromthe SEZ Board, including 11 pharma SEZs and 4 Biotech SEZs.

Global Acquisitions: Indian pharma companies have been among the mostaggressive investors for foreign pharma assets. A Few large acquisitions havecatapulted Indian companies into the global league, competing against Genericgiants. For e.g., With Betapharm’s acquisition Dr. Reddy’s has become the4th largest generic company in Germany while Terapia’s acquisition has madeRanbaxy the third largest generic player in Romania. Indian pharma companiesfocused more on EU region for acquisitions where, they believed, a wider range of

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companies were available at reasonable valuations. A buoyant Indian stockmarket facilitated the Indian Pharma majors accessing acquisition currency inthe form of Foreign Currency Convertible Bonds (FCCBs) and increasing privateequity funding also chipped in with renewed faith in Indian entrepreneurialcapabilities…

India Pharma Inc. - CRAMS Model for Success

Global pharma industry is going through a fundamental shift with rapidly chang-ing business landscape. Mounting cost pressures, declining R&D productivity andincreasing drug development costs are forcing MNC pharma companies to out-source their core and non core activities to low cost destinations like India. ManyMNC pharma companies are on a major cost saving drive and have announcedoutsourcing as major component of those plans.

The proposed cost savings plans of big pharma companies offer significantopportunities to the Indian pharmaceutical industry, which, with its strong chem-istry skills, low labour costs, proven process expertise and large number of USFDA approved plants, is at the forefront for capturing a larger pie of the globalCRAMS space. Besides cost, time to market is also a significant factor that isdriving outsourcing of clinical research and clinical trials. In the drug develop-ment process, a new drug spends around 8-10 years in the clinical developmentstage. With looming patent expiries, faster time to market at a lower cost hasbecome the need of the hour for innovator pharma companies.

Major Contracts signed in the CRAMS space to date:

Nicholas Piramal AMO Neutralising tabletsAllergan APIFortune 500 company Formulations for many productsAstraZeneca APIs & Intermediates for many productsGlobal hospital products company APIs for many productsPfizer APIs/formulations for Veterinary products AstraZeneca APIs & Intermediates for many products

Shasun Chemicals GSK API for RanitidineEli Lilly APIs for Nizatidine and Cyclosorine Boots Plc API for Ibuprofen

Divi’s Lab Abbott NA

Dishman Solvay API for Eposaratan MesylateAstraZeneca Intermediates for EsomeparzoleGSK Intermediates for 3 productsMerck Intermediates for 3 products

Cadila (through JV) Altana Two intermediates for PantaprazoleMayne Intermediates for 8 oncology products

Lupin DSM API for Cephaloeporins

Matrix GSK API for Acyclovir

Jubilant Organosys Eli Lilly CCS for 3 molecules

Company Innovator Area

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The opportunities in this space are highly visible and scalable too. Various indus-try sources estimate the global CRAMS market to be worth USD 55 billionby 2010, including USD 30 bn of Contract Manufacturing and USD 20 billion ofContract Research involving Custom chemical synthesis (CCS) and Clinical trialsGrowth enablers: Besides the domestic factors, such as low labour cost, strongchemistry skills, quite a few events at the regulatory and international fronts areexpected to be significant growth enablers for the Indian pharma industry.

Growth enablers - Domestic:

Cost Advantage - India offers superior cost advantage throughout the drug devel-opment process due to world class FDA compliant manufacturing facilities at30-40 per cent lower costs, labour cost being 20-25 per cent that of developedcountries and lower initial capital expenditures.

Diverse patient population - vast genetic pool of patients and volunteers accel-erates enrollment process Well defined guidelines - India has well defined guide-lines for conducting various stages of clinical trials and all Indian ContractResearch Organisations follow international guidelines such as ICH-GCP (GoodClinical Practices) and GLP (Good Clinical Laboratory Practice) Infrastructure:Indian Contract Research Organisations have been beefing up the requisiteinfrastructure for conducting contract research and manufacturing. This includesresearch professionals, latest laboratory equipments and technology, etc.

Growth enablers: Regulatory

Introduction of Product Patent regime - has increased International companies’confidence in India’s outsourcing industry. Though many Indian companies havebeen working as sourcing partners for big MNC pharma players, the recently in-troduced regime is expected to strengthen IPR compliances on industry wide basis.

Growth enablers: international

Patent expiries of top selling drugs - Big pharma companies are facing intensecompetition from generic players. Many existing top-selling drugs are facingpatent challenges and thus competition from generic players. This will putimmense pressure on their operating performance, which in turn force them tooutsource non-core as well as high cost activities to improve their performance.

Drugs worth USD 40 billion are expected to lose their patent protection in thenext three years; this would lead to more outsourcing by innovators as well asgeneric players to arrest falling profitability.

Adverse business environment in Europe and US - Global players in the CRAMSspace are facing tough times. High cost pressures on the back of rapid asset cre-ation, emergence of high quality and low cost destinations like India and Chinaand intense price competition among generics players are some of the factorsthat have contributed to the existing business challenges. Innovator pharma

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companies are now increasingly looking at alternative sourcing destinations likeIndia and China to shift businesses from high cost regions like Europe and USA.

International acquisitions by Indian companies - will act as significant growthenabler. In order to scale up rapidly and have adequate infrastructure in place,Indian companies have made quite a few acquisitions in the CRAMS space. Ratio-nales for these acquisitions vary from case to case but cover the entire value chain.

● Acquisition of manufacturing facilities in China to access low cost APIs

● Acquisition of CROs in Europe to leverage on existing client relationships ofacquired companies

● Acquisition to bride the gaps in the service offerings and become full serviceplayers

● Acquisitions to gain access to newer technology platforms for high-end customsynthesis and clinical research work and new clients

Indian players focused on CRAMS space are creating the necessary infrastructurerequired to tap this opportunity. Though business models adopted by playerspresent in this space are different, there are few factors which are common acrossCRAMS value chain and would determine success in this space.

Critical Success Factors

Strong IPR Compliances: This is one of the most critical factors in global pharmaoutsourcing market. Most of the Indian companies are also present in the genericsspace and this could lead to a conflict of interest between the CRAMS players andinnovator pharma companies. Indian companies will have to consistently adhereto strict regulatory and intellectual property ethics, policies and business modelsto enhance their MNC clients’ confidence.

Relationship with MNC pharma companies: It is important to become a pre-ferred vendor for select big pharma companies than a one-off supplier for manycompanies. This helps in creating entry barriers as building a long term relation-ship takes around 2-3 years. Typically preferred vendors get to cater to 50-60% ofthe supply requirements of the MNC pharma partner. Considering that bigpharma companies have large product portfolios, as the relationship matures theMNC partner’s scale of outsourcing operations will invariably increase.

Presence across CRAMS value chain: Each stage of the CRAMS space is uniqueand has its own benefits and limitations. The key is to have presence across theCRAMS value spectrum to fully capitalize on opportunities provided by this space.Though CCS and the contract research space offers limited scale and volume,margins are high in these stages. Strong chemistry skills at the CCS stage is asignificant step in getting increasingly involved with the overall drug develop-ment process and developing relationships with MNC pharma companies. Thecontract manufacturing space is highly scalable and players have to gear up forlarge volumes. Though margins at this segment are moderate and not as high asthey are in CCS / contract research space, the increasing volume of supplies ofAPIs or formulations helps achieve economies of scale and higher profits.

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Managing Mergers & Acquisitions and Successful Post Merger Integration

As India’s leading pharmaceutical companies are transforming to global players,utilizing both organic routes, through the gradual building up of a business andincreasingly inorganic routes, via mergers and acquisitions, as they seek to boosttheir presence in existing markets and open up new ones.

The mergers and acquisitions have been typically driven by strategic aspectswhich would range from

● Enhancing the top line through:

● increasing global presence

● widening market reach and growing the global footprint

● enhancing the product portfolio

● gaining access to new customers

● Establishing presence in a new area in the Pharma value chain

● Increasing efficiencies through leveraging economies of scale

● Gaining access to new proprietary technology among several others.

The transactions in the current context, i.e. cross-border acquisitions have pro-vided players ready access to key markets and strong distribution networks.Increasing number of Indian pharmaceutical companies has been scouting glob-ally for acquisitions and in the last few years have been the ‘preferred’ buyers.

Some prominent acquisitions in 2005-06

Company Target Focus Area Value (USD mn)

TransactionDate

Transaction

Betapharm Generics 573.6 Feb-06Dr. Reddy’sRoche’s API Business APIs 59 Nov-05Terapia Generics 324 Mar-06Ethimed NV Generics n/a Mar-06

Ranbaxy

Allen Spa Generics n/a Mar-06Matrix Docpharma APIs 263 Jun-05

Trinity Laboratories CRAMS 20.3 Jul-05Jubilant Organosys Target Research Associates Generic Formulation 33.5 Oct-05Solutia Pharma’s Contractchemical process researchand development

CRAMS 74.5 May-06Dishman

Synprotec Contract Research 3.5 Apr-05Able Laboratories Dosage Manufacturing 23.5 Dec-05Sun PharmaTwo facilities fromValeant Pharma

Branded Formulations,US generics

10 Aug-05

Avecia Pharma CRAMS 16.9 Oct-05Nicholas Piramal Bio Syntech Inc Contract Research 6 Jul-05

Aurobindo Milpharma Generics 13.4 Feb-06

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There are several issues that corporates need to consider if they are evaluatingpotential cross-border acquisitions.

What determines the success of a transaction and henceof a merger?

In order to better understand this, let us firstly define ‘Value’ of a deal. And webelieve this does way beyond the financial deal value. Deal Value is about unlock-ing the inherent potential of the two merging businesses/organisations/products,which essentially leverages synergies and hence realise the true power of thecombines/merged entity.

Hence, the success of a transaction lies is in the ability to extract value, beyondwhat the individual businesses are capable of and to leverage synergies of thecombined entity through a carefully planned and executed ‘post merger integra-tion’ programme.

Successful post merger integration is one which minimises the ‘Value Gap’, specif-ically focused on minimising the transition/transformation gap as explainedbelow:

The value gap between expected and achieved results has two components.

2

1

"Transaction" Gap Reasons for Failure

● Overoptimistic appraisal of market potential ● Poor post acquisition integration● Planning is not strategic, but is rather opportunistic or emotional● Execution is rushed and due filigence is insufficient● Cultural and operational integration planning is inadequate implementation is poorly orchestrated● Success evaluation metrics are ot defined, so results are not measurable

● Overestimation of synergies● Overbidding

"Transition/Transformation" Gap Reasons for Failure

Achieved Value(Actual)

True Potential Value(Realizable)

Expected Value(Purchase Price)

Transition/Transformation Gap

Transaction Gap

$$

$Value Gap

The ‘value gap’ stems from several issues, i.e. transaction issues, strategic issues,financial issues, legal issues, human resource issues, cultural issues and intel-lectual property issues.

Transaction issues consider the most appropriate structure, whether it is a100% buy out or a majority/minority joint venture, the price range and assessingthe minimum price expectation of the target.

Strategic issues encompass identifying the benefits from the transaction, theright partner and products. It also involves a clear understanding of the marketand it’s potential. A continuous evaluation of the feasibility of achieving strategic

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objectives and translating business strategy into a post merger implementationplan also fall under its purview.

Under the umbrella of financial issues comes developing a suitable operatingplan with financial forecasts, paying an appropriate price relative to comparabletransactions and assessing the financial structure of the deal with a prudent mixof internal accrual, debt or equity. Differences between varied accounting policies,tax issues and the country’s stock exchange compliance rules should also be con-sidered prior to going ahead with an acquisition.

M&A also raises many legal issues that affect strategy, deal structure, respon-sibility and liability. Often the company is unaware of all the legal guidelines inthe different countries and some countries have stringent law and environmentprovisions. Other legal issues that need to be addressed are compliance of thetransaction with local, state and federal laws and conducting a diligence tounearth any potential lawsuits or potential claims.

Intellectual Property issues must also be considered during an acquisition.IPR counsel must be involved from the beginning of the due diligence process andshould conduct an independent review of IP assets. IP assets that are currentlyactive must be evaluated and trade secrets must be studied to see if the seller hasan active and documented program. The acquirer also needs to confirm if thereare any non-disclosure and non-competition agreements in place with currentofficers and employees. A check on unregistered IP assets must be scheduled aswell as the acquirer should confirm that an incomplete schedule of IP assets hasnot been provided by the target.

Presently, people issues are fast becoming a priority for M&As. Initiativesmust be taken with regard to organization structure, recruitment, retention,management and payment scheme. One must evaluate the employee resistanceto the change in ownership since gaining emotional and intellectual buy-in fromthe staff is not easy. During a merger, employees are concerned about job security,power and prestige changes, loss of identity and unequal compensation. Rewardprograms, pension and retirement benefits and commitment to medical benefitsalso add to the uncertainty. In terms of the key personnel, the company mustselect the best management and leadership team to lead the new organization. Itmust also identify employees for retention, their performance management andbusiness continuity.

A culture mismatch is one of the main reasons for failures of cross-borderacquisitions. The difficulties that arise while effectively integrating the culturesof the company is underestimated. Language barriers and disparities in organi-zational culture can be a detriment to the process. As M&A activity increasinglyinvolves companies from different countries, cultural factors become more pro-nounced which may lead to significant talent churn and morale problems.

However, all the issues relating to an acquisition are not deterring Indian com-panies to aggressively look for opportunities overseas. Infact out of the sevenreported deals in 2006, Indian companies were the acquirers in four. The largestof these four deals was DRL’s US$570 mn acquisition of Betapharm. Ranbaxy alsoput down about US$430 mn for 3 buyouts including Allen SpA in Italy, Romania-based Terapia (for US$ 324 mn) and Belgium-based Ethimed. Other majors suchas Wockhardt, Lupin and Sun Pharma are also on the lookout for potentialtargets.

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The trend of Indian companies acquiring companies globally is likely to con-tinue. The sluggish growth in domestic market, global generics opportunity, theconsequences of post product patent regime and cost advantages of manufacturingin India, will further drive Indian companies in aggressively gaining a globalfootprint across the regulated markets to garner additional market share,increase R&D capabilities and enhance product portfolios. Within the nextdecade, India stands tall on the global pharmaceutical stage and ready to makean unforgettable impact.

Given the dynamics of the Indian Pharmaceutical industry and the increasedtrend of overseas acquisitions, some of the additional post merger integrationchallenges include:

● Defining the Corporate Governance structures, given the structure of the over-seas business

● Leveraging strengths of both entities and defining targets for the combinedentity

● Implementing robust planning processes to enable the merged entity to func-tion optimally in the post merger context

● Aligning the employees to the Vision of the combined entity, thus increasingemployee morale and minimising employee attrition

● Assessing the implications of the cultural differences and establishing a com-mon way of working

● Communicating to all customers and business partners especially given that amerger lends vulnerability to any organisation from a competitive perspective

Addressing these issues and challenges successfully and staying focussedon the integration objectives, towards delivering Value is what PostMerger Integration entails…

Every merger has its unique characteristics as would be defined by the dy-namics of the industry and the characteristics of the organisations/businessesconcerned.

● A well planned and thought through post merger integration program beginsupfront during the deal execution phase itself and has distinct phases:

Plan and Design:

● Confirming the synergies and drivers for the merger and hence the integration

● Defining the integration objectives, priorities and targets

● Planning the integration program

● Management alignment and Team orientation

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Integrate:

● Execute prioritised projects to integrate the structure, processes, policies andsystems of the merging businesses

● Constantly monitor progress vis-à-vis integration targets

● Communicate and manage change across the organisations

Evaluate:

● Measure success of the merger

● Define and adopt a mechanism for continual improvements

● In our experience most mergers go through a typical lifecycle which in turn iscertain challenges unique to the stage of the merger

Challenges along the distinct phases of the integration, which typically contribute to the 'Value Gap'

IV:EVALUATE

III:INTEGRATE

II: DESIGN

I: PLAN

Value realisation

Value creationValue

Preservation

UnderstandValue at Risk

● Establishing detailed key performance measures in business case/ strategy map

● Defining the synergies opportunities in line with strategic vision for the merger● Articulating a dear strategy map for the merged entity● Awareness education of the key stages of the M&A process● Understanding associated business and people related risks and opportunities● Addressing organizational readiness to change● Through planning of the integration program with targets defined

● Monitoring and tracking performance of M&A process against value benefit timeline● Realizing full potential of merger related benefits● Providing reporting systems and formal communications● Ongoing program and project management

● Managing and minimizing risks; unlocking opportunities

● Addressing uncertainty, fear and anxiety● Managing and minimizing business risks; unlocking opportunities● Minimizing 'road blocks'● Considering regulatory, tax, accounting and legal position● Executing the deal efficiently● Building an appropriate program and project management infrastructure

● Maximizing stakeholder buy-in and involvement● Management of investor, customer and employee relations/ communications● Realising tangible and intangible benefits

Leveraging the SEZ opportunity

Introduction

Special Economic Zones (SEZs) have, in recent times, re-incarnated to serve asgrowth engines that can boost manufacturing, augment exports and generateemployment. With the promise of an internationally competitive hassle-free busi-ness regime, and a basketful of fiscal incentives, it is anticipated that this newregime will pave the way for a large flow of domestic and foreign investment intothe SEZs, which will lead to generation of additional economic activities in India.

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Features of the SEZ regime

The core features of the SEZ regime are:

● Governance by a dedicated, comprehensive legislation, in the form of The SEZAct, 2005 and The SEZ Rules, 2006, which portends stability and clarity

● Flexible land area requirements specifically tailored to suit industry-basedrequirements- 1000 hectares for multi-product SEZs, 100 hectares for multi-services and sector specific SEZs, 10 hectares with specified built – up process-ing area requirements for SEZs in the IT-ITES, Gems and Jewelry, Bio-tech,and non-conventional energy, including solar energy equipments/cell sectors.

● A single-window clearance system supported by ring-fenced administrationwithin the SEZ, aimed at providing a hassle-free environment forentrepreneurs operating within an SEZ

● Substantial fiscal benefits, in the form of relief from direct and indirect taxes,offered under the SEZ umbrella

● Foreign Direct Investment encouraged, by doing away with regulatoryapprovals

● Strong thrust on private participation in the development of numerous SEZsspread across the country’s vast geographical area, with the various State Gov-ernments vying with each other by promising to provide infrastructure andother support expected of them under the legislation

● Promise of a global business environment, state-of-the-art infrastructure andan upscale standard of living, going by the various infrastructure and socialamenities that the SEZs are encouraged to provide for

● Significant increase in exports in recent times from the country, by an increas-ing number of entrepreneurs, who would wish to ride the SEZ wave

● Encouraging and helpful attitude of the regulatory authorities at the Centraland State levels, in clarifying issues in the emerging legislation, and in theapproval process

The Pharma industry and exports

The Indian Pharma industry today is poised at an inflexion point where it cantransform itself from being a largely domestic generics player, into an aggressiveglobal participant In particular, the potential for exports and foreign exchangeearnings has received a fillip in recent times. Some of the driving factors are:

● the introduction of product patents leading to the return of the global Pharmagiants to India, with a greater assurance as to protection of their intellectualcapital

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● growing awareness of India’s inherent advantages such as size and skill of workforce, cost-competitive research base, cGMP compliance and FDA approvedmanufacturing facilities, etc, leading to a surge in incidence of Pharma out-sourcing across the value chain, be it contract manufacturing or setting up ofresearch bases in India,

● recognition by the Government of the role of exports in the future growth of thePharma industry, in the form of commitment to specific measures to be under-taken namely, tackling the non-tariff barriers to Pharma exports, focusing onspecial countries / regions having great potential for Pharma exports, signingof the South Asian Free Trade Area (SAFTA) agreement for smoothening intra-regional Pharma trade within the SAARC countries, organizing internationalPharma meets / conferences, etc.

● Setting up of Pharmexcil in mid 2004, which is the sole authorized agency forissuing Registration-cum-Membership Certificate to exporters of drugs andpharmaceuticals. It is proposed to strengthen Pharmexcil, financially and oth-erwise, to set up warehouses / offices in other countries to help Indianentrepreneurs by forming an online library, organizing exhibitions and brandbuilding activities.

The aforesaid factors/developments that have created a pro-export business atmo-sphere in the Pharma industry have been topped by the new SEZ regime whichdirectly encourages exports.

Participation in an SEZ

Pharma Companies can participate in two ways:

● As Developers: Purchase / acquire land admeasuring 100 hectares or more,and develop it into an SEZ by themselves, or collaborate with other PharmaCompanies, or Co-Developers, who could contribute by providing infrastructurein the SEZ. In this SEZ, the Companies could set up their own operations andalso make a part of it available for other Pharma Companies to set up Unitsand carry out their operations. The income received by the Developer Company(and the Co-Developer) from the business of developing the SEZ would havethe benefit of a 10 year tax holiday (out of 15), besides relief from MinimumAlternate Tax (MAT) and Dividend Distribution Tax (DDT) and a host of Indi-rect tax benefits. Approvals for this purpose need to be obtained from therelevant State Government, as also the Board of Approvals constituted for thispurpose.

● As Units: Pharma Companies can set up units in recognized SEZs especiallyif exports are expected to constitute a major part of their activities. While nothreshold has been specified with reference to the extent of exports expected tobe made by the Unit, it is required to be a Net Foreign Exchange Earner, asprescribed. Fiscal benefits cover a host of indirect taxes and a 15 year tax hol-iday, broken into three tranches of five years each, with 100 per cent tax

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deduction for the first five years, 50 per cent for the next five years and 50 percent of the ploughed back export profits for the five years thereafter. MAT isalso not applicable to Units set up in SEZs.

Approvals for this purpose have to be obtained from a Development Commissionerappointed for the relevant SEZ.

A number of Pharma sector SEZs have been granted approval across differentstates, namely, Andhra Pradesh, Gujarat, Maharashtra and Uttar Pradesh.

An alternative is to set up a Unit in a multi-sector SEZ many of which havebeen approved across the Country.

The Pharma Policy

The Draft National Pharmaceutical Policy, 2006 (DNPP) dated 28 December2005, has been issued by the Department of Chemicals and Petrochemicals. TheDNPP, inter alia, contains a brief section highlighting the need to have PharmaParks / SEZs for the pharma industry.

The Government of India also proposes to provide grants / subsidies (40 percent of cost of investment in each Park or Rs. 40 crores, whichever is less) to theentity developing the Park. Further, it is proposed to set up 25 such Pharma Parksover the next five years in the country.

Upon finalization of the Pharma Park Policy by the Government, armed withthe greater clarity that it would no doubt provide, Pharma Companies in theDeveloper mode could plan towards strapping up the benefits provide under bothlegislations in a common location.

Certain issues to be addressed

Participation in an SEZ, whether as a Developer or a Unit, would require certainissues to be addressed to ensure that benefits under the SEZ regime are maxi-mized. Some of these issues which are loaded with implications from a tax,regulatory and business perspective are:

● Should the Pharma Company become a ‘Developer’ on its own, or collaboratewith others who are more competent to say, provide infrastructure, etc?

● Should an SPV be constituted for Developing an SEZ? Further, should the Unitbe part of an existing entity or should a new legal entity be set up for carryingout operations within an SEZ?

● Should the SEZ be planned as a captive / single user SEZ, or should it beplanned as one which would attract other Pharma Companies as well?

● Should the R&D activities associated with the activities of the Unit in an SEZ,or otherwise, be set up in an SEZ? If so, should it be a part of the ManufacturingUnit or should it be set up as a stand-alone Unit? What would be the idealtiming for setting up an independent R&D Unit within an SEZ?

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● What sub-contracting activities may be planned around the operations in anSEZ?

● Which are the activities that could be carried out by the Unit? Should they betotally new activities, having no relation to existing ones?

Leveraging the right opportunity

As the SEZ opportunity represents one of the last bastions of tax holidays in aglobalized economic environment; there is imminent need for a Pharma Companyto harness the various benefits on offer. Clearly, the benefits in question are notmerely of the fiscal variety, but are supplemented by the inherent advantages offunctioning in a global business environment, leveraging on the cost advantageand huge knowledge base that the country has to offer.

An evolving and ambitious legislation, a vibrant economy and a host of advan-tages for the taking, make the SEZ journey a compelling one. Armed with the rightentry strategy, planning and guidance around the regulatory provisions, and thecurrent environment prevailing in connection with the approvals handed out,investing into an SEZ in India would seem a well- advised step forward.

Improve Cost Efficiency and Profitability through Technology

Promising Stage

The Indian Pharmaceutical Industry is the fore runner amongst India’s science-based industries and is well poised for growth owing to wide ranging capabilitiesin the field of drug manufacturing and technology. India’s share of the globalpharmaceutical industry is increasing at 10 percent a year, compared to 7 percentannual growth for the world market overall. Also, while the Indian sector repre-sents 8 percent of the global industry total by volume, putting it in fourth placeworldwide, it accounts for 13 percent by value, and its drug exports have beengrowing 30 percent annually.

The sector, however, is being battered today with global pricing pressures aswell as by increasing scrutiny by regulators and a skeptical public. There is aturmoil mounting owing to increasingly felt fear of possible price controls andreduced R&D efficiency. In order to achieve one of the objectives of the ‘NationalPharmaceuticals Policy 2006’ of developing India as the preferred global destina-tion for pharmaceutical R&D and manufacturing, this is the most conducive timefor the government and the drug producers, to partner in improving cost efficiencyand profitability for the sector.

Blurring the Boundaries between Pharmaceuticals & IT

It is no longer a hidden truth that the Information Technology (IT) sector in Indiahas ushered in an era of global dominance for the country and is another signifi-cant contributor to the well being of the Indian Economy. It is being increasinglyfelt that Technology can help play a vital role in releasing to a large extent, the

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financial pressure build up on the pharmaceutical industry. IT can help the phar-maceutical industry in achieving a twin advantage; it can be used as a driver forinnovation and in standardizing and streamlining business processes and improv-ing access to information between departments to help boost productivity andlower costs. Pharmaceutical companies can benefit from faster decision making,better project management and effective tracking of marketing programs throughenhanced data collection. Indian Pharmaceutical companies need to embrace ademand-driven production strategy to achieve profitability and optimize invest-ments and technology can be a powerful tool for enabling this transformation.

There are daunting pressures on the supply chain because pharmaceuticalcompanies not only need to deliver the right drugs but also deliver them on time,in the right quantity, at an unquestionable quality level. There is a need today forpharmaceutical companies to redesign and remodel core business processes tomake a potion with technology that benefits the entire value chain. EnterpriseResource Planning (ERP), Sales Force Automation, Supply Chain Optimization,Web-Enabled Customer and Vendor Management, and Customer RelationshipManagement Tools used in the right combination can help pharmaceutical com-panies in achieving synergies in planning, execution and distribution, reducingcosts over the long term and increasing process efficiencies and reach.

Companies can use ERPs to optimize supply and demand planning at thestrategic, tactical and operational levels with a fully integrated, comprehensiverange of tools. ERPs can not only help companies anticipate market behavior,but also help them plan more precisely and work together with supply networkpartners.

Plans and forecasts can be generated to span the entire supply chain, includingdemand, distribution, production and transportation: they accurately balancematerial, labor, and equipment constraints with anticipated customer demand;and the combination of supply and demand network planning supports the entiresales and operations planning process.

Reduced time to market

Research and Development (R&D) efforts in the pharmaceutical industry revolvearound medicine discovery, scientific development, and preclinical and clinicalevaluation processes. Information is the key to identifying product developmentopportunities based on current market opportunities. ERPs can enable an orga-nization to optimize its investments, by assessing budget, costs and risks as wellas forecasting and planning resource capacity. This not only helps increase effi-ciencies but also helps accelerate development time by capturing critical infor-mation across development (e.g. analytical testing, product & packagingspecifications), optimizing the scale-up process and reducing the clinical trialsupply cycle time and regulatory submission compilation time.

Customer Relationship Management

In an industry where ‘me-too’ players are a major challenge, it is imperative tobring down the time between the launch of a product and its peak sales point to

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maximize profits. Technology helps in implementation of collaborative processesthat support customer interactions throughout all channels. Pharmaceutical com-panies need to adopt a customer-centric approach and integrate multiple mar-keting channels to facilitate better segmentation and selection of their customerbase. CRM helps a company to maximize its ability to attract, grow and hold itscustomers. Customer driven demand also helps in forecasting optimum produc-tion levels and hence better productivity.

Supply Chain Management

Supply Chain Management covers optimization of supply and demand to supportthe process of assigning production orders to resources in a specific sequence andtime-frame. Production planning can be achieved by forecasting demand based onhistorical factors and received orders. Supply Chain Management also helps inmanaging unexpected changes to meet changing customer or supplier situations.Integration of planning with manufacturing helps optimize the capacity utiliza-tion of all assets.

Inventory Management

ERPs assist in reducing inventory costs by reforming asset management processesand automating capital planning and performance management. Visibility of thesupply chain from raw materials to final delivery helps in accurate planning andforecasting and hence maintaining optimum inventory levels.

Batch Management

Pharmaceutical companies need to strictly monitor and observe the expiry datesof the drugs produced. ERPs help expedite the process of batch management andmake available all information about the batches, be it the stock or the status(available, blocked, restricted use, etc.) instantly available. This not only helpsreduce the risk of using sub-par material but also helps the organization gainbetter hold on it future planning and production exercise. Use of ElectronicProduct Code technology can help in effective tracking of individual productunits through Radio Frequency Identification (RFID) tags and hence aid in batchmanagement.

Quality Management

With a highly integrated and focused approach to quality management, pharma-ceutical companies have an opportunity to greatly improve information sharinglinking quality processes throughout the organization. This helps increase speed,efficiency, and accuracy across the organization. Increased visibility of qualitydata throughout the organization and enhanced communication between differentquality groups helps in total quality management and hence aids in achieving costefficiencies.

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Marketing Management

Marketing covers increasing brand awareness hence aiding in the companygrowth. This scenario encompasses product management, campaign and cus-tomer event management as well as key account management. Integratingresources across the enterprise to conduct a customer base segmentation becomescrucial in overcoming the current trend of declining sales force efficiency. Byassigning the appropriate target group to the different channels (sales force,interaction center, and Internet) as a result of segmentation, all marketing andsales resources are managed to derive maximum sales impact thus improvingprofitability.

Financial Management

An integrated business management platform also enables pharmaceutical com-panies to tighten control over their accounting processes. An ERP aids in estab-lishing an asset management process and automation of capital planning andperformance management. ERPs can help an organization in understanding thecorporate profit structure in near real time by setting overhead standards andenabling multi-dimensional analysis of the profitability of each item, division, andcustomer. With integrated accounting, inventory, and sales information, compa-nies can review performance data on a daily, weekly, and monthly basis allowingaccess to accurate, up-to-date accounting information, enabling analysis of factsand figures in real time and making informed decisions faster.

Conclusion

To conclude, the pharmaceutical industry needs to tap into the right opportunitiesto automate, and as always the challenge in any capital investment is to measurereturns on investment. While opportunities to optimize supply chains, integratechannels, reduce costs and provide better reach seem an ideal goal, companiesshould also be aware of the multiple challenges one faces while implementinglarge scale IT projects.

Foremost among these challenges is to define the true business case coveringmeasurable benefits, monetary and implicit, that will accrue from enterpriseapplication implementation, and follow through the project to identify whetherthese benefits are built in, and whether they are delivered after the product goeslive. Similarly, emphasis needs to be placed on systems stabilization over a periodof time, which is often ignored and can lead to significant operational challenges.Last but not the least, focus on internal controls needs to be maintained from thedesign to deploy stages of the implementation to ensure that technology risksarising from new technology implementation and impacting financial reportingare considered and mitigated.

The opportunities are many, and if pharmaceutical companies overcome thechallenges of new technology acquisition, the right portfolio of technology productscan provide an effective answer for requirements of sustained and profitablegrowth.

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The Road Ahead…

Given the trends in the Indian pharmaceutical market including key industryconsiderations, it is imperative for the Indian industry to quickly leverage theemerging opportunities. These could be:

● Exploitation of Contract Research and Manufacturing (CRAMS)

● Global generics opportunity

● New drugs delivery systems

● Biotechnology

Equally important in an inorganic growth strategy is the successful managementof mergers and acquisitions and carrying through effective post-merger integra-tion The SEZ opportunity forces players to focus on the opportunity presented bythe new SEZ legislation and the favoured treatment to SEZs that the Governmentof India is currently inclined to give Underlining all this is the necessary andcritical factor of success, namely effective cost-efficiency and profitability by mak-ing use of the latest technology solutions.

Summing up, the Indian pharmaceutical players are living in interesting timesand continued success will depend on a proper understanding of the landscape,quickly exploiting emerging opportunities, ruthless execution of strategic mergersand acquisitions and effectuating a seamless organisation to evolve into trulyglobal players.

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6.2

The India Opportunity in theEnergy Sector

KPMG

As India continues to grow at the rate of 7-8 percent, energy security has becomea core focus. To alleviate concerns over energy security, the Government of Indiahas taken multiple steps in recent years which include encouraging private sectorparticipation, a more holistic approach towards broad basing its supply base, andimproving efficiency in the sector as a whole. Although India has made a start inthis direction, the Government would need to further its initiatives in three areas:

● The Government would need to increasingly enter into alliances and partner-ships with key nations in Asia, Africa, Latin America, etc. to diversify theenergy supply base and improve long term supply security.

● Currently, different energy segments are viewed independently from a policyand regulatory perspective. The importance of cross linkages between differentenergy segments is now being appreciated and the importance of developing anintegrated energy policy to meet the common objective of energy security isrecognized.

● At an operational level, commensurate investment would be required in devel-oping infrastructure viz. rail, road, port, and power transmission which arecritical for efficiency in the energy value chain.

Looking at the subject in totality, the Government has developed a comprehensiveplanning framework through the Indian Hydrocarbon Vision 2025 that providesa detailed road map for Indian hydrocarbon industry to enhance the country’sEnergy Security.

The principal objectives of the IHV 2025 include:

● Developing the sector as a globally competitive industry, ensure healthy com-petition and improve product standards Ensure energy security keeping inview strategic and defence issues

● Creating infrastructure to meet the demands for coal, petroleum products andnatural gas

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● Rationalizing tariff and pricing policy to promote investment

● Putting in place necessary regulatory system

● Exploring new resources of hydrocarbons such as CBM and Gas Hydrates

It is evident that one of the principal focus of the IHV is to draw private invest-ments through structural and pricing adjustments in specific energy sub sectors.The following sections highlight the key opportunities in the different sectors:

Coal

India has vast reserves of coal and participation of the private sector in captivemining across different user industries is an immediate opportunity for invest-ment. Coal fields with mineable coal reserves in excess of 1,000 million tonnes areproposed to be identified and are in the process of being allocated for captive min-ing. This may imply a total capital requirement of around USD 1.5-2 billion.

Oil

The Government policy of allowing full private participation in upstream explo-ration and production has already attracted a number of private investors.

Five rounds of competitive bidding under the Government policy named NewExploration Licensing Policy (NELP) have already been done and reserves esti-mated at 700 MMT2 of oil and gas have been discovered. In addition Indiapresents a lot of potential in the refining sector due to strategic advantages of lowcost and location and is already a net exporter of products. The downstream mar-keting sector is now also open to private participation.

Gas

Discoveries of gas to the tune of 700 bcm3 in the last decade in the country holdpromise for gas reserves in India. Apart from domestic gas, significant focus isbeing placed on LNG as a means of ensuring supplies for domestic demand,resulting in a number of LNG terminal projects that are being planned in differentparts of the country. Coal bed methane potential appears to be very promisingand will probably exceed free natural gas reserves.

An emerging area on the demand side is auto CNG and piped gas whichtogether would account for about 7 percent of total demand in five years. In thenext few years, at least 30 cities have been identified for city gas coverage byprivate and public sector players.

Draft gas pipeline policy gives support to the development of a national gasgrid, which would create a common gas market across the country.

Nuclear

The growth of nuclear power in India as envisaged is possible provided robusttechnologies are developed for both the front end and the back end of the fuel cycle.

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India has one of the largest reserves of the nuclear fuel thorium, however tillcommercial production based on this fuel becomes feasible, the nuclear energyprogramme will be uranium based. There is a persisting need for developing tech-niques for economic and efficient extraction of uranium from lean sources e.g. seawater.

Hydro

India is endowed with hydro-potential of about 250,000 MW4. However, only17 percent of the hydroelectric potential has been harnessed so far and 5 percentis under various stages of development. Private participation in the hydro sectorwill be important to meet the target of an additional 45,000 MW of hydro capacityaddition in the next ten years. Various policy measures are being considered toattract private investment.

Renewable Energy

India has a vast potential for renewable energy, especially in areas such as solarpower, biomass and wind power. The current installed capacity of renewableenergy is around 7,100 MW, constituting about 6 percent of India’s total installedgeneration capacity. The Government has set an objective of achieving aninstalled renewable based generation capacity of 10,000 MW by the year 2012,largely in the areas of wind and small-hydro. Technological breakthroughs forcost-effective photovoltaic technology could generate a quantum leap in therenewable energy sector as India is well endowed with solar insolation (averageof 6 kwh/sq.mt./day).

Electricity

Generation

Based on Government’s plans, by 2012, a capacity addition of 22,900 MW has beenidentified for the private sector out of total target of around 107,000 MW5. Theopportunities in Generation are now very encouraging on account of the emergingpower trading environment, the policy of open access on transmission and distri-bution networks and reforms in the power sector which is leading to improvementin the financial health of the sector. All new private sector generation projects inthe country would need to be set up based on International Competitive Bidding.

Transmission

Private investment in the transmission sector can be done either through anIndependent Power Transmission Company (IPTC) or through a Joint VentureCompany (JVC). These participations are envisaged largely in creation of theNational Grid (Formation of the National Grid is a plan for strengthening of the

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inter-state and interregional transmission network that will enable unrestrictedflow of electricity across regions and enable development of a deep electricitymarket in India) along with the state owned transmission utility. The privatesector participation is expected to be in projects requiring a capital outlay ofaround USD 4.5 billion.

Distribution

The Electricity Act 2003 provides for parallel and second distribution licensee insame area of supply. This opens up the distribution sector to potential competitionand private sector participation; however such opportunities may be few and fea-sible only in areas where the existing network is grossly inadequate. Privatizationof existing distribution utilities is possible, though good opportunities are fewowing to the large risks involved. Privatization opportunities in urban areas andfranchising of certain distribution operations are possible areas to look out for.

Trading

Power trading as an activity is evolving rapidly in India. Traders can play theimportant role of managing risk apart from facilitating market development.Open access and the recent policy announcement of allowing 100 percent foreigndirect investment in trading are expected to lead to growth of this sector.

Energy savings and demand side management

A study for the Asian Development Bank estimated an immediate market poten-tial of energy saving of 54,500 million kWh and peak saving of 9,240 MW. Thishas an investment potential of USD 3 billion.

Inspite of the above opportunities, lot remains to be done in terms ofstrengthening/building the regulatory institutions that will allow Government todistance itself from operational decision making and make the reform processmore transparent and sustainable. For example the demands for such a body inGas as well as Coal sectors are long pending. If granted, it will lead to muchdesired information transparency and objective tariff setting. Similarly, the com-missions in the power sector would need to be provided more independence to dealwith tariff design, market structure development, etc and given an environmentto operate without political interference.

In the rest of this report, starting with an overview, each energy segmenthas been discussed in greater detail highlighting key issues and points of viewof KPMG’s ENR practice in dealing with them and the emerging areas forinvestment.

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Overview of India’s Energy Position

By world standards, India’s current level of energy consumption is very low. Thetotal annual energy consumption (commercial) for India is estimated at 327 mtoe(million tons oil equivalent) for the year 2003-04 and the per capita consumptionstands at 304 kgoe (kilograms oil equivalent).

Per Capita TPES Consumption (Kgoe) Per Capita Electricity Consumption (KWh)

Japan (2003) 7816

7007

1379

13066

8044

2429

585

4056

4272

1090

7840

4668

1688

304

South Korea (2003)

China (2003)

USA (2003)

OECD (2003)

World Average (2003)

India (2003)

Japan (2003)

South Korea (2003)

China (2003)

USA (2003)

OECD (2003)

World Average (2003)

India (2003)

Source: Planning Commission, Govt of IndiaExhibit 2.1: India’s per capita energy consumption compared to other countries

However, with a targeted GDP growth rate of 7 to 8 percent, and an estimatedenergy elasticity of 0.80, the energy requirements of the country are expected togrow at 5.6-6.4 percent per annum over the next few years.

This implies a four-fold increase in India’s energy requirement over the next25 years and the country faces significant challenges to meet this.

India’s Current Energy Basket

India is well endowed with coal. However, it is poorly endowed with oil assetsand has to depend on crude imports to meet a major share of its needs (around70 percent). The above exhibit reflects only primary energy sources that are com-mercially exploited. A large population of India in the rural areas depends ontraditional sources of energy such as firewood, animal dung and biomass. Theusage of such sources of energy is estimated at around 155 mtoe per annum orapproximately 47 percent of total primary energy use.

Future Energy Requirements and Supply Options

At the projected growth rate in primary energy demand8, India needs to strate-gically evaluate its supply options to meet its energy requirements. Coal wouldcontinue to be its dominant energy source.

However it would have to actively develop non-coal sources to meet its futureneeds. It is estimated that at a growth rate of 5 percent in coal production, India’sextractable coal reserves would get exhausted in 40 years. Therefore, from a long-term perspective and in view of growing environmental concerns from use of coal,the country needs to look at developing other sources such as nuclear and renew-able energy.

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India has vast reserves of the nuclear fuel thorium but technology is not yetdeveloped for its commercial use. Renewable energy could also contribute usefullyto India’s energy requirement given that India is well endowed with solar energy.India’s oil assets are meagre but recent discoveries hold promise for India’s gasreserves and coal bed methane.

Hydro 2%Nuclear 2%

Oil 36%

Coal 51%

Non-Power-Natural Gas, 16

Non-Power-Oil, 113

Non-Power-Coal, 113

Total Electricity Generation, 161

Total primary energy use

Natural Gas 9%

Source: Planning Commission, Govt of IndiaExhibit 2.2: India’s Primary Energy Resources and energy use

The following exhibit 2.4 depicts the estimated energy reserves/potential for Dif-ferent supply scenarios have been developed by India’s Planning Commission tomeet the future energy requirements. These scenarios look at energy efficiency aswell as supply side options.

Resource Unit Reserves

Coal (Extractable) Mtoe 22540Oil Mtoe 739Gas Mtoe 4076Uranium – Metal Tonnes 61,000Thorium – Metal Tonnes 150,000Hydel MW 150,000

Source: Planning Commission, Govt of IndiaExhibit 2.4: Estimated energy reserves

The energy efficiency options include:

● Energy efficiency in end-use: Efficient use of energy in industry, lighting,household appliances etc. can lower India’s energy needs by 87 Mtoe in 2031-32or 5.3 percent of the total energy requirement.

● Increase in rail road share of freight: Currently, road transport carries a majorportion of freight traffic. If share of railways in freight increase from currentlevel of 32 percent to 50 percent by 2031-32, it would contribute significantlytowards energy saving.

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● Increase in transportation efficiency: Use of mass transport system in cities,better utilization of motor vehicles (such as vehicle pooling) and increase in fuelefficiency of motor vehicles (possible to the extent of 50 percent with currenttechnology). These measures can save about 69 Mtoe of energy or 4.2 percent.

● Efficiencies in thermal power generation: Currently, the efficiencies of thermalgeneration in India stand at 30.5 percent. An increase to 42 percent throughuse of super critical boiler technologies could lead to savings of 114 Mtoe or7 percent

Together the energy efficiency measures can save 270 mtoe of energy or around15 percent of India’s energy requirements by 2031-32.

The supply side options include:

● Fully exploiting India’s hydro potential of 150,000 MW from current level of30,955 MW

● Scaling up nuclear generation by successfully developing the Fast BreederReactor (FBR) technology which uses uranium as fuel and developing AdvanceHeavy Water Reactor for utilizing thorium, which India has abundant reserves.

● Development of natural gas sources and use of it for electricity generation,either through indigenous exploration or through initiatives of import throughpipeline and as LNG

● Development of renewable energy, including solar power (India has very largepotential) through cost effective photovoltaic technology, fuel wood, bio-diesel,wind energy

The range of utilization of different fuels in 2031-32 as compared to current levelsis shown below:

Resource Range of Utilization ofSupply Sources (Mtoe) in2031-32

Current Utilization ofSupply Sources(Mtoe)

Oil 463 – 493 116.00Natural Gas 114 – 224 27.65Coal 573 – 1082 184.35Hydro 5 – 50 <1Nuclear 3 – 89 <1Solar 1 – 4 <1Wind 0 – 12 <1Fuel wood 0 – 69 115.44Ethanol 0 – 4 <1Bio-diesel 0 – 8 <1

Source: Planning Commission, Govt of IndiaExhibit 2.5: range of utilization of different fuels in 2031-32 compared to currentlevels

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Key Imperatives for India

To meet its large and growing energy needs, there are certain key imperatives forthe Indian energy sector:

Provide impetus for Private Participation

Private participation in the form of financial, technological and managerial areneeded to meet the challenging growth targets. This would also bring in rightcompetition and efficiencies, needed in the sector. Recognizing this, the GOI hasallowed private participation in Oil and Gas exploration and production, coalmining (albeit for captive use) and in hydro power and renewable energy. NELP(New Exploration Licensing Policy) for oil and gas allows 100 percent foreignequity investment and is liberal in allowing self-marketing by the investors.

To sustain continued private participation, a number of important steps haveto be taken further.

● Clarity in Policy Framework: There is a need to evolve a clear policy frameworkfor the energy sector. Clarity is required in matters related to pricing of energy,the target market structure, cross-border investments and imports and exportsof energy products. In India, clarity is beginning to emerge in some of theseareas and debates have been initiated in others.

● Independent Regulatory Mechanism: An independent regulator is required forthe energy sector to determine prices in the first instance and once competitiondevelops to ensure that there is a level playing field for all. Today there is muchinefficiency in energy sector pricing due to the monopolistic market structure.Prices are either self determined by the monopoly companies or in some casesinappropriately priced according to import parity prices. There has been ade-quate debate on this issue and it appears that sooner than later the countrywill have full fledged regulators for the energy sector.

● Develop Energy Markets: Well functioning energy markets are important toattract investments and bring efficiency in the sector. Currently, there is lim-ited market activity (examples are an internet portal based trading for a limitedquantity in case of coal and auctioning in case of gas for limited quantities).Markets will be facilitated and effective when there are many players and thereis an organized marketplace for energy products.

Actively pursue cross-border investments in EnergySector

Energy equity in overseas assets is part of India’s strategy to acquire energysecurity. This includes Indian companies such as ONGC, Coal India, GAIL,Reliance etc. acquiring or seeking to acquire equity through joint ventures in oiland coal rich nations. The Government is also pursuing strategic alliances with

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various countries. The recent memorandum of understanding with China on thisissue is an example. As per the Indian minister for petroleum and natural gas,“We have realized that when we compete in an unhealthy manner to acquire oilfields in third countries, we only end up driving costs for each other. We haveended up paying billions of dollars more by trying to outbid each other everywhere.This will end, as co-operation will precede competition.’’

Besides, the Indian Government is also seriously exploring the nuclear optionto meet its energy needs and it is looking at co-operation in this area with thenuclear suppliers’ group countries.

Create an enabling infrastructure for Energy Sectorgrowth

Investments in ports, railways, pipelines and power transmission are urgentlyneeded to attract energy sector investments in the first place and to enable effi-cient energy choices. Today, the capacities of these infrastructures are fullystressed and there is much inefficiency. Recognizing this, the Government hasannounced policies to involve private participation and the country is witnessingprivate investment in ports, pipelines and power transmission. Even in case ofrailways, the Government has recently announced a policy decision to open con-tainer transportation to private sector on a common-carrier principle using theexisting railroads.

Rationalize taxes and subsidies to allow efficient pricing

The taxes and duties levied on energy products are lopsided leading to inefficientenergy choices. Taxes on petroleum products such as aviation fuel for exampleare among the highest in the world while railway passenger tariffs are highlysubsidized.

Likewise, there are high subsidies for household cooking fuels such as keroseneand Liquefied Petroleum Gas (LPG) and even electricity for domestic consump-tion. The need for cost reflective pricing is being increasingly recognized asexemplified by the recent Rangarajan Committee Report, the Roadmap for LPGprice rationalization by the Government as well as the recent notification of thepower tariff policy of the Government.

Provide government support for energy efficiency

The Government needs to create a policy framework that provides incentives forenergy efficiency. This could for example mean providing incentives in urbanareas for mass transport systems, and promoting R&D in energy efficiency. Theenvironment should encourage energy efficiency companies to come up and oper-ate profitably. Awareness has been steadily increasing and policy makers are nowthinking on how this can be achieved.

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In parallel, India is also emerging as a significantly active market in terms ofClean Development Mechanism (CDM) projects being conceptualized and regis-tered with the Executive Board (EB).

The growing awareness of the CDM benefits would make this an importantarea for investments in the Indian energy sector. CDM should also give the nec-essary fillip for energy efficiency measures in India.

Coal Sector

The majority of the energy requirement in India is met by coal, largely mined inthe eastern and the central regions of the country. In 2004–05, the total coal pro-duction in the country was around 350 million MT and majority of it catered tothe core sectors of power, steel and cement.

Inspite of various policy initiatives to diversify the fuel mix, it is becomingincreasingly evident that coal will continue to play the major role in sustainingthe growth momentum of India. Based on estimates, the consumption of coal isprojected to rise by nearly 40 percent over the next five years and almost to doubleby 2020. However, in the recent past, the coal sector in the country has come underpressure over its inability to meet demand (both planned and unplanned) of theuser industries.

By Government’s own estimates, coal production will lag behind demand byabout 100 million MT as of 2012 and by 250 million MT by 2020.

Key Issues Facing the Sector

The critical issues facing the coal sector are highlighted below:

● Historically, opencast mining has been favoured over underground mining9.This has led to land degradation, environmental pollution and reduced qualityof coal as it tends to get mixed with other matter;

● In addition, current economic mining practices are generally limited to depthsof 300 meters and 25 percent of the reserves of the country are beyond thisdepth10;

● Further, coal mining in India is associated with poor employee productivity(Coal Indian Limited, CIL, produces 80% of Indian coal and is the secondlargest employer in the world, with 500,000 employees). The output per minerper annum in India varies from 150 to 2,650 tonnes compared to an average ofaround 12,000 tonnes in the U.S. and Australia12; and

● Finally, India has still not been able to develop a comprehensive solution todeal with the fly ash generated at coal power stations through use of Indiancoal13. Clean coal technologies, such as Integrated Gasification CombinedCycle, where the coal is converted to gas, are available, but these are expensiveand need modification to suit Indian coal specifications.

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The task of transformation of the coal sector is formidable given the size of invest-ment requirement, and the level of political interference that is expected duringsuch process. The following efforts can become the cornerstones of reform in thesector.

Deregulation of the coal sector

Deregulation and opening of the sector to private participation will spur stateowned Coal India Limited (CIL) to improve performance, and help attract invest-ments to the tune of USD 8–10 billion required to upgrade existing mines andopen new ones in the next five to seven years. Recognizing this, Government hasnow decided to offer access to state-owned mining blocks to investors. Simulta-neously, Coal India is being encouraged to further identify coal blocks where-from coal extraction will be commercially viable. As soon as attractive blocks areoffered and successes become visible, private sector investment would increasesignificantly.

An independent Regulatory body to govern investment and operation in thesector is required. Such a body will help create a level playing field and will allowthe Government to distance itself from activities like allocation of blocks, approvalfor mines, etc. The body can also be expected to introduce competitive priceregulation.

Improvement in operational efficiency of the coalcompanies

Coal India is in need of an organizational transformation to gradually alignits operating costs to international standards. Mining costs of CIL are at least35 percent higher than those of leading coal exporting countries such as Australia,Indonesia, and South Africa. To match productivity, Coal India will need to investin new technologies, improve processes in planning and execution of projects, andinstitutionalize a comprehensive risk management framework14.

Strengthening of logistics in coal distribution

In India, the logistics infrastructure such as ports and railways are overburdenedand costly and act as bottlenecks in development of free market. Privatization ofports may bring the needed efficiencies and capacities. In addition, capacity addi-tion by the Indian Railways is necessary to increase freight capacity from the coal-producing regions to demand centres in the northern and central parts of thecountry. On the Indian rail network, freight trains get a lower priority than pas-senger trains, a problem that promotes delays and inefficiency.

Special freight corridors would raise speeds, cut costs, and increase the sys-tem’s reliability.

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Focusing on technology for future

India’s numerous technology research institutes are working on energy relatedR&D. However, there is a possibility that they are operating in a fragmentedfashion. The Government may get improved recoveries on its investment by con-centrating on few important technology areas. To start with focus may be appliedfor tighter emission standards and development of inexpensive clean-coal tech-nologies viz. extraction of methane from coal deposits.

Policy and Regulatory Framework

The coal industry in India has traditionally been characterized by state monopoly,lack of independent regulation and lack of transparency in tariff determination.The Government has now realized that a high growth rate in domestic productionof coal cannot be sustained without carrying out structural reform and introduc-tion of competition through participation of the private sector. In this regard, theGovernment has taken the following measures:

● Distancing of the Government from price determination of all grades of coal;

● Opening of captive coal mining for power, iron and steel, and cement to privateinvestment. Foreign investment in Indian companies taking up coal mining forcaptive use has been permitted. The allocation of coal blocks are to be done onthe basis of competitive bidding15;

● Allowing State Government companies or undertakings to carry out mining ofcoal (or lignite) reserves (either by opencast or underground method) anywherein the country16;

● Reduction in customs duty on coal imports to 5 percent; and

● Downsizing of the budgetary support to the national coal industry.

In addition to the above, the following measures, which have been accepted inprinciple, are awaiting implementation:

● Freeing the sector from controls on distribution

● Establishment of a regulatory authority to resolve price disputes between pro-ducer and consumers of coal

● Granting of infrastructure status to coal sector

● Allowing public sector enterprises for joint venture projects with private sector.

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The India Opportunity

The recognition of requirement for private investment in the sector and theacknowledgement for need of operational efficiency provides various opportuni-ties for investment in the coal and related sectors in India.

Participation of the private sector in captive mining across different user indus-tries is an immediate opportunity for investment. Coal fields with mineable coalreserves in excess of 1,000 million tonnes are proposed to be identified and are inthe process of being allocated for captive mining. This may imply a total capitalrequirement of around USD 1.5–2 billion. However, it would need to be remem-bered that deposits, which are found on surface and easily extractable, may havealready been largely explored.

Now, agencies will need to address increasingly difficult terrain and search coalat greater depths with more sophisticated technology, requiring more capital andlarger scale of operations.

They will also have to issue new regulations supporting a free market, allowthe formation of joint ventures or other alliances, and encourage the developmentof a shared infrastructure, such as dedicated rail lines and power transmissionnetworks. To achieve these goals, the Government will have to overcome opposi-tion from strong political and business interests within the sector, which is atraditional source of political influence.

As related sectors, seaports that receive shipments of coal, railroads, etc wouldrequire USD 40–50 billion in investments to enable expansion in capacity in aharmonious manner. The Government’s plan to invest USD 2 billion to increasecapacity and remove bottlenecks at existing major ports is much lower comparedto an estimated USD 30 billion that is in actual requirement. Similarly, a totalUSD 15–20 billion is required in new railway tracks to act as freight corridors andto integrate them with existing rail operations.

Oil Sector

Oil comprises of 36 per cent of India’s primary energy consumption at present,and expected to grow both in absolute and percentage terms driven by overalleconomic growth. The growth in demand expected to catapult the overall demandto 196 MMT in 2011-12 and 250 MMT in 2024-25.

The growing demand supply gap has led the Indian government to open up theE&P sector to private participants through NELP and develop a more holisticstrategy for acquisition of equity oil abroad.

Key issues facing the Sector

● Absence of statutory framework in the upstream industry: India hassignificantly shied away from structural regulation; regulations in India aremore focused towards use of standards in the areas of health, safety and envi-ronment, and certain critical aspects of operations and pricing. The scope of theproposed legislation through the recently drafted Petroleum Regulatory Board

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Bill is confined to the downstream industry. While upstream is still governedunder a policy framework by the Directorate General of Hydrocarbons andnotable absence of any statutory framework.

● Lack of clarity in Open Access Policy: Mandatory provision of surpluscapacity17 to the open access pool in all new product pipelines subjects themto the risk of possible under-recovery of costs due to any unutilized/surpluscapacity. Any unabsorbed costs on unutilized capacity might be recoverablethrough levelised tariffs if the investor remains the main user of the pipeline.Alternatively treatment of unabsorbed cost as a regulatory asset for subsequentrecovery from third party users on amortized basis might raise debate on crosssubsidization issues and create disincentives for new shippers to contractcapacity.

● Incidence of cross subsidy due to social obligations: Till recently thesubsidy burden on LPG, SKO and diesel were allocated to the national oil com-panies, but the incidence is been spread out across to the private sector.Although this phenomenon is likely to remain due to social obligations of theGovernment, a more transparent procedure for the allocation of subsidieswould boost investor confidence further.

Policy and Regulatory Framework

The current upstream regulation is provided by Director General of Hydrocarbons(DGH), more so on the technical aspects rather than on pricing front. Midstreamand downstream sector is largely unregulated; however, downstream regulationis proposed to be introduced.

Over the past five to six years, the trend has been towards opening up the sectorfor greater investment, setting up an independent regulator to monitor post pro-duction activities, and enabling a transition from an administered to a marketdriven mechanism. This includes de-controlling of most of the petroleum products

Trend in primary energy demandDemand for oil is expected to grow from 119 MTOE from 2004 to 250 MTOE during 2025 at annual growth of 3.6per cent

During the same perioddomestic production fromexisting developed reserves expected to grow at approximately 2.5 per cent

The gap in demand and output will catapult India to one of thelargest consumers of crude oilalong with China. The 2countries will account for 35per cent of the world'sincremental energy demand

800

2004 2010 2015 2020 2025

376

119 168 188 218 250

490568

650735

700600500400300200100

0

MTO

E

OilGas

Source: BP and EIA:Exhibit 4.1: India’s energy mix and outlook for oil

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and allowing private sector companies to market them at the market-determinedprices18.

Another significant trend in oil and gas regulation in India, and one which islikely to continue, is the opening up of the sector to private and foreign partici-pation. A 100 percent Foreign Direct Investment is allowed in the exploration,pipeline infrastructure, refining and in downstream retailing (100 percent FDI inretailing is allowed subject to minimum investment of USD 445 million in mid-stream or upstream sector.), LNG and trading segments subject to approval.Combined with the attractiveness of the Indian market in the oil sector, this islikely to bring forth significant investments in the future.

On the pricing front, the government appointed committee on pricing and tax-ation of petroleum products has recommended that the oil companies should shiftfrom import parity based pricing to trade based pricing. It has also suggestedreduction in custom duties on petrol and diesel from 10 per cent to 7.5 per centand shifting excise duty from an ad valorem levy to a specific levy.

The India Opportunity

Investments under NELP

To increase investment in the upstream side, MoPNG (Ministry of Petroleum andNatural Gas) has introduced a transparent bidding process for allocation of oiland gas blocks. The launch of NELP in 1997 and award of 120 production sharingcontracts under five rounds may be hailed as a policy success. About 700 MMT ofoil and oil equivalent gas are established through the five rounds. However, therecent rounds of NELP bidding are still dominated by public sector. To bring newtechnologies and international practices in the oil and gas exploration sector, gov-ernment is keen on greater foreign participation under NELP process.

Destination India as refining hub

India possesses certain key advantages for developing itself as an export refininghub which include cost competitiveness and location advantage. India has signif-icant lower cash operating costs mainly on account of cheaper power and labourcosts as well as lower capital costs by as much as 25 to 50 percent over other Asiancounterparts. Geographically, India is strategically located en route of MiddleEast crude for East Asian and Pacific rim markets. In fact, India possesses surplusrefining capacity and has already turned a net exporter of products19.

Certain areas of the country have been already demarcated for the developmentof export oriented refineries, and dialogues are underway between MoPNG andsome of the oil companies on implementation of the strategy, which include build-ing supporting infrastructure for enabling exports.

By 2010, the expected world supply deficit in refining capacity would bearound 112 MTPA because of shutting down of some of the smaller refineries indeveloped economies. Smaller refineries in North America and Europe are finding

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it uneconomical to invest for cleaner fuels because of high compliance cost andcleaner fuel norms. In Japan and Australia, oil majors have rationalized theirrefining assets as they are becoming uneconomical to operate.

Going forward, significant new investments are expected in refinery capacityin India for the purpose of exports. Besides, upgrading some of the existingrefineries might be on the cards since most of these refineries have low complexity,which is now becoming an important prerequisite to hedge against variation incrude supplies and achieve cost competitiveness by accommodating cheaper qual-ity crude.

Building strategic petroleum reserve through publicprivate partnership

Taking into account the oil security concern of India, the Government has decidedto set up strategic crude oil storage at various locations in the country. Thisstrategic storage would be in addition to the existing storage of crude oil andpetroleum products with the oil companies and would provide an emergencyresponse mechanism in case of short-term supply disruptions.

Additionally, the government is also exploring the possibility of increasing theoil stockpile in the country through various innovative schemes such as leasingof storage space to international oil trading companies, building of additionalstorage terminals through the concessions route etc that would potentially inducesignificant investments in storage and transportation infrastructure.

Driven by —

Sustained increase in refining capacity,driven by costadvantages overerstwhile importingcountries

Currently Indiapossesses surplusrefining capacitygenerating exportableproducts

Significant proportionof exports driven bypetrochemicals sale byReliance

India's terms of trade for petroleum products

Value of Imports

Value of Exports

25000

20000

15000

10000

5000

00-0

1

01-0

2

02-0

3

03-0

4

04-0

5

25000

Net imports

Net exports

20000

15000

10000

5000

- 5000

- 10000

90.9

1

*C00 tonnes

91.9

2

92.9

3

93.9

4

94.9

5

02.0

3

03.0

4

01.0

2

00.0

1

99.0

0

98.9

9

98.9

7

97.9

8

95.9

6

Exhibit 4.2 India’s petroleum exports on the rise since 2001

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Acquisition of overseas oil assets

MoPNG has conceived a more coordinated approach to acquisition of overseas oilassets through joint foray (compared to the current fragmented approach), bilat-eral engagements with other countries to benefit from each others strengths inareas of technology transfers, R&D, safety and training, as well as multilateralengagements such as the Asian Round Tables, International Energy Forum etc.

Recently India has signed an MoU with China for joint bidding of hydrocarbonblocks.

Competition in the downstream (retail and institutional)segment

As per Petroleum Regulatory Board (‘PRB’) Bill, all upcoming pipelines wouldhave mandatory open access. Creation of open access capacity would drive com-petition in the retail and the institutional segment. In anticipation of competition,major oil firms are expanding their retail network and forming alliances with ahost of product and services companies to offer non-fuel products and services aspart of their overall proposition. On the institutional segment, incumbents arefocusing on profitable segments for subsidized products like LPG (commercial &non-domestic) as well as on specialty products like Hexane.

Gas Sector

India is a relatively new entrant into the natural gas market when compared tomature NG based economies like Japan, Korea, and the United States. However,the increasing significance of the fuel in the Indian context can be gauged by thefact that by 2025, the country is expected to rival both China and Japan in havingthe largest NG demand in Asia. Demand in each of these countries is expected tobe in the range of 350 MMSCMD20.

The significant potential for NG demand, especially in the context of India’sprojected 7–8 percent growth, is being driven by a few key factors

● The share of natural gas in India’s energy basket is only around 8.9 percent, ascompared to the world average of around 24 percent. More than 50 percent ofNG volume goes to sectors where it is a substitute to petroleum products andthe rest goes to the power sector where it would substitute coal. In this context,NG volume in the country will partly be driven as a substitute to petroleumproducts since it is cheaper and cleaner. In addition, reforms in the power sectorwould also encourage NG to be used as a cleaner substitute to coal in the longterm. The share of NG in the fuel mix expected to go up from 8.8 percent cur-rently to 22 percent in 2031–32.

● Per capita consumption of NG in India is currently amongst the lowest in theworld, at 29 cu m as compared to a world average of around 538 cu m21.

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● Demand for natural gas (more than 120 MMscmd, million standard cubicmetres per day) in the country has far outstripped supply (about 66 MMscmd),and there is an increasing trend of new NG demand emerging as well as con-version from existing fuels to NG22.

Key Issues

India’s gas supply issues are different from that of oil, mainly because domesticonshore and offshore as has been contributing to meet more than 90 percent ofdemand so far. Except for the LNG terminals at Hazira and Dahej, all other gasrequirements for the country are being met through domestic sources. However,existing onshore and offshore fields are facing a declining trend in production(production in 2015 may be less than 50 percent of current production23) and areunlikely to contribute to growth in supply. The identification of new sources of gassupply would be critical to sustaining the demand for gas in the country.

● Domestic reserves/production will not be sufficient: While there have been newfinds of about 70 Bcm a year in the last decade, production has not increasedcorrespondingly largely due to unattractive market prices. However, signifi-cant shortfall will mean that one way or the other these reserves will have tostart being utilized. Significant incentives are being offered by the governmentthrough its NELP programs to attract greater investment in this area.

● Cross-border gas pipelines are still facing uncertainty: While initiatives relatedto cross-border NG pipelines with Myanmar, Turkmenistan, Iran, etc. havebeen under discussion for quite some time, the political environment and inter-national climate has been unfavourable, thus delaying these projects indefi-nitely. Even when they do materialize, the country may face potential supplydisruption if political issues emerge over medium term. Given these con-straints, LNG may be the answer to the Indian NG supply issue.

● Inability to take international prices: Due to the distinctive nature of the Indianmarket, current international prices cannot be passed through to major NGusers viz. power and fertilizer sectors (which constitute over 70 percent ofdemand). These customers have traditionally been buying gas at administeredprices of less than USD 3 per MMBtu. In the short term, however, even at aboutUSD 6 per MMBtu, NG does become relatively affordable for existing powerand fertilizer plants largely because they are being impacted by shortages, andindustrial customers because of the high prices of Naphtha, FO or LPG. Fur-ther, reforms in the power sector will lead to greater ability to take higher pricesin the longer term.

Policy and Regulatory Framework

Over the past six years, the trend in natural gas regulation has been towardsopening up the sector for greater investment, setting up an independent regulatorto monitor post production activities, and enabling a transition from the admin-istered control regime to a market driven mechanism.

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Significant regulatory issues which do or will impact the gas sector in Indiainclude:

● Gas Linkage Committee: The Gas Linkage Committee (GLC) was establishedto manage the allocation of gas (given limited supplies) to eligible customers.This was linked with the administered price mechanism which depresseddomestic gas prices for certain sectors. However, new fields under the NationalNELP are already exempt from the purview of the GLC and can trade at marketprices.

● Petroleum and Natural Gas Regulatory Bill: The Petroleum and Natural GasRegulatory Board Bill tabled in Parliament in 2003 will define the regulatoryframework for the sector. The Board, once in place, will have powers extendingacross all activities post production of natural gas, and including setting up ofLNG terminals, building and operations of transmission pipelines on a commoncarrier principle, laying down regulation of city gas networks, laying downguidelines for fair practices in marketing of natural gas etc. In the interim, untilthe Bill is passed, the modified gas pipeline policy is currently in effect, whichallows companies with the least terms of transportation tariff and most effi-cient operations to operate inter-state pipelines.

● Foreign Direct Investment in NG Sector: Foreign Direct Investment of 100percent is allowed in the exploration, pipeline infrastructure, LNG and tradingsegments subject to approval. Combined with the attractiveness of the Indianmarket in the NG sector, this is likely to bring forth significant investments inthe future. The integrated LNG policy is currently under discussion and islikely to be put in place soon.

The India Opportunity

Domestic exploration of NG

The government sees significant potential in domestic exploration as an optionfor matching supply with demand. On an average, reserves of more than 70 bcma year have been discovered over the past decade. The NELP provides significantbenefits to private players in terms of allowing 100 percent FDI, a seven year taxholiday, free marketing rights in the domestic market etc. which are likely toattract a number of players to the next round (NELP VI). However, unless sig-nificant finds are made (similar to KG basin) the country will still have to dealwith a domestic shortage of gas.

LNG may be the answer

Given the shortages and uncertainties related to international pipeline gas, LNGmay be the answer. A significant focus is being placed on LNG to secure supplies

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resulting in a number of LNG terminal projects that are being planned includingKochi, Dabhol, Ennore, Mangalore and expansion of Dahej.

However, issues related to pricing and the limited potential sources of LNGsupply (Qatar, Iran, Australia) to India need to be sorted out. In the long-term,this is likely to be one of the most significant areas of investment in the NG sector,with the most attractive areas being those where pipeline gas is not expected inthe near future.

Coal Bed Methane (CBM) and Underground CoalGasification Opportunities

With proven reserves of 765 Mtoe and indicated reserves of between 1,260 - 2,340Mtoe24, CBM as an opportunity could be larger than either oil or natural gas.CBM exploration has already been taken up seriously with more than 16 blocksawarded so far and more to be taken up as part of the CBM-III and NELP VIinitiatives. Compression of CBM and marketing as CNG could be exploited inpotential industries as a substitute to conventional natural gas. A related excitingtechnology is that of underground coal gasification, which is already beingexploited in Russia at a small level. Given India’s large coal reserve, the UGCtechnology could potentially produce volumes of multiples of India’s free naturalgas reserve. For example Gujarat’s coal reserves could produce as much as 70times ONGC’s current free gas reserves25.

Emergence of the retail gas user

Increasingly, due to environmental and economic considerations, gas is reachingthe retail user segment as a fuel for domestic and transportation purposes. Thegrowth of Auto CNG and Piped domestic gas in major Indian urban centres hassparked off a new demand spurt for NG. Auto CNG and piped gas together wouldwithin five years account for about 7 percent of total demand up from the current2 percent. The fast pace of growth can be assessed from the fact that in the nextfew years, at least 30 cities have been identified for city gas coverage by privateand public sector players, as compared to the six cities that currently have thesefacilities. Supporting regulation related to conversion of public transportation toCNG in some major cities has helped this growth significantly.

Development of common gas market through NationalGas Grid

The growth in each of the end user industries as well as the wide spread of theretail segment would need to be supported by the appropriate infrastructure. Atpresent, gas transmission and distribution infrastructure in India is still at anascent stage, with only one cross-country pipeline (HVJ pipeline) in existenceapart from a number of regional and city networks, which have been growing

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significantly in the last five years. The draft gas pipeline policy in 2003 gave sup-port to the development of a national gas grid, which would create a common gasmarket across the country, as opposed to the regional markets in existence today.Private and public sector players increasingly see this area as an attractiveopportunity to connect markets that could not be tapped so far.

With the setting up of the Petroleum and Natural Gas Regulatory Board, andthe coming of a regulator for pipeline infrastructure, it is likely that private inter-est would increase in the pipeline infrastructure segment. Reliance’s recent ini-tiative to develop a cross-country pipeline connecting the KG basin to markets inNorth India is an indicator of the potential that private players can exploit in thisarea26.

Nuclear Energy

India presently has fourteen Nuclear power plants in operation comprising twoBoiling Water Reactors & 12 Pressurized Heavy Water Reactors (PHWRs) withan installed capacity of 3,310 MWe. Another eight reactors comprising 3,420 MWeare under construction which includes six PHWRs and two 1,000 MWe LWRs. Allthe above reactors are under the control of Nuclear Power Corporation of IndiaLtd.

Additionally, a new public sector company BHAVINI was created to carry outthe construction and operations of Department of Atomic Energy’s (DAE) first

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500 MWe proto-type Fast Breeder Reactor (FBR). The fuel for this reactor will beplutonium bred from indigenously available Uranium.

In its quest for attaining energy security through use of nuclear energy, Indiahas formulated a three-stage nuclear power programme, consisting of setting upof (PHWRs) in the first stage, Fast Breeder Reactors (FBRs) in the second stageand reactors based on Uranium 233-Thorium 232 cycle in the third stage. TheFBRs in stage two will be fuelled by plutonium and will also recycle spent uraniumfrom the PHWRs for breeding additional plutonium fuel for electricity generation.Thorium irradiation in stage two (FBRs) will produce uranium 233 to start stagethree. It is also envisaged that in the first stage of the program, capacity additionwill be supplemented by electricity generation through Light Water Reactors(LWRs).

A beginning has been made in the introduction of LWRs with the intergovern-mental agreement between India and the Russian Federation for co-operation insetting up of two 1,000 MWe LWRs at Kudankulam, Tamil Nadu. However, in thelong run it is planned to indigenize the initiative.

Strategic importance of nuclear energy

The nuclear energy production must expand by a factor of fourteen to meet the“Sustainable Development (SD) Vision Scenario” of the International EnergyAgency (IEA)27. India’s long-term energy requirements and availability of energysources imply that it will have to build 250,000 MWe of nuclear capacity by 2050.This will not only enhance energy security but will also yield rich dividends byreducing carbon emissions.

A study conducted by DAE28 points out the inevitability of developing fastbreeder technology and thorium fuelled reactors to provide energy security to thenation as the presently known extractable coal reserves will have been exhaustedby 2050.

Key issues facing the sector

The key issues facing the sector are as follows:

● Limited Uranium resources: The known reserves of uranium in the countrycan support about 10,000 MWe of installed electricity capacity based onPHWRs for a life-time of 40 years at 80 percent capacity factor. If the ongoingexploration efforts in the country locate additional uranium reserves, PHWRprogramme can also be expanded beyond the envisaged plan.

● Plutonium required to fuel 2nd Stage: PHWR program must provide theinitial inventory of plutonium needed to seed the Fast Breeder Reactor (FBR)program.

● Reduction of capital cost and improved efficiency: New developments in caseof FBRs should aim at reducing the capital cost, O&M and fuelling costs, whileimproving safety. Long design life of about 60 years would also reduce the life-time cost and the cost of decommissioning. Further, thermal efficiencyimprovements by 4 to 5 percent are also needed.

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● Waste disposal and Safety systems: Indian reactors have demonstrated a fairlygood record of safety and have sound waste disposal systems. However, withincreased share of Nuclear energy in the coming years these aspects will needincreased focus.

The India Opportunity

The growth of nuclear power in India as envisaged is possible provided robusttechnologies are developed for both the front end and the back end of the fuel cycle.Presently, the known uranium reserves in India are modest and uranium pro-duction needs to be augmented manifold to realize the planned growth of PHWRs.There is a persisting need for developing techniques for economic and efficientextraction of uranium from lean sources and it should be done by research groupsjointly with state owned Uranium Corporation of India Ltd. Sea water can be animportant source of uranium on a long-term basis and R&D for recovery of ura-nium from sea water should be systematically pursued.

Within the next three to four years, India will achieve an installed capacity of6,730 MW of nuclear power. The country has set itself a target of achieving aninstalled nuclear capacity of 20,000 MWe by 2020 and 64,000 MWe by 2032 .Fur-ther India needs to reach 250,000 MWe by 2050.This corresponds to a share of 10percent of the country’s installed capacity by 2032 and 20 percent in 2050 formthe present share of 2.7 percent. This capacity could consist of imported LWRswhich run on imported fuel, domestic PHWRs which run on imported fuel anddomestic fuel and FBRs. Progressively power reactors running on thorium wouldget added to this list.

Hydro

The installed capacity of Hydro power projects in India is 32,135 MW. India hasa large hydro potential and fully exploiting it is an important element in India’spursuit of energy security.

Key Issues

Government of India is addressing various issues relating to development of hydropower. Private sector participation is also being encouraged in a big way.

● Funding: Hydro projects involve high initial costs with one of the lowest lifetimecost of power generation. To meet the funding requirements, the Governmenthas decided that all Central Sector projects will be provided budgetary support.It is also proposed to levy a Power Development Cess in the country to fundhydro projects.

● Geological risks: Hydro projects present geological surprises when constructionstarts and this leads to increase in project cost presenting additional risks tothe investors.

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● Survey and investigation of the potential hydro sites based on advanced scien-tific techniques are an essential requirement for the future.

● Long delays in obtaining clearances: Projects are delayed due to time taken inacquiring land, obtaining clearances and issues related to rehabilitation andresettlement. To resolve this, it is proposed that new projects will initially betaken up by Government owned companies for investigations, updation ofDPRs, obtaining the necessary clearances and pre-construction activities. Afterthese stages, the projects could be offered to the private sector for executioneither on ‘stand alone’ basis or for joint venture participation with the stateowned companies.

● Delays due to disputes between the states: In case of hydro projects involvingmore than one state, disputes between states has led to substantial hydro powerpotential remaining locked up. Many mega hydro projects could not be takenup for implementation, even though these projects are well recognized asattractive and viable.

● Simplified procedure for transfer of clearances: The immediate requirementwould be to transfer the clearances already accorded to non-starting hydroprojects in the State Sector to Central Sector or Independent Power Projects(IPP) or Joint Ventures between IPPs and central sector.

Policy and Regulatory Framework

The key policy initiatives in the hydro sector are:

● Rationalization of Hydro Tariff: Recognizing the difficulties in execution ofhydro projects, the Government has decided to rationalize the existing hydrotariff norms, improve the incentives for better operation and evolve a solutionto the contentious issue of computing the completion cost.

● Estimates on Completion Cost (Geological Risks): A realistic estimate of com-pletion cost has to take into account the geological and hydrological risks, costescalation and natural occurrences of land slides, rock falls etc.

● Promoting Hydro Projects with Joint Ventures: With a view to bring in addi-tional private investment in the hydro sector, there has been emphasis onschemes through joint ventures between the public and domestic / foreign pri-vate enterprises. Relaxation in certain rules pertaining to mandatory sharingof power with neighbouring states is provided in case of joint venture projects.

● Support for Acquisition, R&R, Catchment Area Development: The acquisitionof forest and private land involves Government procedures and difficult nego-tiations with land owners. It is now the responsibility of the State Governmentto acquire the land (Government/Private/Forest) for the project and also nego-tiate at its own terms with land owners as per the policy adopted by it. In caseany cost is incurred by the developer it shall be considered as cost to the projectand allowed to be considered for tariff determination.

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The India Opportunity

India ranks fifth in terms of exploitable hydro-potential in the world. As perassessment made by Central Electricity Authority (CEA), India is endowed witheconomically exploitable hydro-power potential to the tune of 148,700 MW. Thebasin wise assessed potential is29: In addition, 56 number of pumped storageprojects have also been identified with probable installed capacity of 94,000 MW.In addition to this, hydro-potential from small, mini & micro schemes has beenestimated as 6,782 MW from 1,512 sites. Thus, in totality India is endowed withhydro-potential of about 250,000 MW. However, only 17 percent of the hydroelec-tric potential has been harnessed so far and 5 percent is under various stages ofdevelopment. Thus, 78 percent of the potential remains without any plan forexploitation. While private participation is currently low at 3 percent, privateparticipation in future will be important to meet the ambitious target of45,000 MW capacity addition in the next ten years.

Basin/Rivers Probable Installed Capacity(MW)

Total 148,701

33,832Indus Basin

20,711Ganga Basin

4,152Central Indian River system

9,430Western Flowing Rivers of southern India

14,511Eastern Flowing Rivers of southern India

66,065Brahmaputra Basin

Source: Narmada Hydroelectric Development Corporation website

Renewable Sources

Renewable energy sources (RES) is an important element of India’s power policyto meet the needs of power in an environmentally friendly way and to providepower to remote areas. India is the first country to have a dedicated ministry fordeveloping and promoting non-conventional energy sources in the country. Cer-tain forms of renewable energy sources (wind energy, smallhydro and biomass)have been able to establish a strong presence. There is relatively strong partici-pation of private sector in response to the policy and incentives extended to theparticipants (for example a significant share of the wind-power based generationcapacity has been set-up by private sector).

During the last couple of years considerable activity has been witnessed amongRES-based power generators for availing benefits under the Clean DevelopmentMechanism (CDM) for their projects.

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Key Issues Facing the Sector

● Relatively high capital cost and low plant load factors make renewable energymore expensive. There is a need to balance environmental and financial con-siderations for which support from Government and the Regulatory Commis-sions is crucial. Technological development to bring down costs and increaseavailability are key imperatives.

● Low plant load factors and seasonal nature of generation mean that grid sup-port is required to maintain a reasonable supply level to the consumers. Hybridsystems in remote areas where extension of grid may not be feasible mayemerge.

● Coordination between various ministries of the Government is required tomaximize the benefits under various programmes for rural electrification,renewable energy sources development and village energy security programRegulatory certainty on tariff and other conditions of power procurement willcontinue to remain crucial for maintaining private sector interest in this area

● Adoption of renewable energy technologies in certain cases may lead toincreased competition for land use which will need to be managed, as and whenusage of such technologies becomes more wide spread.

Policy and Regulatory Framework

Some of the key legislative, policy and other measures initiated by the variousstakeholders for promoting RES are:

● The Act provides for State Commissions to fix a minimum percentage for pur-chase of energy from such renewable energy sources. Some of the State Com-missions have already initiated measures in this direction. Also the recentlynotified National Tariff Policy (NTP) mandates that such minimum percentageshould be made applicable latest by April 1, 2006

● The policy recognizes that renewable sources of energy should be offered apreferential tariff till the time that technologies evolve so that they can competewith other conventional sources of electricity generation

● The policy encourages generation and distribution of electricity in notified ruralareas without any need for obtaining a licence from the SERCs

● A number of fiscal benefits in form of duty exemptions, income-tax holidays,accelerated depreciation norms etc. have been extended. In addition, IndianRenewable Energy Development Agency has also been extending financial sup-port to the interested investors

The India Opportunity

India has an enormous potential of renewable energy across the various sourcesas indicated in the table below. The current installed capacity of around 7,100

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MW31 constitutes about 6 percent of India’s total installed generation capacity.And given that only a small percentage of it has been utilized, it offers an excitingopportunity for various participants (including generator and equipment manu-facturers) to explore and establish a strong presence.

The new draft policy on renewable energy released by the Ministry of Noncon-ventional Energy Sources (MNES) has set an objective of achieving an installedrenewable based generation capacity of 10,000 MW by the year 2012.

● Certain forms of renewable energy sources viz. wind energy, smallhydro andbiomass have been able to establish a strong presence in India in the renewableenergy landscape. With an installed capacity of around 4,400 MW32 of wind-based power generation, India is the fourth largest wind power generator inthe world. India ranks second in the world with an installation base of 3.8 mil-lion biogas plants.

● Some State Governments have provided a lot of encouragement for renewablessuch as bio-diesel for which cultivation of crops such as jatropha has beenencouraged on a large scale.

● Development and introduction of cost-effective technologies in areas like SolarPhotovoltaic can play a pivotal role in wider proliferation of the same in India(there are about 300 clear sunny days in a year in most parts of India and thedaily average solar energy incident over India varies from 4–7 kWh/m2,depending upon location).

● Planning Commission, in a recent document33, has suggested a number of pol-icy measures to promote specific renewable energy alternatives includingbiodiesel, ethanol and solar thermal water heaters. The emphasis in on creatinga market for these alternatives by specifying some sort of purchase obligationfor other participants like oil companies and Government agencies.

● The policy initiatives as described earlier including the recommendation forsourcing power from renewable energy sources on a competitive basis will pro-vide the required impetus for the growth of the this sector.

1.5 million sq. m collector area

RES Potential30 Existing Installed Capacity*

Wind 45000 MW ~4400 MW

Small Hydro (upto 25 MW) 15000 MW ~1700 MW

Solar Photo Voltaic Power 20 MW/sq. km Very low exploitation.

Urban and Industrial Waste-based powerBiogas plants 12 million 3.8 million

Improved BiomassChulhas (Cook-Stoves)

120 million

Solar Water Heating140 million sq. mcollector area

Biomass power /cogeneration

19500 MW ~950 MW

2700 MW Very low exploitation.

Source: MNES Website

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Electricity

As per the Constitution of India, “electricity” falls within the concurrent jurisdic-tion of the Centre and the States. In most states in India, the sector consists ofvertically integrated State Electricity Boards - most of which are now unbundledinto Generation, Transmission and Distribution companies which continue to bestate-owned. In a few States, private licensees for power distribution are also inoperation.

Currently only 10.6 percent of the total installed capacity is in the private sec-tor. Distribution is privatised in the state of Orissa and some cities such as Delhi,Kolkata, parts of Mumbai, Ahmedabad and Surat in the western state of Gujarat.

Demand Supply Position and Expected Trends

The projected elasticity of electricity w.r.t. GDP is 0.95. With this, the growth ratein electricity consumption is expected to be 7.6 percent. The per capita consump-tion presently stands at 606 kWh (2005), far below the world average of 2,429kWh. At an 8 percent GDP growth, the per capita consumption of India in 2032is estimated to be 2,643 kWh, which is just comparable to the present day worldaverage.

With an installed capacity of 123 GW, the country currently faces energy short-age of 8 percent and a peak demand shortage of 11.6 percent. In order to sustaina growth rate of 8 percent, it is estimated37 that the power generation capacityin India would have to increase to 306 GW in the next ten years which is 2.5 timescurrent levels.

Key Issues Facing the Sector

Socio-Political Influences

Over the decades, the power sector in India has become an instrument for imple-mentation of State Government’s social policies. It is characterized by heavysubsidies, mostly poorly targeted and State Government’s involvement in func-tioning of the power utilities. The agricultural sector is a major consumer ofelectricity and together with other economically weaker sections of society has ledto large costs for the utilities in serving these consumers.

This combined with poor state of State Government finances led to inadequatecompensation to the power utilities contributing to degradation of the financialposition.

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High level of network losses

The power utilities in India suffer from a very high level of network losses ofaround 40 percent largely due to theft, pilferage and non-collection of duesand also due to the state of the network involving long low voltage lines. Non-realization of revenue for power generated has led to financial degradation andspiral of worsening performance.

High level of financial losses

Due to the reasons mentioned above, the power sector in India suffers hugefinancial losses to the tune of USD 6 billion an annum. These losses have accu-mulated over time and resulted in inadequate financial resources for capacityaugmentation.

Inadequate Generation and Transmission Capacity

Inadequate resource generation for investments has led to generation capa-city shortfall of over 15 percent. Payment security mechanisms for privateplayers have been difficult to provide on account of the financial situation.Likewise, inadequate transmission capacity in the country has led to a situationwhere regional surpluses remained unutilized to meet deficits elsewhere.

Poor Quality of Supply

Inadequate generation capacity and the poor quality of the distribution networkhave resulted in poor quality of supply. Supply is characterized by planned andunplanned interruptions and deviations in voltage and frequency from prescribed

Year

2003-04 131 633

761

1097

1524

2118

2886

3880

153

220

306

425

575

778

2006-07

2011-12

2016-17

2021-22

2026-27

2031-32

InstalledCap. Req.

(GW)35

Energy Req.(BillionkWh)36 World 2,429

7,816

6,231

440

435

1,379

5,000 10,000 15,000

13,066

Japan

US

UK

Indonesia

India

China

Source: IEAExhibit 9.1: Per capita consumption KWh, 2003

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parameters. There has been some improvement in these parameters in recentyears owing to penalties and incentives for utilities for deviations.

Lately, availability of fuel for power generation is becoming a significant con-straint. Coal shortages are increasing and gas shortages are leading to a situationwhere plants are not able to operate to full capacity.

Policy and Regulatory Framework

Electricity being a concurrent subject under the Constitution of India, a Centrallevel as well as a State level jurisdiction is envisaged. The policy framework nowhinges on bringing in competition, private sector participation and independentregulation (especially attempts bringing in independence from Government inter-ference in state owned utilities). There is also a new emphasis on rural electrifi-cation a national programme for the same has been taken up.

The regulatory system now consists of a Central Electricity Regulatory Com-mission (CERC) regulating all matters pertaining to more than one state, StateElectricity Regulatory Commissions (SERC) for matters within a state and anAppellate Tribunal (being the higher court of appeal against the two regulators).In addition, there is a Central Government authority - the Central ElectricityAuthority (CEA) responsible for power planning for the country and accordingapprovals for large hydro projects.

The legislative framework is governed by the Electricity Act, 2003. This alongwith subsequent policies including the National Tariff Policy, the National Elec-tricity Policy and the Rural Electrification Policies define the policy landscape.The main enablers for competition are:

● All new generation in private sector has to be contracted through competitivebidding and even in case of public sector the same should be done in five yearstime. Regulated pricing applies only when competitive bidding has not beenadopted.

● Open access on common carrier principle is allowed on transmission networksand will soon be phased in on distribution networks. This enables competitionin procurement of bulk power as well as in retail supply to large consumers whowill soon be able to contract supply on their own. There are issues related tocross-subsidy surcharge in retail supply which is a surcharge payable by thesupplier or consumer to the incumbent to compensate for loss of cross-subsidy.

● Provisions for parallel competitive distribution networks in existing areas aremade. However, parallel networks are likely to come up only in areas wherethe existing network is in very poor state and the consumer profile is veryfavorable.

The policy now also requires reduction of cross-subsidies in tariffs and betteringtargeting of overnment subsidies.

The policy allows 100 percent Foreign Direct Investment (FDI) in generation(other than atomic reactor power plants), transmission, distribution and trading.There is no limit on the project cost and quantum of FDI. The categories which

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would qualify for such approval are: (i) Hydroelectric power plants (ii) Coal /Lignite based thermal power plants and (iii) Oil /Gas based thermal powerplants.

The India Opportunity

Generation

In generation segment, opportunities exist due to the large demand-supply short-fall. A number of private projects have come up in recent times. While most of thegeneration would be sold through long-term contracts, there is a policy focus onenabling open access that would allow generators to sell directly to large con-sumers. This and the evolving power trading market imply generators can alsolook at the possibility of setting up merchant plants or at least set aside a part ofthe capacity for merchant use. We are beginning to see instances of merchantplants coming up in the country.

The Government has also announced the setting up of ultra mega powerprojects (projects of size greater than 4,000 MW). The concept involves a Govern-ment agency doing the preparatory work related to land acquisition, environmen-tal clearances etc. and then awarding the projects to private developers on acompetitive basis. The policy now also allows generators to take up coal miningfor captive use.

These measures along with fiscal concessions for large generation projects suchas waiver of customs duty make this a very attractive opportunity. The opportu-nity for generators appears to be brighter than what it was earlier with more focuson improving the health of existing distribution segment and also opening up ofnew market for industrial/high value consumers through open access.

Based on Government’s plans, by 2012, a capacity addition of 22,900 MW hasbeen identified for the private sector out of total target of around 107,000 MW.

Transmission

Private investments in transmission can be through Independent Power Trans-mission Company (IPTC) or a Joint Venture Company (JVC). Under the IPTCroute, the private promoter will have 100 percent ownership, whereas, in the JVCroute a minority holding will reside with the state owned Central TransmissionUtility (CTU) viz. PGCIL. Both forms of private participation are envisaged increation of the National Grid38 along with the CTU. The required capital outlayfor this purpose is around USD 4.4bn.

There are issues relating to payment security and obtaining right of way(ROW), environmental clearances, etc. that need to be addressed to promote pri-vate investment.

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Distribution

While the experience of private participation in this segment has not been to theexpected level, the recent policy initiatives provide adequate signals in terms ofattractiveness of this segment for private investment. The Act provides for par-allel and second distribution licensee in same area of supply, which enablessetting up parallel distribution lines (and arguably more efficient ones) in specificareas39.

Privatization of existing distribution utilities is possible, though good oppor-tunities are few owing to the large risks involved. Till risks related to measure-ment of operational parameters such as losses (due to inadequate metering),regulatory risks (due to relative immaturity and lack of sufficient independencefrom Government), information risks (state of assets in the ground) and politicalrisks (preventing cost reflective tariffs) are not minimized, the privatizationopportunities may be limited. However, privatization of urban areas might be apossible opportunity in the future (privatization of Delhi distribution in 2002 isan example) as also opportunities related to franchising of certain distributionoperations.

Trading

Power trading volumes in India, though small, have been growing steadily overthe years. Investment opportunities arise due to the following:

● Open access in transmission and distribution networks will facilitate tradingand enable direct sales to large consumers. Efforts at establishing a nationalpower exchange are on and this will facilitate trading to a great extent.

● The policy of allowing 100 percent FDI in power trading will result in entry offoreign players in the trading market and the depth and maturity of the marketwill increase.

● While inadequate transmission is a constraint at presence, efforts of the Gov-ernment to enhance transmission capacity including inviting private partici-pation and setting up of National Grid are expected to address this.

● There is an emerging trend of new private generators selling power to tradersrather than financially weak distribution utilities. Traders are in a better posi-tion to manage risks relating to payments and demand uncertainties. Besides,with rising short term prices of electricity, traders have the potential to earnlarger returns. However, there are issues relating to regulating trading mar-gins which are the current subject of much debate.

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Energy savings and Demand Side Management

A study for the Asian Development Bank (ADB, 2003) estimated an immediatemarket potential of energy saving of 54,500 million kWh and peak saving of9,240 MW. This has an investment potential of over USD 3 billion. Additionalsavings are possible by reduction of auxiliary consumption in generation plants.Investment in this area is also likely to aid in reducing carbon emissions andtherefore, part of the investments can also be financed through the Carbon Creditsgenerated.

Equipment manufacturing

The large growth needs implies growing demand for generators, lines and equip-ment, meters, etc. While it is estimated that the existing manufacturing capacityin the country can support addition of about 6,000 MW of capacity, the futurerequirement is 15,000 MW every year for the next ten years.

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No CompanyCoal Sector

1 Coal India LtdOil SectorExploration and Production

1 ONGC2 Oil India Limited (OIL)3 Cairn Energy plc4 BG Group plc5 Reliance Industries Limited6 GSPC-Niko

Refineries1 Indian Oil Corporation Limited (Indian Oil)2 Reliance Industries Limited3 Bharat petroleum Corporation Limited (BPCL)4 Hindustan Petroleum Corporation Limited (HPCL)

Gas SectorExploration and Production

1 ONGC2 OIL3 Cairn Energy plc4 BG Group plc5 Reliance6 GSPC-Niko

LNG Terminals1 Petronet LNG2 Royal Dutch Shell

Transmission and Distribution1 GAIL

Electricity SectorGeneration

1 NTPC Limited2 National Hydroelectric Power Corporation (NHPC)3 Nuclear Power Corporation (NPC)4 BBMB5 NEEPCO6 GVK7 GMR8 Lanco9 Essar

Transmission1 Powergrid Corporation (PGCIL)

Generation & Transmission1 DVC

1 Tata Power2 Reliance Energy3 CESC Limited

Generation, Transmission & Distribution

Appendix: Few Major Players in India

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Part Seven

Appendices

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Appendix 1

Sector Specific Guidelinesfor FDI

Sl.No.

1a

b

Sector/Activity

Airports100%

100%

Automatic

FIPBbeyond 74%

PN 4 / 2006

PN 4 / 2006

Subject to sectoral regulationsnotified by Ministry of Civil Aviationwww.civilaviation.nic.inSubject to sectoral regulationsnotified by Ministry of Civil Aviationwww.civilaviation.nic.in

Greenfield projects

Existing projects

2 49%-FDI;100% – for NRIinvestment

Automatic Subject to no direct or indirectparticipation by foreign airlines.Government of IndiaGazette Notification dated 2.11.2004issued by Ministry of Civil Aviation.www.civilaviation.nic.in

Air Transport Services

3 100% Automatic PN 4 / 2006Subject to license byappropriate authority

AlcoholDistillation & Brewing

6 74% (FDI+FII) Automatic PN 2 / 2004Subject to guidelines for setting upbranches/subsidiaries of foreignbanks issued by RBI.www.rbi.org.in

BankingPrivate sector

7 Broadcasting

a FDI +FIIinvestmentup to 20%

FIPB PN 6 / 2005Subject to Guidelines notified by Ministry ofInformation & Broadcastingwww.mib.nic.in

FM Radio

b 49% (FDI+FII) FIPB Subject to Cable Television NetworkRules (1994) Notified by Ministry ofInformation & Broadcastingwww.mib.nic.in

Cable network

c 49% (FDI+FII)Within this limit, FDI componentnot to exceed 20%

FIPB Subject to guidelines issued byMinistry of Information& Broadcastingwww.mib.nic.in

Direct-To-Home

4 49%(only FDI)

FIPB Where any individual investmentexceeds 10% of the equity, provisionsof Section 3(3)(f) of Securitization andReconstruction of Financial Assetsand Enforcement of Security InterestAct, 2002 should be complied withwww.finmin.nic.in

Asset ReconstructionCompanies

5 74% FIPB Subject to guidelines issued byDepartment of Atomic Energyvide Resolution No. 8/1(1)/97-PSU/1422 dated 6.10.98.

Atomic Minerals

FDI Cap/Equity Entry Route Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

1-846730-22-8_APP 1_267_12/29/2006

Sl.No.

Sector/Activity FDI Cap/Equity Entry Route Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

d

e

Setting up hardwarefacilities such asup-linking, HUB, etc

49% (FDI+FII)

26% FDI+FII

FIPB

FIPB

PN 1 / 2006

PN 1/ 2006

Subject to Up-linking Policy notifiedby Ministry of Information& Broadcastingwww.mib.nic.inSubject of guidelines issued byMinistry of Information &Broadcastingwww.mib.nic.in

Up-linking a News &Current AffairsTV Channel

f 100% FIPB PN 1/ 2006Subject of guidelines issued byMinistry of Information &Broadcastingwww.mib.nic.in

Up-linking aNon-news & CurrentAffairs TV Channel

8 100% FIPB PN 4 / 2006Subject to industrial licenseunder the Industries (Development & Regulation) Act, 1951

Cigars & Cigarettes-Manufacture

11 100% Automatic PN 2 / 2005 &PN 2 / 2006

Subject to conditions notifiedvide Press Note 2 (2005 Series) including:a. minimum capitalization of US$ 10 million for wholly ownedsubsidiaries and US$ 5 millionfor joint venture. The funds would have to be brought within six monthsof commencement ofbusiness of the Company.b. Minimum area to be developedunder each project – 10 hectares incase of development of serviced housing plots; and built-up areaof 50,000 sq.mts. in case ofconstruction development project;and any of the above in case ofa combination project.[Note: For investment by NRIs,the conditions mentioned in PressNote 2 / 2005 are not applicable.]

ConstructionDevelopment projects,including housing,commercial premises,resorts, educationalinstitutions,recreational facilities,city and regional levelinfrastructure,townships.

9 100% Automatic PN 4 / 2006Subject to provisions ofCoal Mines (Nationalization)Act, 1973www.coal.nic.in

Coal & Lignite miningfor captive consu-mption by powerprojects, and iron &steel, cement produ-ction and other eligibleactivities permittedunder the Coal Mines(Nationalisation)Act, 1973.

10 100% Automatic PN 4 / 2006Coffee & Rubberprocessing &warehousing

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12 Courier services forcarrying packages,parcels and otheritems which do notcome within the ambitof the Indian Post Office Act, 1898.

100% FIPB PN 4 / 2001Subject to existing laws andexclusion of activity relatingto distribution of letters,which is exclusively reservedfor the State.www.indiapost.gov.in

13 26% FIPB PN 4 / 2001 &PN 2 / 2002

Subject to licensing under Industries(Development & Regulation)Act, 1951 and guidelines on FDI inproduction of arms & ammunition.

Defence production

14 100% Automatic PN 4 / 2006Floriculture,Horticulture,Development ofSeeds, AnimalHusbandry,Pisciculture,aqua-culture,cultivation ofvegetables,mushrooms, undercontrolled conditionsand services relatedto argo andallied sectors.

Automatic Subject to industrial license underthe Industries (Development& Regulation) Act, 1951 andother sectoral regulations.

15 100% PN 4 / 2006Hazardous chemicals,viz., hydrocyanic acidand its derivatives;phosgene and itsderivatives; andisocyanates anddi-isocyantes ofhydrocarbon.

Automatic Subject to industrial license underIndustries (Development &Regulation) Act, 1951 and regulationsunder Explosives Act, 1898

16 100% PN 4 / 2006Industrial explosives –Manufacture

Automatic Subject to licensing by the InsuranceRegulatory & Development Authority.www.irda.nic.in

17 26% PN 10 / 2000Insurance

FIPB Foreign investment in an investingcompany will not be counted towardssectoral cap in infrastructure/servicessector provided the investment is upto 49% and the managementof the company is in Indian hands.

18 49% PN 2 / 2000 &PN 5 / 2005

Investing companiesin infrastructure/services sector(except telecomsector)

Sl.No.

Sector/Activity FDI Cap/Equity Entry Route Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

Sector Specific Guidelines for FDI 269

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19 100% Automatic PN 2 / 2000,PN 3 / 2005 &PN 4 / 2006

Subject to Mines & Minerals(Development & Regulation) Act, 1957www.mines.nic.inPress Note 18 (1998) andPress Note 1 (2005) are not applicablefor setting up 100% ownedsubsidiaries in so far as the miningsector is concerned, subject to adeclaration from the applicant thathe has no existing joint venture forthe same area and / or theparticular mineral.

Mining coveringexploration and miningof diamonds & preciousstones; gold,silver and minerals.

20

iii

iii

iv

vvi

viiviii

ixx

xi

xiixiiixivxv

xvixvii

xviiixix

100% Automatic PN 2 / 2000,PN 6 / 2000 &PN 2 / 2001

Subject to:a. minimum capitalization norms forfund based NBFCs - US$ 0.5 millionto be brought upfront for FDIup to 51%; US$ 5 million to bebrought upfront for FDI above 51%and up to 75%; and US$ 50 millionout of which US$ 7.5 millionto be brought upfront and the balancein 24 months for FDI beyond 75%and up to 100%.b. minimum capitalization norms fornon-fund based NBFC activities –US$ 0.5 million.c. foreign investors can set up 100%operating subsidiaries without thecondition to disinvest a minimumof 25% of its equity to Indian entities subject to bringing in Under Secretary50 million without any restriction onnumber of operating subsidiarieswithout bringing additional capital.d. joint venture operating NBFC’sthat have 75% or less than 75%foreign investment will also beallowed to set up subsidiaries forundertaking other NBFC activitiessubject to the subsidiaries alsocomplying with the applicableminimum capital inflow.e. compliance with the guidelines ofthe RBI.

Non Banking FinanceCompanies –approved activitiesMerchant bankingUnderwritingPortfolio ManagementServicesInvestment AdvisoryServicesFinancial ConsultancyStock BrokingAsset ManagementVenture CapitalCustodial ServicesFactoringCredit ReferenceAgenciesCredit Rating AgenciesLeasing & FinanceHousing FinanceForex BrokingCredit card businessMoney changingbusinessMicro creditRural credit

Sl.No.

Sector/Activity FDI Cap/Equity Entry Route Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

Appendices270

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Sl.No.

Sector/Activity FDI Cap/Equity Entry Route Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

21

a

a

b

Petroleum & NaturalGas sectorOther than Refiningand including marketstudy and formulation;investment/financing;setting up infrastructure formarketing inPetroleum & NaturalGas sector.

22 26%

26% in case ofPSUs 100% incase of Privatecompanies

100%

FIPB

FIPB (in caseof PSUs)Automatic(in case ofprivatecompanies)

Automatic

PN 2 /2000

PN 1 / 2004 &PN 4 / 2006

Subject to Guidelines notified byMinistry of Information &Broadcasting.www.mib.nic.in

Subject to Sectoral policy

www.petroleum.nic.in

Subject to sectoral regulations issuedby Ministry of Petroleum & NaturalGas; and in the case of actual tradingand marketing of petroleum products,divestment of 26% equity in favourof Indian partner/public within 5years.www.petroleum.nic.in

Print MediaPublishing ofnewspaper andperiodicals dealingwith news andcurrent affairs

Refining

b 100% FIPB PN 1 / 2004

PN 2 / 1998,PN 7 / 2000 &PN 4 / 2006

Subject to guidelines issued byMinistry of Information &Broadcasting.www.mib.nic.in

Publishing of scientificmagazines/ specialtyjournals/ periodicals

25

PN 6 / 2002

Telecommunication

a 74% (IncludingFDI, FII, NRI,FCCBs, ADRs,GDRs, convertiblepreference shares,and proportionateforeign equity inIndian promoters/InvestingCompany)

Automaticup to 49%.

PN 5 / 2005PN 5 / 2005

Subject to guidelines notifiedin the Series

Basic and cellular,Unified AccessServices, National/International LongDistance, V-Sat, PublicMobile Radio TrunkedServices (PMRTS),Global Mobile PersonalCommunicationsServices (GMPCS) andother value addedtelecom services

FIPBbeyond 49%

23 100% Automatic Subject provisions of the ElectricityAct, 2003www.powermin.nic.in

Power includinggeneration (exceptAtomic energy);transmission,distribution and PowerTrading.

24 100% FIPB Subject to divestment of 26% equityin favour of Indian partner/Indianpublic within 5 years and priorapproval of State Governmentfor change in land use.

Tea Sector, includingtea plantation

Sector Specific Guidelines for FDI 271

1-846730-22-8_APP 1_271_12/29/2006

b 74% Automaticup to 49%.FIPB beyond 49%

PN 4 / 2001Subject to licensing and securityrequirements notified by theDepartment of Telecommunicationswww.dotindia.com

ISP with gateways,radio-paging,end-to-end bandwidth.

c 100% Automaticup to 49%.FIPB beyond 49%

PN 9 / 2000Subject to the condition that suchcompanies shall divest 26% of theirequity in favour of Indian public in5 years, if these companies are listedin other parts of the world. Alsosubject to licensing and securityrequirements, where required.www.dotindia.com

ISP without gateway,infrastructure providerproviding dark fibre,electronic mail andvoice mail

d 100% Automatic PN 2 / 2000Subject to sectoral requirements.www.dotindia.com

Manufacture oftelecom equipments

27 Satellites – Establishment andoperation

74% FIPB Subject to Sectoral guidelines issuedby Department of Space / ISROwww.isro.org

28 100% Automatic PN 9 / 2000;PN 2 / 2006; &PN 4 / 2006

Subject to Special Economic ZonesAct, 2005 and the Foreign TradePolicy.www.sezindia.nic.in

Special EconomicZones and Free TradeWarehousing Zonescovering setting up ofthese Zones andsetting up unitsin the Zones

26 Trading

a 100% Automatic PN 4 / 2006Subject to guidelines for FDI intrading issued by Department ofIndustrial Policy & Promotionvide Press Note 3 (2006 Series).

Wholesale / cash& carry trading

b 100% AutomaticTrading for exports

e 51% FIPBSingle Brand productretailing

c 100% FIPBTrading of itemssourced from smallscale sector

d 100% FIPBTest marketing of suchitems for which acompany has approvalfor manufacture

Entry RouteSl.No.

Sector/Activity FDI Cap/Equity Other conditions Relevant Press Noteissued by D/o IPPwww.dipp.gov.in

The Press Notices can be found on the DIPP websiteSource: Govt of India, Ministry of Commerce

Appendices272

1-846730-22-8_APP 1_272_12/29/2006

Appendix 2

Clearances and ApprovalsInformation

1-846730-22-8_APP 2_273_12/29/2006

Concerned Ministry/Department ofGovt. of India

Website addresSubject Matter

Industrial EntrepreneurMemorandum fordelicensed industries

Department of Industrial Policy &Promotion

Department of Industrial Policy &Promotion

Reserve Bank of IndiaDepartment of Industrial Policy &Promotion

http://dipp.gov.in

http://dipp.gov.in

http://www.rbi.org.inhttp://dipp.gov.in

Approval for IndustrialLicense/carry-on-businessLicense

Approval for TechnologyTransfer:(i) Automatic route(ii) Government approval(PAB)

Reserve Bank of IndiaDepartment of Economic Affairs

http://www.rbi.org.inhttp://finmin.nic.in

Approval for financialcollaboration:(i) Automatic route(ii) Government approval(FIPB)

Department of Industrial Policy &Promotion

http://dipp.gov.inApproval of Industrial Park(i) Automatic route(ii) Non-Automatic route(Empowered Committee)

Department of Company Affairs(Registrar of Companies)

http://dca.gov.inRegistration as a company &certificate of commencementof business

Department of Industrial Policy &Promotion

http://dipp.gov.inMatters relating to FDIpolicy and its promotion andfacilitation as also promotionand facilitation ofinvestment by Non-ResidentIndians (NRIs)

Reserve Bank of India http://www.rbi.org.inMatters relating to ForeignExchange

Department of Revenue http://finmin.nic.inMatters relating to Taxation

Concerned Ministry/Department ofGovt. of India

Website addresSubject Matter

Central Board of Direct Taxes http://incometaxindia.gov.inMatters relating to DirectTaxation

Central Board of Excise & Customs http://www.cbec.gov.inMatters relating to Excise &Customs

Ministry of Labour http://labour.nic.inMatters relating to IndustrialRelations

Directorate General of Foreign Trade http://dgft.delhi.nic.inImports of Goods

Ministry of Environment and Forests http://envfor.nic.inMatters relating toEnvironment & Forestclearance

Ministry of Overseas Affairs http://iic.nic.inOverseas investment byIndians

Departments Concerned of StateGovernments

A link for Web site addressof the state/UT is given atwww.dipp.gov.in

Allotment of land/Shed inIndustrial areas, acquisitionof land, change in land use,approval of building plan,release of water connectionetc.

Source: Govt of India, Ministry of Commerce

Appendices274

1-846730-22-8_APP 2_274_12/29/2006

Appendix 3

Addresses for FilingApplications

Sl.No. Application for Address for filing

1

2

3

4

5

6

7

8

9

10

PR&C Section, SIA, Department of Industrial Policy & Promotion,

Ministry of Commerce & Industry, Udyog Bhavan, New Delhi – 11, India

Industrial Licence/COB Licence

PR&C Section, SIA, Department of Industrial Policy & Promotion,

Ministry of Commerce & Industry, Udyog Bhavan, New Delhi – 11, India

IEM

Jt.Director, Industrial Statistics Unit (ISU), Department of Industrial Policy

& Promotion, Room No. 326, Udyog Bhavan, New Delhi – 11, India

Monthly Production Returns

PR&C Section, SIA, Department of Industrial Policy & Promotion,

Ministry of Commerce & Industry, Udyog Bhavan, New Delhi – 11, India

FDI Application with NRI Investment

& 100% EOU application and

FDI in Retail Trading

Project Approval Board, SIA,

Department of Industrial Policy & Promotion, Ministry of Commerce &

Industry, Udyog Bhavan, New Delhi – 11, India

Foreign Technology Agreement under

Government Approval

PR&C Section, SIA, Department of Industrial Policy & Promotion,

Ministry of Commerce & Industry, Udyog Bhavan, New Delhi – 11, India

Approval for Industrial Park,

Model town/Growth Center

under Government Approval

Regional Office concerned of Reserve Bank of India

(Addresses are available at RBI website)

FDI under automatic route

FIPB Unit, Department of Economic Affairs, Ministry of Finance,

North Block, New Delhi – 110001, India

FDI application under government route

Registrar of Companies, Ministry of Company Affairs,

B Block, 2nd floor, Paryavaran Bhavan,

CGO Complex, New Delhi – 110003, India

For registration and incorporation

of Company

Reserve bank of India, Central Office, Foreign Investment Division,

Shaheed Bhagat Singh Road, Mumbai – 400001, India

For setting up Liaison/Project/

Branch office of a foreign company

Source: Govt of India, Ministry of Commerce

1-846730-22-8_APP 3_275_12/29/2006

Fax: +91 11 23014564, E-mail: vishu@ub.nic.in

1-846730-22-8_APP 3_276_12/29/2006

Appendix 4

Inward Investment fromJapan Liaison Office

Development Officer (Japan Cell)Investment Promotion & Infrastructure Development CellDepartment of Industrial Policy & PromotionMinistry of Commerce & IndustryGovernment of India368 Udyog BhawanNew Delhi - IND-110 011Telephone + 91 11 2306 1526Fax + 91 11 2306 2626

1-846730-22-8_APP 4_277_12/29/2006

Email : japan.cell@nic.in

1-846730-22-8_APP 4_278_12/29/2006

Appendix 5

State Statistics

1-846730-22-8_APP 5_279_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

And

hra

Pra

des

hH

yder

abad

ww

w.a

po

nlin

e.go

v.in

Tel

ugu,

Urd

uM

id E

aste

rnco

ast

2750

6876

.20

61.1

1%44

.54

509

Aru

nach

alP

rad

esh

Itana

gar

http

://

arun

acha

lpra

des

h.go

v.in

/E

nglis

h, H

ind

iN

E/C

hine

sbo

rder

8374

31.

1054

.74%

0.56

430

Ass

amD

isp

urht

tp:/

/ass

amg

ovt

.nic

.in/

Ass

ames

e;B

angl

a; B

od

o;

Kar

bi

S &

E o

fB

huta

n78

483

26.7

064

.28%

9.57

300

Bih

arP

atna

http

://g

ov.

bih

.nic

.in/

Hin

di;

Ang

ika;

Bho

jpur

i;M

agah

i;M

aith

ili

SE

of N

epal

9416

483

.00

47.5

3%12

.56

127

Chh

attis

garh

ww

w.c

hhat

tisga

rh.n

ic.in

Hin

di;

Chh

attis

garh

iIn

land

fro

mK

olk

ata

1351

9420

.80

65.1

8%8.

47*

326*

Go

aP

anaj

iht

tp:/

/go

ago

vt.n

ic.in

/K

onk

ani;

Mar

athi

Mid

dle

of

wes

t co

ast

3702

1.30

82.3

2%2.

12*

1290

*

Guj

arat

Gan

hina

gar

ww

w.g

ujar

atin

dia

.co

mG

ujar

ati

Pak

ista

nco

asta

lbo

rder

1960

2450

.70

69.9

7%39

.48

623

Har

yana

Cha

ndig

arh

http

://h

aray

ana.

gov.

inH

ind

i; P

unja

bi

NW

of D

elhi

4421

221

.10

68.5

9%18

.25

719

Appendices280

1-846730-22-8_APP 5_280_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

Him

acha

lP

rad

esh

Sim

laht

tp:/

/him

acha

l.nic

.in/

Hin

di;

Pah

ari

bo

rder

sC

hina

/Tib

et55

673

6.10

77.1

3%4.

4160

4

Jam

mu

and

Kas

hmir

Sum

mer

:S

rina

gar

Win

ter:

Jam

mun

http

://

jam

muk

ashm

ir.n

ic.in

/K

ashm

iri;

Urd

uB

ord

ers

Pak

ista

n &

Chi

na

2222

3610

.10

54.4

6%4.

5935

6

Jhar

khan

dR

anch

iw

ww

.jhar

kand

.go

v.in

Hin

di

Wes

t of

Ko

lkat

a79

700

26.9

054

.13%

6.05

286

Kar

nata

kaB

anga

lore

ww

w.k

arna

taka

.go

v.in

Kan

nad

aw

est c

oas

t19

1791

52.8

067

.04%

32.6

652

6

Ker

ala

Thir

uvan

anth

a-p

uram

(Tri

van-

der

um)

ww

w.k

eral

a.go

v.in

Mal

ayal

amS

W ti

p38

863

31.8

090

.92%

22.1

594

Mad

hya

Pra

des

hB

hop

alw

ww

.mp

.nic

.inH

ind

iC

entr

al In

dia

3081

4460

.30

64.1

1%22

.66

309

Mah

aras

htra

Mum

bai

ww

w.m

ahar

asht

ra.g

ov.

inM

arat

hiM

umb

ai a

ndin

land

3077

1396

.90

77.2

7%81

.77

707

Man

ipur

Imp

hal

http

://m

anip

ur.n

ic.in

Mei

tei

bo

rder

sM

yanm

ar22

327

2.10

68.8

7%0.

8932

7

Meg

hala

yaS

hillo

nght

tp:/

/meg

hala

ya.n

ic.in

Gar

o;

Kha

si;

Eng

lish

nort

h o

fB

angl

ades

h22

429

2.30

63.3

1%1.

1643

0

State Statistics 281

1-846730-22-8_APP 5_281_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

Miz

ora

mA

izaw

lht

tp:/

/miz

ora

m.n

ic.in

Miz

o;

Engl

ish

bo

rder

sM

yanm

ar21

081

0.90

88.4

9%.4

8**

488*

*

Nag

alan

dK

ohi

ma

http

://n

agal

and

.nic

.inE

nglis

hb

ord

ers

Mya

nmar

1657

92.

0067

.11%

1.04

**45

6**

Ori

ssa

Bhu

ban

eshw

arw

ww

.ori

ssa.

gov.

inO

riya

S o

f Ko

lkat

a15

5707

36.8

063

.61%

13.0

429

9

Pun

jab

Cha

ndig

arh

http

://p

unja

bgo

vt.n

ic.in

Pun

jab

ib

ord

ers

Pak

ista

n50

362

24.4

069

.95%

19.4

367

5

Raj

asth

anJa

ipur

ww

w.r

ajas

than

.go

v.in

Hin

di;

Raj

asth

ani

bord

ers

Pak

ista

n &

SW

of D

elhi

3422

3656

.50

61.0

3%24

.28

356

Sik

kim

Gan

gto

kht

tp:/

/sik

kim

.nic

.inN

epal

ib

ord

ers

Nep

al a

ndB

huta

n

7096

0.54

69.6

8%0.

3453

0

Tam

il N

adu

Che

nnai

http

://t

n.ni

c.in

Tam

ilS

E ti

p13

0058

62.4

073

.47%

41.5

457

1

Tri

pur

aA

gart

ala

http

://t

rip

ura.

nic.

inB

enga

li;K

okb

oro

kE

of

Ban

glad

esh

1049

23.

2073

.66%

1.57

*44

7*

Utt

ar P

rade

shLu

ckno

ww

ww

.up

gov.

nic.

inH

ind

i; U

rdu

S o

f Nep

al23

8566

166.

2057

.36%

51.8

225

2

Appendices282

1-846730-22-8_APP 5_282_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

Utt

aran

chal

Deh

rad

unht

tp:/

/ua.

nic.

inH

ind

i;G

arw

hali;

Kum

aoni

W o

f Nep

al53

566

8.50

72.2

8%4.

4443

2

Wes

t Ben

gal

Ko

lkat

aw

ww

.wb

gov.

com

Ben

gali

N o

f Ko

lkat

a88

752

80.2

069

.22%

45.4

949

4

Uni

on

Ter

ri-

tori

es

And

aman

&N

ico

bar

Po

rt B

lair

ww

w.a

nd.n

ic.in

Hin

di;

Ben

gali;

Mal

ayal

am;

Tel

ugu;

Pun

jabi

;T

amil;

Nic

ob

ares

e;E

nglis

h

isla

nds

inIn

dia

nO

cean

, c.

1200

kms

SE

of K

olk

ata

8249

0.36

81.1

8%.2

5**

623*

*

Cha

ndig

arh

Cha

ndig

arh

http

://c

hand

igar

h.ni

c.in

Pun

jab

i; H

ind

iw

ithin

Pun

jab

144

0.90

81.7

6%1.

1314

81

Dad

ra a

ndN

agar

Hav

eli

Silv

assa

http

://d

nh.n

ic.in

N o

f Mum

bai

491

0.22

60.0

3%n/

an/

a

State Statistics 283

1-846730-22-8_APP 5_283_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

Dam

an a

ndD

iuD

aman

Guj

arat

iE

ncla

ves

on

Ara

bia

n S

eaco

ast

122

0.16

81.0

9%n/

an/

a

Nat

iona

l Cap

i-ta

l Ter

rito

ryD

elhi

(NC

T)

Del

hiht

tp:/

/del

higo

vt.n

ic.in

Eng

lish;

Hin

di;

Pun

jab

i; U

rdu

1483

13.8

081

.82%

19.9

511

86

Laks

had

wee

pK

avar

atti

http

://la

ksha

dw

eep

.nic

.in/

Mal

ayal

amis

land

s o

ffS

W c

oas

t32

0.61

87.5

2%n/

an/

a

Pud

uche

rry

(fo

rmer

lyP

ond

iche

rry)

Po

ndic

herr

yht

tp:/

/po

ndic

herr

y.ni

c.in

Fren

ch; T

amil;

Tel

ugu;

Mal

ayal

am

4 p

revi

ous

lyFr

ench

coas

tal

encl

aves

of:

Po

ndic

herr

yan

d K

arai

kal

(with

in T

amil

Nad

u), M

ahe

(with

inK

eral

a) a

ndY

anam

(with

inA

ndha

raP

rad

esh)

492

0.97

81.4

9%1.

4212

32

Appendices284

1-846730-22-8_APP 5_284_12/29/2006

Sta

teC

apit

alO

ffic

ial W

ebsi

teO

ffic

ial

Lang

uage

/sLo

cati

on

Des

crip

tio

nA

rea

inS

qua

reK

ms

Po

pul

atio

n(2

001

cens

us)

inm

illio

ns

Lite

racy

Rat

e(2

001)

%

Gro

ssS

tate

Do

mes

tic

Pro

duc

t(G

SD

P)

(200

4/5,

2003

/4*,

2002

/3**

)U

S$

bn

Per

Cap

ita

US

$pa

Uni

on

Ter

rito

ries

(UT

) do

no

t hav

e lo

cal S

tate

go

vern

emen

ts b

ut a

re r

uled

by

Cen

tral

Go

vern

men

t thr

oug

h a

go

vern

or.

Del

hi a

nd P

uduc

herr

y ha

ve e

lect

ed le

gisl

atur

es a

nd a

re m

ovi

ng to

war

ds

full

Sta

teho

od

.

Cha

ndig

arh

is th

e ca

pita

l of b

oth

the

Pun

jab

and

Har

yana

Sta

tes,

but

is n

ot u

nder

eith

ers

juri

sdic

atio

n b

ut a

dm

insi

tere

d b

y C

entr

al G

ove

rnm

ent a

sa

UT.

The

Nat

iona

l Cap

ital R

egio

n is

an

info

rmal

term

ref

erri

ng to

the

Nat

iona

l Cap

ital T

erri

tory

Del

hi p

lus

the

sate

llite

tow

ns o

f Far

idab

ad,

State Statistics 285

1-846730-22-8_APP 5_285_12/29/2006

Lite

racy

so

urce

: w

ww

.src

ind

ore

.org

/lits

tate

.htm

Gur

gao

n (b

oth

in H

arya

na S

tate

) and

No

ida

and

Gha

ziab

ad in

Utt

ar P

rad

esh.

GS

DP

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Appendix 6

Joint Venture ServiceProviders in India

JM Morgan StanleyPrivate Limited

MUMBAI

Address JM Morgan Stanley Private Ltd,141, Maker Chambers III,Nariman Point, Mumbai - 400 021India

Tel (91) 22 6630 3030

Fax (91) 22 2204 2137

Web http://www.jmmorganstanley.com/

G. Email corporate@jmmorganstanley.com

NEW DELHI

Address JM Morgan Stanley Private Ltd.,114, Himalaya House, 11th Floor,23, Kasturba Gandhi Marg,New Delhi – 110 001.India

Tel (91) 11 5130 5000

Fax (91) 11 5151 0410

Web http://www.jmmorganstanley.com/

G. Email Ms. Sanchita Chadha,sanchita.chadha@jmmorganstanley.com

DSP Merrill LynchLimited

MUMBAI

Address DSP Merrill Lynch Ltd.Mafatlal Centre, 10th FloorNariman PointMumbai 400 021India

Tel (91) 22 6632 8000 / 2280 4100

Fax (91) 22 2282 1827

Web http://www.dspml.com

G. Email dspml@in.ml.com

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Ernst & Young PrivateLimited

MUMBAI

Address Ernst & Young Pvt. Ltd.18th Floor, Express TowersNariman PointMumbai- 400 021India

Tel (91) 22 2282 5000

Fax (91) 22 2282 6000

Web http://www.ey.com/GLOBAL/content.nsf/India/Home

G. Email ey.ind@in.ey.com

NEW DELHI

Address Ernst & Young Pvt. Ltd.Ernst & Young TowerB-26, Qutab Institutional AreaNew Delhi 110 016India

Tel (91) 11 2661 1004

Fax (91) 11 2661 1012

Web http://www.ey.com/GLOBAL/content.nsf/India/Home

G. Email ey.ind@in.ey.com

KPMGs MUMBAI

Address KPMGKPMG HouseKamala Mills Compound448, Senapati Bapat MargLower Parel, Mumbai 400013India

Tel (91) 22 39896000

Fax (91) 22 39836000

Web http://www.in.kpmg.com

G. Email On-Line Form

HSBC Securities &Capital Markets (India)Private Limited

MUMBAI

Address HSBC Securities & Capital Markets(India) Private Limited6th Floor, HSBC,52/60 MG Road, Fort,Mumbai 400001India

Tel (91) 22 2268 1248

Fax (91) 22 2263 1984

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Web http://www.hsbcnet.com/hsbc/india

G. Email On-Line Form

ICICI SecuritiesLimited

MUMBAI

Address ICICI Securities LimitedH.T. Parekh Marg,Churchgate, Mumbai - 400 020India

Tel (91) 22 2288 2460/70

Fax

Web http://www.icicisecurities.com

G. Email On-Line Form

Brescon CorporateAdvisors Limited

MUMBAI

Address 6th & 7th Floor,SIDDHI VINAYAK CHAMBERSGandhi Nagar, OPP MIG CLUBBandra (EAST)Mumbai 400 051MaharashtraIndia

Tel (91) 22 2641 0254 / 2641 0255

Fax (91) 22 2643 7160

Web http://www.brescon.com

G. Email mdo@brescon.com

Edelweiss Capital MUMBAI

Address 14th Floor, Express TowersNariman PointMumbai 400 021.

Tel (91) 22 2286 4400

Fax (91) 22 2282 6632

Web www.edelcap.com

G. Email On-Line Form

NEW DELHI

Address Flat No E-65, Himalaya House,6th floor, 23 Kasturba Gandhi Marg,New Delhi - 110001

Tel (91) 11 4153 1011

Fax (91) 11 4153 1433

Web www.edelcap.com

G. Email On-Line Form

Joint Venture Service Providers in India 289

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Avendus Advisors MUMBAI

Address IL&FS Financial Centre,West Quadrant - 2nd Floor,Bandra-Kurla Complex, Bandra (East)Mumbai - 400 051India.

Tel (91) 22 6648 0050

Fax (91) 22 6648 0040

Web www.avendus.com

G. Email mumbai@avendus.com

CLSA India MUMBAI

Address CLSA India8/F Dalamal HouseNariman PointMumbai 400 021

Tel (91) 22 5650 5050

Fax (91) 22 2284 0271

Web www.clsa.com

G. Email On-Line Form

MAPE Advisory GroupPrivate Limited

MUMBAI

Address Laxmi Towers‘A’ Wing, 4th FloorBandra Kurla ComplexBandra (East)Mumbai – 400051

Tel (91) 22 2653 0800

Fax (91) 22 2653 0999

Web http://www.mapegroup.com

G. Email sylvia@mapegroup.com

NEW DELHI

Address MAPE Advisory Group Pvt. Ltd.6, First Floor, Augusta PointDLF Golf Course RoadGurgaon (Haryana) 122 002

Tel (91) 124 401 MAPE (6273)

Fax (91) 124 414 2339

Web http://www.mapegroup.com

G. Email sachin@mapegroup.com

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Appendix 7

Indian Numbering System

Large numbers are counted in India in different units to Western countries.

101001000

Are dealt with in the normal Western way.

10,000 = 1 lakh (or lac)

10,00,000 = 10 lakhs = one (Western) million = 1,000,000

1,00,00,000 = 1 crore = 10 (Western) million = 10,000,000

Note that the number has the same amount of zeros, it is just that the commasbreak it up in a different manner.

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Appendix 8

Useful Websites

Government & State Operated Websites

For States Official Websites see Appendix 5

National Portal of India http://india.gov.inNational Portal of India - Business pages http://india.gov.in/business.php

Government of India Directory http://goidirectory.nic.in

Ministry of Commerce & IndustryDepartment of Commerce http://commerce.nic.in/Department of Industrial Policy &

Production (DIPP)http://dipp.nic.in

Secretariat for IndustrialAssistance (SIA)

http://siadipp.nic.in/sia/default.htm

Ministry of Finance http://finmin.nic.in

Ministry of Company Affairs http://mca.nic.in

Ministry of Statistics and ProgrammeImplementation

http://mospi.nic.in

Reserve Bank of India (RBI, the Central Bank) www.rbi.org.inClearing Corporation of India (CCIL) www.ccilindia.com

Securities and Exchange Board of India (SEBI) www.sebi.gov.in

National Council on Educational Research &Training

http://ncert.nic.in

Literacy Data; Resource for Adult Education http://www.srcindore.org/litstate.htm

India Trade Promotion Organisation www.indiatradepromotion.org

Pharmacy Council of India www.pci.nic.in

Press Counicl of India http://presscouncil.nic.in

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Business & Trade Organisations

Confederation of Indian Industry www.ciionline.orgFederation of Indian Chambers of Commerce

and Industrywww.ficci.com

India Brand Equity Foundation (IBEF) www.ibef.org

Institute of Marketing and Management www.immindia.comMarket Research Society of India www.mrsi-india.com

Institute of Chartered Accountants of India www.icai.orgNASSCOM (IT, Software & BPO association) www.nasscom.org

Indian Banks Association www.iba.org.in

Bi-lateral Trade Organisations

Contact details for Joint BusinessCouncils and Chambers withoutwebsites can be found at

http://commerce.nic.in/Bi_Chambers%20_Trade.pdf

India-China Chamber of Commerce &Industry

www.indiachinachamber.com

Indo-African Chamber of Commerce &Industry

www.indoafrican.org

Indo-Australian Chamber of Commerce www.indoaustchamber.comIndo-British Partnership Network www.ibpn.co.ukIndo-German Chamber of Commerce www.indo-german.comIndo-Italian Chamber of Commerce www.indiaitaly.comIndo-Japan Chamber of Commerce & Industry www.ijcci.comSingapore Indian Chamber of Commerce &

Industrywww.sicci.com

US India Business Council www.usibc.comWebsite for Indo - Belgian/French/Italian/

German Chamberswww.euindiachambers.com

Miscellaneous

Newspapers

Business Standard www.business-standard.comThe Economic Times www.economictimes.comFinancial Express www.financialexpress.comThe Hindu (Madras based national newspaper) www.hinduonnet.comThe Hindustan Times (Delhi based national

newspaper)www.hindustantimes.com

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India Daily (Expat focussed) www.indiadaily.comIndian Express (Delhi based national

newspaper)www.indianexpress.com

Times of India (Delhi based nationalnewspaper)

www.timesofindia.com

Major Commercial Banks

State Bank of India www.sbi.co.inSBI Commercial and International Bank www.sbici.comStandard Chartered www.standardchartered.comExport-Import Bank of India www.eximbankindia.comHSBC India www.hsbc.co.inList of all Indian banks websites www.rbi.org.in/scripts/

banklinks.aspx

Other

National Centre for Trade Information www.ncti-india.comGlobal Supply GS1 www.gs1india.orgNational Small Industries Corporation www.nsicindia.comSmall Industry India www.laghu-udyog.comJobs in India www.naukri.comOfficial Tourism Portal (Ministry of Tourism) www.incredibleindia.org

International

World Bank www.worldbank.orgIMF www.imf.orgWorld Association of Investment Promotion

Agencieswww.waipa.org

Coface www.coface.comCIA Factbook www.cia.gov/cia/publications/

factbook/index.htmlGlobal Market Briefings www.globalmarketbriefings.comInternational Executive Development

Programmeswww.iedp.info

Useful Websites 295

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