Doing business and investing in India can seem like a bewildering experience for new market entrants. IndusLaw helped Polish businesses see the wood for the trees during a workshop in Warsaw last week, with Ran Chakrabarti flagging some of the big picture issues
The doctrine of harmonious construction under Interpretation of statute
Doing Business in India | Warsaw | Poland | 24 April 2018
1. Doing Business in India
An Overview
Ran Chakrabarti | Warsaw | 24 April 2018
2. Overview
| Structural Nuances & Structural Reforms
| Business Models
| Entry Options
| Foreign Direct Investment
| The Foreign Exchange Management Act (FEMA)
| The Companies Act (2013)
| Employment Law
| Intellectual Property
| Dispute Resolution
2
3. Structural Nuances & Structural Reforms
| Quasi federal system
- Center has competence over the courts and judiciary, defense, banking, institutions
- States have competence over agriculture, land, trade and commerce within states
| Goods & Services Tax (2016)
- Unified indirect tax code: 4 rates depending on the product or service and credit for downstream inputs
| Insolvency & Bankruptcy Code (2016)
- Aims to put creditors in charge of distressed corporates, restructuring in a time bound manner (maximum
270 days) or insolvency and a carve up of the assets
| Demonetisation (2016)
- The net growth in Corporate Income Tax is 22.4 per cent and in Personal Income Tax is 8.5 per cent
[businesstoday]
- An increase in central indirect tax collection by about 26.2 percent and direct tax collection has increased
to 14.4 percent [firstpost.com]
| World Bank Ease of Doing Business 2018
- Up from 137 to 100
3
4. Business Models
| Selling products in the Indian Market
- Distributorship model
The process of movement of products from the manufacturer to the end consumer including distributors,
wholesalers and brokers
- Franchising model
Permission granted by a company to other firms or people to sell products or services to consumers under
its name
The franchisor may control various factors such as pricing & other brand related elements
- Joint venture
A business arrangement between two or more companies to pool their resources for the purpose of
accomplishing a risk reduced mechanism in a commercial enterprise
• Can be incorporated or unincorporated
• Critical to clarify reserved matters, put and call exits and valuation in deadlock scenarios
• Critical to allocate responsibilities and limit liabilities in unincorporated joint ventures
4
5. Business Models
| Manufacturing products in India
- Special Economic Zones
• A geographical region with liberal economic laws, created for promoting manufacturing exports and
economic development
• Wide variety of special exemptions, relating to taxes, quotas, customs and labor regulations
• For export only
- Make in India
• A national program initiated by the Government of India
• designed to facilitate investment, foster innovation, enhance skill development, protect intellectual
property and build best in class manufacturing infrastructure in the country
5
6. Entry Options
| As a Foreign Company
- A liaison office
• Limited scope of activity
• A marketing face in India
• Cannot trade or generate revenue in India
• Must be funded entirely from the company (a profit making track record during the immediately
preceding three financial years in the home country and net worth of not less than USD 50,000 or its
equivalent)
- A project office
• Where a non-resident company has secured a contract to execute a project in India
• Activities must be related to the particular project
• Onetime turnkey projects
• Often enter into unincorporated joint ventures with other partners
6
7. Entry Options
| As a Foreign Company
- Branch Office
• Subject to Reserve Bank of India permission with limited scope of activities
• Requires a profit making track record during the immediately preceding five financial years in the
home country and a net worth of not less than USD 100,000
- Can
• Export and import of goods
• Professional or consultancy services, including Informational Technology and Software and technical
support
• Promoting technical or financial collaborations between Indian companies and parent
• Representing the parent company in India, including airlines and shipping companies
- Cannot
• Manufacturing in India (except in an SEZ) or processing activities on its own
• However, it is allowed to outsource these activities to a domestic manufacturer
7
8. Entry Options
| As a Foreign Company
- Offshore contractual arrangement with Indian counter-party (such as a distributor)
• Simple, low cost, but depends entirely on counter-party network in the market
• Consider issues relating to intellectual property relating to the product or service
• Avoid setting up a permanent establishment through seconding personnel
8
9. Entry Options
| As an Indian Company (subject to FDI regulations)
- A wholly owned subsidiary or a majority owned company of the parent company
• Maintain control
• Fund through equity instruments
• Companies Act (2013) and appointment of directors (one must be Indian resident)
• Key directors duties
- A joint venture with an Indian partner
• Ideal for a business which requires leveraging Indian counter-party’s local knowledge and network in
the market?
• Fund through equity or transfer of intangibles (such as Intellectual Property or assets)
• Shareholders agreement essential, with deadlock provisions carefully thought out
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10. Foreign Direct Investment
| Prohibited Sectors
| Nuclear energy | Gambling & Betting | Lotteries | Real Estate | Tobacco products
| Permitted Sectors
- Automatic Route
• 100 per cent
Key sectors include Real Estate (Township, Housing & Built up Infra), Agriculture & Animal
Husbandry, Mining & Exploration, E-Commerce, Railways Infra, Financial Services, Broadcasting
Carriage Services, Greenfield Pharmaceuticals, ARC’s, Wholesale Trading and Industrial Parks
Single Brand Retailing (subject to 30 per cent local sourcing rule over 5 years) and allowed to sell
through e-commerce
• 49 per cent
Key sectors include Defence, Telecom Services, Insurance, Petroleum Refining, Banking,
Infrastructure Companies, Power Exchange, Scheduled Air Transport
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11. Foreign Direct Investment
| Permitted Sectors
- Approval Route
• 100 per cent
Key sectors include Satellites (establishment and operation), Mining & Mineral Separation,
Telecom Services, Scheduled Air Transport, Publishing & Printing
• 74 per cent
Key sectors include Banking-Private Sector, Brownfield Pharmaceuticals, Private Security
Agencies
• 49 per cent
Key sectors include Broadcasting Content Services
• 26 per cent
Key sectors include Print Media
11
12. Foreign Exchange Management Act (FEMA)
| Provides the framework regulating
- the inflow and outflow of foreign exchange in and out of India
- the ownership of property in India by foreign entities
- the transfer and issue of shares to foreigners and non-resident Indians (NRIs)
- the ability of Indian companies to borrow foreign debt
- the ability of Indian companies to provide guarantees and security for the indebtedness of foreign
subsidiaries
| DoCoMo v Tata (Delhi High Court)
12
13. Company Law
| Companies Act (2013)
- Key Provisions
• The issue and increase of share capital
• Director appointment, removal & decision making
• Officer, Key Managerial Personnel, Promoter, Independent Director
• Shareholder decision making on key issues
• Incurring and extending loans
• Providing security for indebtedness
• Guarantees and security for third party indebtedness
13
14. Employment Law
| Key Employment Related Issues
- Minimum Wage
The Minimum Wage Act, 1948 fixes the minimum wage for certain ‘scheduled employment’ categories –
which is applicable to the whole of India, the minimum wages given under this Act apply to both skilled as
well as unskilled laborers
- Maternity Benefits
The Maternity Benefits Amendment Act, 2017 regulates maternity leave entitlements and other related
benefits for women employed in factories, mines and shops or commercial establishments employing 10 or
more employees
- Provident Fund Contributions
Employee’s Provident Fund (EPF) contribution is a retirement benefit scheme that’s available to all
salaried employees
This fund is maintained and overseen by the Employees Provident Fund Organisation of India (EPFO) and
any company with over 20 employees is required by law to register with the EPFO.
- Prevention of Corruption
All laws relating to the prevention of corruption are governed by The Prevention of Corruption Act,1988
and The Indian Penal Code, 1860
14
15. Intellectual Property Law
| Key Intellectual Property Law Issues
- Registration of your brand in Europe does not afford protection in India
- Registration therefore necessary in India
- Decision relating to the Toyota Prius brand
The Supreme Court held that:
“If goodwill or reputation in the particular jurisdiction (in India) is not established by the plaintiff, no other
issue really would need any further examination to determine the extent of the plaintiff’s right in the
action of passing off that it had brought against the defendants in the Delhi High Court.”
- Consider whether you license your Indian subsidiary with the intellectual property, rather than transferring?
- Registration of intellectual property created by a joint venture in India
15
16. Dispute Resolution
| Dispute Resolution
- Commercially contracting with an Indian party for goods and services
• Choosing foreign law and the foreign courts limit the effectiveness of your remedy if your
counterparty does not have a place of business or assets in that jurisdiction
• You would have to take an award and enforce it in India against the Indian counterparty
• Indian law and arbitration therefore might be a sensible choice in certain circumstances
- Disputes with joint venture partners
• Commonly arises through poorly structured joint venture or shareholder agreements
• Must have a deadlock provision that becomes operative as soon as there is deadlock
• Require the other party to buy you out, or buy them out at fair value
• Fair value to be determined by a pre-appointed accountant
• The McDonalds Case
16
17. BANGALORE DELHI
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E: bangalore@induslaw.com E: delhi@induslaw.com
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T: +91 40 4026 4624 T: +91 22 4920 7200
E: hyderabad@induslaw.com E: mumbai@induslaw.com
DISCLAIMER
This presentation is for information purposes only. Nothing contained herein is, purports to be, or is intended as
legal advice and you should seek legal advice before you act on any information or view expressed herein.
Although we have endeavored to accurately reflect the subject matter of this presentation, we make no
representation or warranty, express or implied, in any manner whatsoever in connection with its contents.
No recipient of this presentation should construe it as an attempt to solicit business in any manner whatsoever.
Contact
Hinweis der Redaktion
Case Laws
Distributorship model –
Siddhartha Sales Agency vs. Sony India Pvt. Ltd. [MANU/DE/1063/2009] The Application was of the appellant regarding a claim and dumping of stocks by the respondent in the distributorship agreement but was dismissed by the ArbitratorThe high court stated that the appellant was not going to suffer any irreparable injury in case stocks were not ordered to be returned to the respondent. The reference was made by the court that the goods/stocks billed to Appellant were part of the distributorship agreement and as the court only had powers to decide monetary compensation, it could not pass an order for return of stock. Hence, the appeal was dismissedThe foremost takeaway from this ruling was the importance rendered to the distributorship agreement by the court, giving the agreement more relevance.
Ravissant Pvt. Ltd. Vs D.F. Export S.A. [2008(38)PTC 222(Del)]The suit was filed to seek declaratory relief by the appellant, firstly, a declaration that the Franchise agreement deemed to have been concluded between the parties, secondly, a declaration that termination of the agreement was illegal and of no effect and to seek permanent injunction against defendant restraining it from giving effect to or enforcing termination of said agreement The court held that the plaintiff had not sought appropriate consequential relief, i.e, decree for any amount of money allegedly spent by it towards the agreement.The reliefs of declaration were barred.The Court concluded that injunctive reliefs were barred, in view of Sections 14 and 41 of Act - plaintiff had also not established that any affirmative obligation under Section existed, which entitled it to such relief - Thus, other reliefs claimed too cannot be granted, Henceforth the Suit was dismissedIt was held by the high court that to crystallize into a binding contract, the offer had to be accepted by both the parties but the defendant's letter unequivocally stated that it was unwilling to enter into a Master Franchise Agreement, Hence there was no concluded contract.
Piramal Healthcare Limited Vs DiaSorin S.p.A. [172(2010)DLT131]The defendant had terminated a distributorship agreement on grounds of inability of the plaintiff to establish it's brand in the Indian market and the inability of the plaintiff to achieve the prescribed sales volume under distributorship agreement.In the application filed by the defendant it claimed that it was an Italian company incorporated under laws of Italy, and had its principal place of business at Italy with no office of assets within the jurisdiction of India and since proper law was English law, it meant that England was a more appropriate forum to be more suitably be triedThus the question was if the Court had jurisdiction to interfere and try the suit, which was subject to the terms of the distributorship agreement.It was held that disputes and claims could be agitated before courts of such place in which neither party resides or even in respect of Courts which were situated at a place which had no connection with either of the partiesHence, the plaint was returned to enable Plaintiff to file action in an appropriate Court Application was therefore allowed.
Silgan White Cap Southeast Asia Vs Vimoni India Private Limited [198(2013)DLT439]The plaintiff had filed a suit for recovery seeking a recovery of a sum of USD 437,446.75 which as per the plaintiff is the sum due to him towards the performance of the contractual obligation as per the agreement entered into between the plaintiff and the defendant. As per the distributor agreement the defendant was to act as distributor of the plaintiff's products which include vacuum metal and plastic closures sealing equipments and auxiliaries.The defendant filed a statement saying that a third party (Amcor White Cap Deutschland GMBH) be made a proper party to the suit as there is a technology and sub license agreement between the plaintiff and the third party on behalf of the defendant.The court held that the objective of the suit is the recovery of sum due under the distributorship agreement entered into by the parties and Hence decided against the defendants prayer of adding a party
Special Economic Zone
Governed by the SEZ Act of 2005.
It is a designated duty free enclave within India and treated as foreign territory for the purpose of trade operations and duties and tariffs. It does not require a license for imports.
Units must become net foreign exchange earners within 3 years of its establishment.
SEZ are allowed manufacturing, trading and service activities.
Full freedom for subcontracting.
The domestic sales from the SEZ are subject to full custom duties and import policy is in force, when they sell their produce to domestic markets.
The corporation in SEZs will not have to pay any income tax on their profits for the first five years and only 50% of the tax for 2 more years thereafter.
If half of the profit is reinvested in the corporation, the concession of 50% tax is extendable for next 3 years.
For SEZ developers, the raw material from cement to steel to electrical parts are subject to zero tax and duty.
For the SEZ, the Government acquires vast land tracts and gives to the developers. The basic condition involves that 25% of the area of the SEZ must be used only for export related activities. Rest 75% area can be used for economical and social infrastructure. However, all SEZ benefits are applicable over the entire SEZ area.
There were provisions for sector specific SEZs and Multiproduct SEZs.
Minimum Land Area Requirements
Minimum area requirements for setting up a SEZ are as follows:
500 Hectares for Multi Sector SEZ
50 Hectares for sector specific SEZ
Recent Government Initiatives to promote SEZ
Minimum Land Area requirement for setting up of new SEZs has been reduced to 50% for Multi-product and Sector-specific SEZs.
Sectoral broad-banding has been introduced to encompass similar / related areas under the same Sector.
A new sector ‘agro-based food processing’ sector has been introduced to encourage agro-based industries in SEZs.
Dual use of facilities like Social & Commercial infrastructure by SEZs and non-SEZs entities has been allowed in order to make SEZ operations more viable.
Online processing of various activities relating to SEZ Developers and Units has been introduced for improving ease of doing business.
Case Laws
Distributorship model –
Siddhartha Sales Agency vs. Sony India Pvt. Ltd. [MANU/DE/1063/2009] The Application was of the appellant regarding a claim and dumping of stocks by the respondent in the distributorship agreement but was dismissed by the ArbitratorThe high court stated that the appellant was not going to suffer any irreparable injury in case stocks were not ordered to be returned to the respondent. The reference was made by the court that the goods/stocks billed to Appellant were part of the distributorship agreement and as the court only had powers to decide monetary compensation, it could not pass an order for return of stock. Hence, the appeal was dismissedThe foremost takeaway from this ruling was the importance rendered to the distributorship agreement by the court, giving the agreement more relevance.
Ravissant Pvt. Ltd. Vs D.F. Export S.A. [2008(38)PTC 222(Del)]The suit was filed to seek declaratory relief by the appellant, firstly, a declaration that the Franchise agreement deemed to have been concluded between the parties, secondly, a declaration that termination of the agreement was illegal and of no effect and to seek permanent injunction against defendant restraining it from giving effect to or enforcing termination of said agreement The court held that the plaintiff had not sought appropriate consequential relief, i.e, decree for any amount of money allegedly spent by it towards the agreement.The reliefs of declaration were barred.The Court concluded that injunctive reliefs were barred, in view of Sections 14 and 41 of Act - plaintiff had also not established that any affirmative obligation under Section existed, which entitled it to such relief - Thus, other reliefs claimed too cannot be granted, Henceforth the Suit was dismissedIt was held by the high court that to crystallize into a binding contract, the offer had to be accepted by both the parties but the defendant's letter unequivocally stated that it was unwilling to enter into a Master Franchise Agreement, Hence there was no concluded contract.
Piramal Healthcare Limited Vs DiaSorin S.p.A. [172(2010)DLT131]The defendant had terminated a distributorship agreement on grounds of inability of the plaintiff to establish it's brand in the Indian market and the inability of the plaintiff to achieve the prescribed sales volume under distributorship agreement.In the application filed by the defendant it claimed that it was an Italian company incorporated under laws of Italy, and had its principal place of business at Italy with no office of assets within the jurisdiction of India and since proper law was English law, it meant that England was a more appropriate forum to be more suitably be triedThus the question was if the Court had jurisdiction to interfere and try the suit, which was subject to the terms of the distributorship agreement.It was held that disputes and claims could be agitated before courts of such place in which neither party resides or even in respect of Courts which were situated at a place which had no connection with either of the partiesHence, the plaint was returned to enable Plaintiff to file action in an appropriate Court Application was therefore allowed.
Silgan White Cap Southeast Asia Vs Vimoni India Private Limited [198(2013)DLT439]The plaintiff had filed a suit for recovery seeking a recovery of a sum of USD 437,446.75 which as per the plaintiff is the sum due to him towards the performance of the contractual obligation as per the agreement entered into between the plaintiff and the defendant. As per the distributor agreement the defendant was to act as distributor of the plaintiff's products which include vacuum metal and plastic closures sealing equipments and auxiliaries.The defendant filed a statement saying that a third party (Amcor White Cap Deutschland GMBH) be made a proper party to the suit as there is a technology and sub license agreement between the plaintiff and the third party on behalf of the defendant.The court held that the objective of the suit is the recovery of sum due under the distributorship agreement entered into by the parties and Hence decided against the defendants prayer of adding a party
Special Economic Zone
Governed by the SEZ Act of 2005.
It is a designated duty free enclave within India and treated as foreign territory for the purpose of trade operations and duties and tariffs. It does not require a license for imports.
Units must become net foreign exchange earners within 3 years of its establishment.
SEZ are allowed manufacturing, trading and service activities.
Full freedom for subcontracting.
The domestic sales from the SEZ are subject to full custom duties and import policy is in force, when they sell their produce to domestic markets.
The corporation in SEZs will not have to pay any income tax on their profits for the first five years and only 50% of the tax for 2 more years thereafter.
If half of the profit is reinvested in the corporation, the concession of 50% tax is extendable for next 3 years.
For SEZ developers, the raw material from cement to steel to electrical parts are subject to zero tax and duty.
For the SEZ, the Government acquires vast land tracts and gives to the developers. The basic condition involves that 25% of the area of the SEZ must be used only for export related activities. Rest 75% area can be used for economical and social infrastructure. However, all SEZ benefits are applicable over the entire SEZ area.
There were provisions for sector specific SEZs and Multiproduct SEZs.
Minimum Land Area Requirements
Minimum area requirements for setting up a SEZ are as follows:
500 Hectares for Multi Sector SEZ
50 Hectares for sector specific SEZ
Recent Government Initiatives to promote SEZ
Minimum Land Area requirement for setting up of new SEZs has been reduced to 50% for Multi-product and Sector-specific SEZs.
Sectoral broad-banding has been introduced to encompass similar / related areas under the same Sector.
A new sector ‘agro-based food processing’ sector has been introduced to encourage agro-based industries in SEZs.
Dual use of facilities like Social & Commercial infrastructure by SEZs and non-SEZs entities has been allowed in order to makeSEZ operations more viable.
Online processing of various activities relating to SEZ Developers and Units has been introduced for improving ease of doing business.