The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period.

Investopedia explains 'Divestiture'For a business, divestiture is the removal of assets from the books. Businesses divest by the selling of ownership stakes, the closure of subsidiaries, the bankruptcy of divisions, and so on. 

In personal finance, investors selling shares of a business can be said to be divesting their interests in the company being sold.

A liquidation that is supported by a company's shareholders, as opposed to an involuntary liquidation forced by Chapter 7 bankruptcy. A voluntary liquidation can occur in two situations. One is a members' voluntary liquidation when the directors of a solvent company decide to liquidate the company (with shareholder approval), and declare that they will be able to fulfill all creditor obligations in 12 months. The other situation is a creditors' voluntary liquidation, when the directors approach an insolvency professional for assistance in liquidation since they will not be able to fulfill creditors' obligations.

Definition of 'Voluntary Liquidation'A corporate liquidation that has been approved by the shareholders of the company. Voluntary liquidations stand in contrast to involuntary liquidations, which are a result of Chapter 7 bankruptcy. The shareholder vote allows the company to liquidate its assets to free up funds to pay debts. 

Investopedia explains 'Voluntary Liquidation'Voluntary liquidations in the UK are divided into two categories. One is the creditors' voluntary liquidation, which occurs under a state of corporate insolvency. The other is the members' voluntary liquidation, which only requires a corporate declaration of bankruptcy. Under the second category, the firm is solvent, but needs to liquidate their assets to meet their upcoming obligations. 

Voluntary liquidation can also happen if a vital member of the organization leaves the company and the shareholders decide not to continue operations.

Definition of 'Joint

Venture - JV'A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants' other business interests.

Investopedia explains 'Joint Venture - JV'Although JVs represent a great way to pool capital and expertise and reduce the exposure of risk to all involved, they do present some unique challenges as well. For instance, if party A comes up with an idea that allows the JV to flourish, what cut of the profits does party A get? Does the party simply receive a cut based on the original investment pool or is there recognition of the party's contribution above and beyond the initial stake? For this and other reasons, it is estimated that nearly half of all JVs last less than four years and end in animosity

Tax aspects of joint ventures

There are many different reasons for forming some sort of joint venture,

including property investment or development, the operation of a trade, the

design of a new product or combining resources to bid for a contract.

 

Joint ventures can be structured in different ways. These include establishing a

joint venture company, establishing a partnership or avoiding any sort of joint

venture entity and simply agreeing to work together on a particular project.

Tax issues will need to be considered in relation to the set up of the venture,

the operation of the joint venture and the eventual termination of the venture.

This guide outlines the main tax issues that can arise in relation to the three

types of joint venture mentioned above.

Types of joint venture

The choice of joint venture structure will depend upon many factors and

although the tax treatment is an issue to be considered, the decision is likely to

be made for a mixture of reasons and not purely for tax reasons.

Joint venture company

Some advantages of a joint venture company are that it is a separate legal

entity so that it is liable in its own right for tax liabilities and other debts. If

things go wrong it is more difficult for liabilities to attach to the shareholders

in the joint venture. A company is also a universally recognised structure which

provides a clear structure for accounting purposes and gives flexibility in

raising finance.

A disadvantage of a company is that it is subject to various filing, accounting

and other administrative requirements which can add to the cost.

Tax liabilities may arise on the set up of a joint venture company if assets or

businesses have to be transferred into the company by any of the shareholders.

The transfer of capital assets into a joint venture company will potentially give

rise to a charge to capital gains tax or corporation tax on chargeable gains for

the shareholder making the transfer. Depending upon the nature of the assets

transferred and the tax position of the shareholder making the transfer,

exemptions or reliefs from tax or deferrals of the tax liability may be available.

If the asset transferred into the joint venture company is UK land, a charge to

stamp duty land tax could arise for the joint venture company. For more on this

see Out-Law's guide   to stamp duty land tax . If shares are transferred in stamp

duty could become payable by the joint venture company. For more on this see

Out-Law's introduction to stamp duty guide.

The transfer could also give rise to a VAT liability. If the asset transferred is a

business or a let property it may be treated as a transfer of a going concern for

VAT purposes which would mean that VAT would not be payable by the joint

venture company. For more on this see Out-Law'sguide to VAT on property

transactions   .

If the joint venture company is to be funded by way of loans from the

shareholders, various anti avoidance provisions could prevent the joint venture

company obtaining a tax deduction for the interest paid. These include the

transfer pricing provisions, which restrict tax reliefs for payments between

connected parties to the amount that would have been payable on an arm's

length basis. The transfer pricing provisions can apply in relation to loans even

if the interest rate is what an independent third party lender would have

charged. They can apply if a loan between connected parties exceeds the

amount that would have been lent to the joint venture company by an

independent third party. 

UK corporate shareholders may be able to surrender losses to, or receive

surrenders of losses from, the joint venture company, depending on the

shareholding structure.

There may also be an obligation on the company to deduct tax from interest

paid on loans, especially if the lender is situated outside the UK.

Shareholders could extract profits from a joint venture company by the

payment by the joint venture company of dividends, interest or royalties or

licence fees. Interest, royalties and licence fees may be tax deductible for the

joint venture company, subject to anti avoidance provisions such as the transfer

pricing rules. As mentioned above, those rules restrict tax reliefs for payments

between connected parties to the amount that would have been payable on an

arm's length basis and apply more widely in relation to loans.

If a corporate joint venture is terminated, similar issues to those on set up will

arise if assets are transferred out of the joint venture. One way of extracting

assets from a joint venture company which saves stamp duty or SDLT is to

extract them by way of dividend.

Partnership

There are three different partnership structures. A traditional partnership

could be chosen, a limited partnership or a limited liability partnership or LLP.

Traditional or unlimited partnerships established in Scotland have a different

treatment to those established in England and Wales.

LLPs are treated as a separate legal entity, whereas limited partnerships and

traditional partnerships are not. Both limited partnerships and LLPs offer

limited liability, which means that the partners are not automatically liable for

the debts of the partnership.

If a joint venture partner transfers a capital asset into the partnership, the

transfer will be treated as the disposal by the joint venture partner of a share

in the asset in exchange for a share in the assets contributed by the other joint

venture partners. This could give rise to a tax liability for the joint venture

partner

No stamp duty should arise if shares are transferred in exchange for a share in

a partnership. However, if UK land is transferred there will be a charge to

stamp duty land tax calculated by reference to the profit share or shares of the

partnership that the transferring partner does not own. For instance if a

partner has a 30% share in the profits for the partnership it will be subject to

stamp duty land tax in respect of 70% of the value of the land it transfers into

the partnership. For more on this see Out-Law'sguide to stamp duty land tax.

Partnerships are transparent for tax purposes. This means that the partnership

itself does not pay tax on its profits. Instead each partner is liable for tax on its

share of the profits. There is no joint liability for the tax liabilities of other

partners.

For capital gains purposes each partner is treated as owning the share of each

of the capital assets of the partnership that corresponds to its interest in the

partnership. If the partnership disposes of a capital asset each partner will

make a disposal of its share in the asset and will be subject to tax depending

upon their personal circumstances.

A change in profit sharing ratios can result in a tax liability for a partner whose

share is reduced. However this liability can usually be deferred until the

partner ceases to have a share in the partnership.

When a joint venture partnership is ended, the distribution by the partnership

of its assets to the partners involves each partner whose share in an asset is

reduced disposing of that share for capital gains tax purposes, which may

trigger a tax liability. The partner who acquires the asset will be treated as

acquiring a greater share in the asset and any gain arising on the disposal by

the partnership of the asset which is allocated to the partner who receives the

asset will not be treated by HMRC as a chargeable gain but will instead be

deducted from the partner's base cost in the asset.

Where UK land is transferred out of the partnership to a partner SDLT will be

charged on the person acquiring the land. The rules relating to SDLT and

partnerships are complex but SDLT is, broadly, payable on the proportion of

the market value of the property that corresponds to the shares of the other

partners immediately before the distribution.

When a partnership is terminated the resulting transfer of assets to the

partners can sometimes result in VAT liabilities and so the VAT position must

be considered carefully.

Contractual joint venture

In a contractual joint venture the parties do not establish any separate entity to

carry on the venture. Instead the parties enter into contracts and make their

own profits and losses. They pay tax only on their own profits.

Contractual joint ventures are sometimes used by parties to combine resources

to bid for the award of a contract or to undertake joint research.

An important advantage of contractual joint ventures is that there is no joint

and several liability for the losses of the venture.

As no particular documentation or legal structure is required in order for a

partnership to exist, it is important that the parties to a contractual joint

venture structure their operations so that they cannot be regarded as acting in

partnership. If they are treated as acting in partnership they could be subject

to unexpected tax and other liabilities. One of the key indicators of a

partnership is profit sharing so contractual joint venturers will need to ensure

that the arrangements are structured to avoid this.

A contractual joint venture will not involve the transfer of assets to another

entity and so no tax issues should arise on set up or on termination of the

arrangements. Also the operation of the joint venture will not involve any

sharing of profits so each party will be subject to tax 

nternational Joint Ventures (IJVs) are becoming increasingly popular in the business world as they aid companies to form strategic alliances.[1] These strategic alliances allow companies to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. International Joint Ventures are viewed as a practical vehicle for knowledge transfer, such as technology transfer, from multinational expertise to local companies, and such knowledge transfer can contribute to the performance improvement of local companies.[1] Within IJV’s one or more of the parties is located outside of United States or where the operations of the IJV take place and they frequently involve a local and foreign company

Joint Venture Model

Since outsourcing resembles a partnership or joint venture, many outsourcing contracts have been

structured as joint ventures.

Rationales for Joint Ventures

The rationale for joint ventures can be driven by marketing for new customers in a given

industry, by financial incentives for the customer to share in savings generated by the

service provider’s technology and process improvements. In some cases, joint ventures can

be used as a tool to gain “first mover” advantage in a niche market, with the intent of

achieving dominance in the market as it evolves. In other cases, the enterprise customer

might want to tie up the service provider in a niche market, so that process technology of

the enterprise customer that flows to the service provider is not misapplied to the

competitive disadvantage of the enterprise customer.

Preparation

In the preparatory phases, joint ventures require analysis of the risks to the enterprise

customer’s core business when it tethers itself to the service provider. If the basic service

needs of the enterprise customer fail, then the joint venture fails too. If the joint venture

serves to distract the parties from the ensuring the enterprise customer’s needs are met, the

distraction can result in losses greater than under a straight outsourcing model (fees for

services). For this reason, joint ventures tend to be adopted only after the parties have had

some experience in working together.

The Agreement

Joint venture agreements must define the basic elements of the relationship:

purpose and scope of the joint enterprise;

the types and agreed valuations of the contributions by each party;

contingency planning on the upside, involving a definition of success and how success might

result in any organic changes to the joint venture;

contingency planning on the downside, involving changes not anticipated in the business

strategy but that may require further investment, assumption of new risks or even an organic

change in the joint venture;

decisionmaking principles and governance rules;

exit strategies, including buyouts by one of the parties or by a third party on a voluntary or pre-

committed basis, depending on the contingencies.

For this reason, joint ventures in outsourcing may take substantially more time to sign than a straight

outsourcing.

Benefits

The benefits of a joint venture should be carefully defined and priorities given to the

individual goals to assist decisionmaking. Such priorities may conflict, such as reducing the

costs or improving service quality for the enterprise customer, or generating revenues from

new market initiatives in the niche.

Conflicts of Interest and Viability

Among corporate lawyers and financiers, the short duration of most joint ventures serves as

a testament to the inherent conflicts of interest that each party has when entering into the

venture. The enterprise customer wants its own needs met first, but it also wants to enjoy

the benefits of its contributions to the service provider’s prospecting for new clients and a

share in the profits. The goals of present service benefits and promotion of future revenues

from servicing other customers may conflict. Similar conflicts arise at the service provider

level.

Before entering into a joint venture, the enterprise customer needs to decide whether, in the

absence of a joint venture, it would enter into the market to provide the in-scope services to others in

its market. If not, it should identify why and decide whether a joint venture would overcome any

constraints or impediments to its entering that market. Over time, if the joint venture is successful,

each party would have an interest in providing the in-scope services to third parties without

depending on the other joint venturer. For this reason, joint ventures tend to have a short life cycle.

Despite such risks, joint ventures may serve important values and goals. Those values may

overshadow the simple goal of effective business process management for the enterprise customer.

An antitrust policy is designed to affect competition. The general goal behind such a policy is to keep markets open and competitive. These regulations are used by different governments around the world, although the laws often vary.

In most countries, antitrust policies are written into law. In the United States, they are mainly handled by the Federal Trade Commission (FTC) and the Antitrust Division of the Department of Justice. The FTC mainly deals with issues of consumer protection while the Antitrust Division is generally responsible for criminal violations of an antitrust policy.

Most countries do not have two regulatory bodies as is seen in the US. In Europe, for example, the Competition Directorate is the sole government body that generally handles an antitrust policy. It is common throughout the world for disputes regarding these policies to be handled by a judicial body.

In the United States, the ideas for such policies began after the Civil War when large trusts began to emerge in important industries such as petroleum and cotton. Concerns of abuse led to the first antitrust policy, known as the Sherman Act. This piece of legislation declared that actions that restrain trade or create monopolies are anticompetitive and therefore illegal.

Definition of 'Leveraged Buyout - LBO'The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the

loans in addition to the assets of the acquiring company. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital.

Investopedia explains 'Leveraged Buyout - LBO'In an LBO, there is usually a ratio of 90% debt to 10% equity. Because of this high debt/equity ratio, the bonds usually are not investment grade and are referred to as junk bonds. Leveraged buyouts have had a notorious history, especially in the 1980s when several prominent buyouts led to the eventual bankruptcy of the acquired companies. This was mainly due to the fact that the leverage ratio was nearly 100% and the interest payments were so large that the company's operating cash flows were unable to meet the obligation. 

One of the largest LBOs on record was the acquisition of HCA Inc. in 2006 by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch. The three companies paid around $33 billion for the acquisition.

It can be considered ironic that a company's success (in the form of assets on the balance sheet) can be used against it as collateral by a hostile company that acquires it. For this reason, some regard LBOs as an especially ruthless, predatory tactic.

What is a leveraged buyout?A leveraged buyout or LBO is a type of aggressive business practice whereby investors or a larger corporation utilizes borrowed funds (junk bonds,

traditional bank loans, etc.) or debt to finance its acquisition. Both the assets of the acquiring corporation and acquired company function as a form of secured collateral in this type of business deal. Often times, a leveraged buyout does not involve much committed capital, as reflected by the high debt-to-equity ratio of the total purchase price (an average of 70% debt with 30% equity). In addition, any interest that accrues during the buyout will be compensated by the future cash flow of the acquired company. Other terms used synonymously with an LBO are “hostile takeover,” “highly-leveraged transaction,” and “bootstrap transaction.”Going privateOnce the control of a company is acquired, the firm is then made private for some time with the intent of going public again. During this “private period,” new owners (the buyout investors) are able to reorganize a company’s corporate structure with the objective of making a substantial profitable return. Some comprehensive changes include downsizing departments through layoffs or completely ridding unnecessary company divisions and sectors. Buyoutinvestors can also sell the company as a whole or in different parts in order to achieve a high rate on returns.The 1980’s buyout boomHistorically, leveraged buyouts soared in the 1980s due to various U.S. economic and regulatory factors. First, the Reagan administration of the 1980s employed very liberal federal anti-trust and securities legislation, which greatly endorsed the merger and acquisition (M&A) of corporations. Second, in 1982, the Supreme Court declared any state law against takeovers as unconstitutional, further promoting corporate M&A. Third, deregulation (relaxation, reduction, or complete removal) of many industry-related legislation restrictions incited further proceedings of corporate reorganization and acquisition. In addition, the use of risky high-interest bonds (also known as junk bonds) made it possible for multi-million dollar companies to buyout enterprises with very little capital.Management buyouts or MBOThe most common buyout agreement is the management buyout or MBO. In this corporate arrangement, the company’s management teams and/or executives agree to “buyout” or acquire a large part of the company, subsidiary, or divisions from the existing shareholders. Due to the fact that this financial compromise requires a considerable amount of capital, the management team often employs the assistance of venture capitalists to finance this endeavor. As with traditional leveraged buyouts, the company is made private and corporate restructuring occurs. Many financial analysts will agree that MBOs will greatly increase management commitment since they are involved in the high stake of a company.Pros and cons of leveraged buyoutsFinancial analysts strongly believe there are many pros and cons in the leveraged buyout of a company.Corporate restructuringPros- One positive aspect of leveraged buyouts is the fact that poorly managed firms prior to their acquisition can undergo valuable corporate reformation when they become private. By changing their corporate structure (including modifying and replacing executive and management staff, unnecessary company sectors,

and excessive expenditures), a company can revitalize itself and earn substantial returns.Cons- Corporate restructuring from leveraged buyouts can greatly impact employees. At times, this means companies may have to downsize their operations and reduce the number of paid staff, which results in unemployment for those who will be laid off. In addition, unemployment after leveraged acquisition of a company can result in negative effects of the overall community, hindering its economic prosperity and development. Some leveraged buyouts may not be friendly and can lead to rather hostile takeovers, which goes against the wishes of the acquired firms’ managers.An example of a hostile takeover occurred when the PepsiCo acquired the Quaker Oats Company, an American food company well-known for its breakfast cereals and oatmeal products. In 2001, PepsiCo, in an attempt to diversify its portfolio in non-carbonated drinks, primarily acquired Quaker Oats because QO owned the Gatorade brand. Even though this merger created the fourth-largest consumer goods company in the world, many of Quaker Oats’ managers were against the acquisition, claiming that such a merger was unlawful and contrary to the public interest.Small amount of capital requirementsPros- Since this type of acquisition involves a high debt-to-equity ratio, large corporations can easily acquire smaller companies with very little capital. If the acquired company’s returns are greater than the cost of the debt financing, then all stockholders can benefit from the financial returns, further increasing the value of a firm.Cons- However, if the company’s returns are less than the cost of the debt financing, then corporate bankruptcy can result. In addition, the high-interest rates imposed by leveraged buyouts may be a challenge for companies whose cash-flow and sale of assets are insufficient. The result cannot only lead to a company’s bankruptcy but can also result in a poor line of credit for the buyout investors.An example of an unsuccessful leveraged buyout is the Federated Department Stores. The Federated Department Stores had many stores nationwide and tailored primarily to high-end retailers. However, they lacked an effective marketing strategy. In 1989, Robert Campeau, a Canadian financier, bought out Federated with the hope to make considerable changes. Only one year later, and only after some reforms, Federated could not keep up with the financial burdens of high interest payments and had to file bankruptcy for 258 stores.Management buyoutPros- As mentioned earlier, management buyout of a company is a common business practice. Often times, MBOs occur as a last resort to save an enterprise from permanent closure or replacement of existing management teams by an outside company. Many analysts strongly believe management buyouts greatly promote executive and shareholder interests as well as management loyalty and efficiency.Cons- Not every MBO turns out to be successful as planned. Management buyouts can generate substantial conflicts of interest among employees and managers alike. Management and executive teams can easily be lured to

propose a short-term buyout for personal profit. In addition, they can also corruptly mismanage a company, leading to an enterprise’s depreciated stock.An example of a successful management buyout is Springfield Remanufacturing Corporation, or SRC, an engine remanufacturing plant located in Springfield, Missouri. In 1983, SRC was at risk for permanent closure and was being bought by an outside company until their employees decided to buyout the company. The management buyout of SRC resulted in extreme success. Since 1983, it has grown exponentially from one company within $10,000 of being shut down to a proud assembly of 23 small businesses with a combined profit of over $120 million today.EconomyPros- Every leveraged buyout can be considered risky, especially in reference to the existing economy. If the existing economy is strong and remains solid, then the leveraged buyout can greatly improve its chances for success.Cons- On the other hand, a weak economy is highly indicative of a problematic LBO. During an economic crisis, money may be difficult to come by and dollar weakness could make acquiring companies result in poor financial returns. In addition, acquisition can affect employee morale, increase animosity against the acquiring corporation, and can hinder the overall growth of a company.ConclusionThere are many advantages and disadvantages concerning leveraged buyouts. First, this type of agreement can allow many large companies to acquire smaller-sized enterprises with very little personal capital. Second, since corporate restructuring can take place, the acquired company can benefit from necessary reorganization and reform. In addition, management buyout can prevent a company from being acquired by external sources or from being shut down completely. However, there are many disadvantages imposed by LBOs as well. Often times, the restructuring can lead a company to downsize and can even result in hostile takeovers. The high interest rates from the high debt-to-equity amounts can result in a corporation’s bankruptcy, especially if the company is not generating substantial returns after acquisition. Lastly, management buyouts can produce conflicts of interest among employees, executives, and management teams as well as possible mismanagement by the buyout owners. With the potential for enormous profit, it is no wonder that leveraged buyout strategies expanded throughout the 1980s and have recently made a comeback in modern corporate America.

Definition of 'Share Repurchase'A program by which a company buys back its own shares from the marketplace, reducing the number of outstanding shares. Share repurchase is usually an indication that the company's management thinks the shares are undervalued. The company can buy shares directly from the market or offer its shareholder the option to tender their shares directly to the company at a fixed price.

Investopedia explains 'Share Repurchase'

Because a share repurchase reduces the number of shares outstanding (i.e. supply), it increases earnings per share and tends to elevate the market value of the remaining shares. When a company does repurchase shares, it will usually say something along the lines of, "We find no better investment than our own company."

ADVANTAGES AND DISADVANTAGES OF STOCK REPURCHASE

1. Enhanced dividends and E.P.S.Following a stock repurchase, the number of shares issued would decrease and therefore in normal circumstances both D.P.S. and E.P.S. would increase in future. However, the increase in E.P.S is a bookkeeping increase since total earnings remaining constant. 2. Enhanced Share PriceCompanies that undertake share repurchase, experience an increase in market price of the shares. This is partly explained by increase in total earnings having less and/or market signal effect that shares are under value. 3. Capital structureA company’s managers may use a share buy back or requirements, as a means of correcting what they perceive to be an unbalanced capital structure.If shares are repurchased from cash reserves, equity would be reduced and gearing increased (assuming debt exists in the capital structure).Alternatively a company may raise debt to finance a repurchase. Replacing equity with debt can reduce overall cost of capital due to tax advantage of debt.4. Employee incentive schemesInstead of cancelling all shares repurchase, a firm can retain some of the shares for employees share option or profit sharing schemes. 5 Reduced take over threatA share repurchase reduced number of share in operation and also number of ‘weak shareholders’ i.e shareholders with no strong loyalty to company since repurchase would induce them to sell.

This helps to reduce threat of a hostile takeover as it makes it difficult for predator company to gain control. (This is referred as a poison pill) i.e. Co.’s value is reduced because of high repurchase price, huge cash outflow or borrowing huge long term debt to increase gearing Disadvantages of stock repurchase1. High priceA company may find it difficult to repurchase shares at their current value and price paid may be too high to the detriment of remaining shareholders. 2. Market SignalingDespite director’s effort at trying to convince markets otherwise, a share repurchase may be interpreted as a signal suggesting that the company lacks suitable investment opportunities. This may be interpreted as a sign of management failure. 3. Loss of investment incomeThe interest that could have been earned from investment of surplus cash is lost.

 What are the forms in which business can be conducted by a foreign company in India?

Ans. A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under the Foreign Exchange Management (Establishment in India of Branch Office or Other Place of Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian company? 

Ans. An Indian company may receive Foreign Direct Investment under the two routes as given under:

i. Automatic Route

FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-

IL, which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.

The Indian company having received FDI either under the Automatic route or the Government route is required to comply with provisions of the FDI policy including reporting the FDI to the Reserve Bank. as stated in Q 4.

Q.3. What are the instruments for receiving Foreign Direct Investment in an Indian company?

Ans. Foreign investment is reckoned as FDI only if the investment is made in equity shares , fully and mandatorily convertible preference shares and fully and mandatorily convertible debentures with the pricing being decided upfront as a figure or based on the formula that is decided upfront. Any foreign investment into an instrument issued by an Indian company which:

gives an option to the investor to convert or not to convert it into equity or does not involve upfront pricing of the instrument

as a date would be reckoned as ECB and would have to comply with the ECB guidelines.

The FDI policy provides that the price/ conversion formula of convertible capital instruments should be determined upfront at the time of issue of the instruments. The price at the time of conversion should not in any case be lower than the fair value worked out, at the time of issuance of such instruments, in accordance with the extant FEMA regulations [the DCF method of valuation for the unlisted companies and valuation in terms of SEBI (ICDR) Regulations, for the listed companies].

Q.4. What are the modes of payment allowed for receiving Foreign Direct Investment in an Indian company?

Ans. An Indian company issuing shares /convertible debentures under FDI Scheme to a person resident outside India shall receive the amount of consideration required to be paid for such shares /convertible debentures by:

(i) inward remittance through normal banking channels.

(ii) debit to NRE / FCNR account of a person concerned maintained with an AD category I bank.

(iii) conversion of royalty / lump sum / technical know how fee due for payment or conversion of ECB, shall be treated as consideration for issue of shares.

(iv) conversion of import payables / pre incorporation expenses / share swap can be treated as consideration for issue of shares with the approval of FIPB.

(v) debit to non-interest bearing Escrow account in Indian Rupees in India which is opened with the approval from AD Category – I bank and is maintained with the AD Category I bank on behalf of residents and non-residents towards payment of share purchase consideration.

If the shares or convertible debentures are not issued within 180 days from the date of receipt of the inward remittance or date of debit to NRE / FCNR (B) / Escrow account, the amount shall be refunded. Further, Reserve Bank may on an application made to it and for sufficient reasons permit an Indian Company to refund / allot shares for the amount of consideration received towards issue of security if such amount is outstanding beyond the period of 180 days from the date of receipt.

Q.5. Which are the sectors where FDI is not allowed in India, both under the Automatic Route as well as under the Government Route?

Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the following sectors:

i) Atomic Energy

ii) Lottery Business

iii) Gambling and Betting

iv) Business of Chit Fund

v) Nidhi Company

vi) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) (c.f. Notification No. FEMA 94/2003-RB dated June 18, 2003).

vii) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005).

viii) Trading in Transferable Development Rights (TDRs).

ix) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes.

Table 3: Sector Specific Limits of Foreign Investment in India

Sector FDI Cap/Equity Entry RouteOther

Conditions

A. Agriculture1. Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, Aquaculture, Cultivation of vegetables & mushrooms and services related to agro and allied sectors.  

 100%   

 Automatic   

 

2. Tea sector, including plantation 100% FIPB  

(FDI is not allowed in any other agricultural sector /activity)  

B. Industry1. Mining covering exploration and mining of diamonds & precious stones; gold, silver and minerals.

 100% 

 Automatic 

 

2. Coal and lignite mining for captive consumption by power projects, and iron & steel, cement production.

100% Automatic  

3. Mining and mineral separation of titanium bearing minerals

100% FIPB  

C. Manufacturing1. Alcohol- Distillation & Brewing  100% 

Automatic   

2. Coffee & Rubber processing & Warehousing.

100% Automatic  

3. Defence production 26% FIPB  

4. Hazardous chemicals and isocyanates 

100% Automatic   

5. Industrial explosives -Manufacture 100%  Automatic   

6. Drugs and Pharmaceuticals 100%  Automatic   

7. Power including generation (except Atomic energy); transmission, distribution and power trading.

100% Automatic  

(FDI is not permitted for generation, transmission & distribution of electricity produced in atomic power plant/atomic energy since private investment in this activity is prohibited and reserved for public sector.)

 

D. Services1. Civilaviation (Greenfield projects and Existing projects)

100% Automatic 

2. Asset Reconstruction companies 49% FIPB  

3. Banking (private) sector74% (FDI+FII).FII not to exceed 49%

Automatic  

4. NBFCs : underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodian, factoring, leasing and finance, housing finance, forex broking, etc.

100% Automatic

s.t.minimum capitalisation norms

5. Broadcasting a. FM Radio b. Cable network; c. Direct to home; d. Hardware facilities such as up-linking, HUB. e. Up-linking a news and current affairs TV Channel

 20% 49% (FDI+FII)  100%

FIPB 

6. Commodity Exchanges49% (FDI+FII) (FDI 26 % FII 23%)

FIPB  

7. Insurance 26% AutomaticClearance from IRDA

8. Petroleum and natural gas : a. Refining

49% (PSUs). 100% (Pvt. Companies)

FIPB (for PSUs). Automatic (Pvt.)

 

9. Print Media a. Publishing of newspaper and periodicals dealing with news and current affairs b. Publishing of scientific magazines / speciality journals/periodicals

26%   100%

FIPB   FIPB

S.t.guidelines by Ministry of Information & broadcasting

10. Telecommunications a. Basic and cellular, unified access services, national / international long-

74% (including FDI, FII, NRI, FCCBs, ADRs/GDRs,

Automatic up to 49% and FIPB beyond

  

distance, V-SAT, public mobile radio trunked services (PMRTS), global mobile personal communication services (GMPCS) and others.

convertible preference shares, etc.

49%.  

Sectors where FDI is Banned

1. Retail Trading (except single brand product retailing);2. Atomic Energy;3. Lottery Business including Government / private lottery, online lotteries etc; 4. Gambling and Betting including casinos etc.; 5. Business of chit fund;6. Nidhi Company;7. Trading in Transferable Development Rights (TDRs); 8. Activities/sector not opened to private sector investment; 9. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Piscicultureand cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agro and allied sectors) and Plantations (Other than Tea Plantations); 10. Real estate business, or construction of farm houses;Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco or of tobacco substitutes.

Definition of 'Cost Of Labor'The sum of all wages paid to employees, as well as the cost of employee benefits and payroll taxes paid by an employer. The cost of labor is broken into direct and indirect costs. Direct costs include wages for the employees physically making a product, like

workers on an assembly line. Indirect costs are associated with support labor, such as employees that maintain factory equipment but don't operate the machines themselves.

Investopedia explains 'Cost Of Labor'When manufacturers set the price of a good they take the cost of labor into account. This is because they need to charge more than that good's total cost of production. If demand for a good drops or the price consumers are willing to pay for the good falls, companies must adjust their the cost of labor to remain profitable. They can reduce the number of employees, cut back on production, require higher levels of productivity, reduce indirect labor costs or reduce other factors in the cost of production.

Definition of 'Labor Productivity'A measurement of economic growth of a country. Labor productivity measures the amount of goods and services

produced by one hour of labor. More specifically, labor productivity measures the amount of real GDP produced by an hour of labor. Growing labor productivity depends on three main factors: investment and saving in physical capital, new technology and human capital.

Investopedia explains 'Labor Productivity'For example, suppose the real GDP of an economy is $10 trillion and the aggregate hours of labor in the country was 300 billion. The labor productivity would be $10 trillion divided by 300 billion, equaling about $33 per labor hour. Growth in this labor productivity number can usually be interpreted as improvements or rising standards of living in the country.

nternational trade has many benefits, some of which are more obvious than others. Detailed below are key benefits highlighted by clients who have made international trade a major part of their on-going business strategy.

Read on as Charles Purdy,  Director of Smart Currency Exchange Ltd gives his insight on the main advantages of international trade.

#1 Grow Your Business

When trading internationally the “universe” of potential clients and suppliers will increase significantly. Just imagine increasing the number of

potential clients by 100% each time you start selling in a new country. In all likelihood, this will probably be much easier than trying to expand your market place in your “home” country.

#2 Diversify Risk

The idea that a business relies solely on one market and directs all its resources into a single currency may prove to be more risky than it may first seem. Just look at the number of unprecedented global “disasters” (financial meltdown, earthquakes and unrest in the Middle East) over the last few years and the drastic impacts these have had on markets. Your home market could contract or even disappear, but your business may be saved by the business it generates overseas.

#3 Better Margins

As well as seeing increased sales, you may well enjoy better margins. Sterling which is currently weak may give you a head start when exporting. Pricing pressure could be less and it could also reduce seasonal market fluctuations.

#4 Earlier Payments

When working with companies overseas, both you and your customer will want to execute the transaction in the safest and most efficient manner possible. One of the many advantages when trading internationally is that overseas payers often pay upfront. This reduces payment risk and may well help your working capital.

#5 Less Competition

The ability to stand out amongst competitors is a crucial factor in business. When there are fewer competitors, this task is made easier. Your business, which may be viewed as comparable to others in the UK, may, when placed in a larger and more diverse environment, turn out to be a unique product or service not to be missed. By making the product or service available to worldwide buyers, you instantly create another life line for the business by being in less competition and increasing the possibility of standing out. This will in turn boost sales potential and allow your business to flourish.

Advantages of Organic Growth

When you grow your business through strong management and effective planning, you know your

business inside and out. You can move quickly to take advantage of changes in the marketplace,

and you can experience the satisfaction of seeing your vision come to fruition. You also have the

choice of growing your business at a rate that is comfortable for you. Instead of merging with another

company or buying one, you can sell your business when it is mature. This can create profit for you.

Advantages of Inorganic Growth

Growing your business inorganically involves joining with another business through a merger or an

acquisition. This immediately expands your assets, your income and your market presence. You will

have a stronger line of credit because of the combined value of the two businesses. You will also

benefit from the added expertise from personnel at the new business.

Disadvantages of Organic Growth

You may have limited resources for growing your own business. You may also find that the

marketplace will not allow you to grow beyond a certain point. In addition, your plans for your own

growth can be thwarted by competition, causing you to cut back expectations and consider the

possibility of having to close down due to limited opportunities. Growing a business from the start-up

stage means constantly struggling to make sure you have positive cash flow in order to pay your bills

and payroll, as well as finding ways to grow sales. While these concerns exist if you join with another

company, the larger size of the combined organization provides better cash flow and sales growth

because of a larger customer base.

Disadvantages of Inorganic Growth

You will have to expand your management capabilities dramatically when you join forces with

another business. You will suddenly have many more employees and more assets to monitor, use

and dispose of as your business needs change. In addition, you may grow in directions that you

didn’t anticipate. In effect, the focus of the second business can take over the vision you had when

you started your business. You may enter areas of the marketplace where you have no expertise.

You can also grow too fast. Most mergers and acquisitions require financing, and you will have to

service your debt from the growth you experienced with the merger or acquisition. If your

calculations about increased income are inaccurate, you may find yourself strapped with a debt you

have difficulty repaying.

An indicator of a company's profitability, calculated as revenue minus expenses, excluding tax and interest. EBIT is also referred to as "operating earnings", "operating profit" and "operating income", as you can re-arrange the formula to be calculated as follows: 

EBIT =

Revenue - COGS- Operating Expenses - Depreciation & Amortization