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LABOUR LAWS AND LEGAL ENVIRONMENT IN INDIA FOR EUROPEAN INVESTORS

Prepared by

MUPPALA SEKHAR REDDY Masters in International Business

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CONTENT

Definition 4

Abstract 5

Labour laws and legal environment 6

1. Labour laws and social security system 6

1.1. Trade union act 6

1.2. Wages regulation act 7

1.3. Minimum wage structure in India 7

1.4. Payment bonus act 8

1.5. Working conditions act 9

1.6. Temporary, permanent and contract employees 9

2. Legal environment in India 10

2.1. Intellectual property protection 10

2.2. Law of trademarks 10

2.3. Law on copyright 11

2.4. Law of patent 11

3. Business regulations 12

3.1. Foreign exchange regulations 13

3.2. Industrial licensing regulations 14

3.3. Trade regulations 14

3.4. Import restriction 14

3.5. Export restrictions 15

4. Business regulations for foreign companies 16

4.1. Employment regulations for foreign nationals 17

4.2. Capital market regulations 17

4.3. Completion regulations 18

4.4. Corporate governance 19

4.5. Environment regulations 19

4.6. Technical and quality standards 20

4.7. Business and corporate social responsibilities 20

5. Commercial laws and tax system 21

5.1. Taxation of foreign companies 21

5.2. Double tax avoidance agreement 22

5.3. State government taxes 22

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6. Foreign investment regulations 23

6.1. Direct investment law 23

6.1.1. Direct investment 23

6.2. FDI procedures at the federal level 24

6.3. Registration and approval system 25

6.4. Liaison and branch offices 25

6.4.1. Liaison office 25

6.4.2. Branch office 26

6.5. Foreign investment is not permitted 27

6.6. Foreign investment in small scale industries 28

6.7. Investment in existing companies 28

6.8. Foreign investment in trading companies 29

6.9. Dispute resolution 29

6.10. Arbitration 30

7. European investors in India 31

7.1. EU and India trade facts and figures 32

7.2. India bilateral investment trading with European countries 33

7.3. India trade with world 34

7.4. EU-27 trade with India 34

7.5. European Union and India FTA 35

7.6. Indian pharmaceutical companies and patents 36

7.7. Key issues of concern to the EU in trade facilitation in India 36

7.8. What are the advantages of EU-India FTA? 37

7.8.1. Promoting sustainable development 38

7.8.2. Ever growing trade and investment 38

7.8.3. Bringing people together 38

7.9. European Union relationship with India and china 39

8. Conclusion 40

9. Abbreviation 43

10. Source 45

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DEFINITION:

Labour laws and legal environment provides clear guidelines to the companies, organizations

and employees of the country. If any foreign companies want to introduce their business they

should satisfy rules and regulations of foreign laws of the county which they will be investing

regarding.

In recognition of the important role of Foreign Direct Investment (FDI) in the accelerated

economic growth of the country, Government of India initiated a slew of economic and financial

reforms in 1991. India is now ushering in the second generation reforms aimed at further and

faster integration of Indian economy with the global economy. As a result of the various policy

initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and

FDI is encouraged in almost all the economic activities under the automatic route.

For quite a long time, India had a restrictive policy in terms of foreign direct investment. As a

result, there was lesser number of companies that showed interest in investing in Indian market.

However, the scenario changed during the financial liberalization of the country, especially after

1991. Government, nowadays, makes continuous efforts to attract foreign investments by

relaxing many of its policies. As a result, a number of European companies have shown interest

in Indian market.

There are a number of reasons why the European companies are coming down to India. India has

got a huge market. It has a population of over a billion with a rapidly expanding middle class of

at least 200 million. It has also got one of the fastest growing economies in the world. European

companies can bring hi-tech industries, high-valued goods and given the opportunity, well

developed expertise in the service sector including legal services to India. Indian companies can

take advantage of their expertise in business operations, a rapid expanding Research and

Development base and the cost advantages of large-scale production. Besides, the policy of the

government towards FDI has also played a major role in attracting the European companies in

India.

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ABSTRACT

Labour laws and legal environment provides an idea and clear vision for the companies and

citizens of the country. If any foreign companies want to introduce themselves they should

follow the rules and laws of the county regarding the foreign policy of the country.

In the same way India has its own laws and legal terms for the foreign investors. Previous days

some obstacles like beaurocracy, redtapism and political hassles were there so many foreign

companies had shown no interest to start business in India. India had a complex image within

European investors and companies.

The country had somewhat poorly marketed itself, and traditional images still abound of some

sort of backwardness in economic or potential terms. The relations with the Indian administration

are often difficult, more at local / State levels than with the central authorities. The level of

“hassle costs”, and the predictability of decisions are considered as the most difficult points in

the overall relationship with administrative bodies.

In the last decade there has been lot of changes in the laws and business environments in favor to

the foreign companies, which is attracting and encouraging the foreign as well as the European

investors to start business in India. For instance 6 years back the percentage of FDI investment in

India is 20-25% in the capital but now it has been modified to 49% of capital.

India and EU has been negotiating a comprehensive free trade agreement (FTA) covering trade

in goods and services, intellectual property rights and government procurement since 2007.

Under the proposed India-EU free trade agreement, the European Commission (EC) has sought

an expansive mandate to negotiate on investment issues on the behalf of the European Union.

The EC officially made recommendations to the European Council seeking modifications in the

negotiating directives for the trade agreement with India. If these recommendations are accepted,

the European Commission would pursue comprehensive cross-border investment liberalization

and protection provisions under the proposed free trade agreement with India.

From the year 1997 to 2000 there has been modifications in the FDI investment in all sectors like

insurance, real estate, print media, defense and agriculture etc. which allowed the investors to

invest with the percentage from 45% to 100%. Previous years these fields were negative list for

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the FDI’s. These investments are accepted under the rules of FEMA (Foreign exchange

management act) and FERA (foreign exchange regulation act).

Labour laws and legal environment:

1. Labour laws and social security system

2. Legal environment in India

3. Business regulations

4. Business regulations for foreign companies

5. Commercial laws and tax system

6. Foreign investment regulation

7. European investors in India

1. Labor laws and social security system

India has an extensively regulated system for protecting the interests of industrial workers,

employees in government enterprises, and government-controlled sectors like banking and

infrastructure, where collective bargaining determines working conditions and regulations.

However, regulations are not as strong in employment categories such as administrative and

management staff, employees in non-manufacturing enterprises, casual workers, domestic help

etc., where individual contracts govern the employment conditions. Disputes on employment

related issues are heard by Labor courts in case of industrial employees and by civil courts for

other categories.

Labor laws fall under the following groups, governed by several Acts

Industrial relations - Industrial Disputes Act:

1.1. Trade Unions Act

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The Industrial Disputes Act governs the conduct of industrial relations and provides the

framework for fair and just settlement of disputes by negotiation, arbitration, conciliation,

compromise or adjudication. The Trade Unions Act provides for the registration of trade unions,

to manage industrial relations on behalf of the workers. Collective bargaining, conciliation,

arbitration and adjudication usually negotiate wages in the organized sector. Most trade unions

are connected with a political party, and the leading political parties sponsor trade union wings.

1.2. Wage regulations

The Minimum Wages Act empowers the Government to fix minimum wages for employees

working in specified employment categories, especially in industry. India’s minimum wages

range between Rs. 1500 and 3000 per month depending on the location and skill levels, and are

subject to periodic review and revision. Prevailing wages generally tend to be higher than the

stipulated levels, but can be lower in situations where collective bargaining is not in place

contract labor, for instance.

1.3. Minimum Wage structure in India

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Source: Ministry of Labour, http://labour.nic.in/welcome.html, India, 01/04/2011

1.4. The Payment of Bonus Act

Provides for a minimum bonus of 8.33% of salary, and a maximum of 20 % of the annual

income. For bonus calculations, the upper limit of salary is fixed at Rs. 3.500 per month (even if

the salary is higher, say Rs 5,500). All establishments employing twenty or more persons even

for one day during a year are required to pay bonus. New units are exempted till they start

making profits or for five years of operation, whichever comes first.

The Payment of Gratuity Act provides for payment of gratuity to employees having

completed five years service, at the rate of 15 days’ salary for each completed year of

service, payable at the time of retirement/ settlement, and tax-free up to Rs. 350,000.

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Every establishment having more than ten employees is required to register under this

Act, within five years of being set up.

Social Security - Provident Fund, Employee State Insurance Act, Maternity Benefits Act,

Workmen’s Compensation Act, etc

The Employees Provident Fund and Miscellaneous Provisions Act provides for the

retirement benefits in the form of provident fund, family pension and deposit-linked

insurance to employees. Companies employing more than 20 persons are covered by the

Act, and employee and employer are required to contribute a minimum of 10% of the

basic salary to the regional Employee Provident Fund; these contributions attract tax

exemptions/concessions.

The Employees State Insurance Act provides for medical care benefits in case of

sickness, maternity, employment injury and pension for dependants in the event of the

death through accidents at the workplace. The Act specifies a deposit of 6.5% of the

salary, of which 1.75% is to be contributed by the employee, the rest by the employer,

and applies to all employees with salaries below Rs 6500 per month under this Act.

The Maternity Benefit Act regulates the provision of maternity and other benefits to

women employees for a certain period before and after childbirth. A woman employee is

entitled to post natal leave of six weeks, with full pay. The Workmen’s Compensation

Act provides for payment of compensation to workmen and their dependants in case of

injury and accident (including certain occupational disease) arising out of and in the

course of employment and resulting in disablement or death. Compensation is

determined on the basis of loss of earning ability created by the accident and is linked to

current salary.

1.5. Working conditions

The Factories Act is the principal legislation for regulating various aspects relating to safety,

health and welfare of workers employed in factories. It forbids employment of children less than

14 years of age in any factory, prescribes a 48-hours limit per week for adult workers, and sets

the minimum standards of lighting, ventilation, safety and welfare services, which employers

must provide in their factories. The Act applies to all establishments having not less than ten

persons carrying on a manufacturing/ industrial activity using electricity, or having twenty or

more persons carrying on manufacturing or industrial activity without the use of electricity.

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The Equal Remuneration Act provides for payment of equal remuneration to men and women

workers for the same work and prevents discrimination against women in matters of recruitment

and also in relation to matters such as promotion, training or transfer.

The Child Labour Act prohibits employment of children in certain hazardous

occupations and processes and regulates their employment in some other areas.

Legislative provisions have also been made in various laws to protect children from

exploitation at work and to improve their working conditions.

The Contract Labour Act regulates establishments and contractors employing at least

twenty workmen as contract labour on any day during the year, and provides for the

welfare and health of contract labour involved in any activities that are not intermittent or

casual in nature. All contract workmen employed for more than 200 days during a year,

are entitled to wages and other benefits on the same lines and terms as regular employees,

and are to be absorbed as regular employees of the establishment.

1.6. Temporary, permanent and contract employees

A fundamental distinction exists among temporary, permanent and contract workmen in the

context of the workplace.

Indian laws recognize a category of regular workers called contract workers, who are not on the

rolls of the enterprise itself, but are provided through registered external contractors. Contract

labour is essentially used for jobs that are of an intermittent or casual nature- landscaping,

cleaning and estate maintenance, construction, etc., but not any jobs that are related with the

main business process of the enterprise. Contract labourers do not get wages and benefits similar

to the permanent employees of an enterprise, nor the membership of the trade unions recognised

by the enterprise.

2. LEGAL ENVIRONMENT IN INDIA

2.1. Intellectual property protection

Before joining the WTO, India recognized only the following forms of intellectual property:

• Patents

• Trade Marks

• Copyrights

• Industrial Designs

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Agreement on Trade Related aspects of Intellectual Property Rights (TRIPS) required India to

enact new legislation in respect of ‘Geographical Indications of Goods’ and ‘Integrated Circuits

and Industrial Secrets’, besides effecting significant changes in existing laws on Patents,

Trademarks and Copyrights.

India has now put in place new laws extending intellectual property rights to all convention

countries on a most favored nation (MFN) basis. While new laws on Trademarks, Geographical

Indications and Copyrights have been framed without any controversy and in harmony with

prevailing international practices, the issue of Patents has attracted enormous controversy and

divided opinions within the country, despite a new Patents Act coming into force in 1999.

The salient features of current laws on intellectual property protection are enumerated below.

2.2. Law of trade marks

In India, a trademark can be registered under the Trade and Merchandise Marks Act.

The major features of India’s trademark protection regime are:

Trademarks can be assigned to goods and services

Certain kinds of marks are not be allowed (obscene text, marks affecting religious

sentiment, prohibited names etc)

Trademarks from a convention country shall be allowed registration in India with

retrospective effect (if applied for within six months)

Registration is valid for ten years, with the option for renewal for similar periods.

Trademarks are licensable/ assignable against consideration.

Trademarks registered in other convention countries are accorded protection in India (on

bilateral basis) even if they are not in use or well-known in India

2.3. Law on Copyright

India enacted its first legislation to protect copyright in 1957, and amended it last in 1999.

Copyright registration in India classifies works in six categories:

1. Literary works other than computer programmes, tables and databases and dramatic works

2. Musical works

3. Artistic works

4. Cinematographic films

5. Sound recordings

6. Computer programmes, tables and compilations including databases

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Copyright is available during the lifetime of an author and for a further sixty years from the year

of the author’s death.

While the subject of copyright is fairly old, new dimensions have arisen in areas such as

computer software development Where professional skills are the most important element in

bringing revenues. India’s Copyright Act provides that the Company or employer indeed owns

the copyright on works developed by employees. Similarly, a client has copyright in respect of

all materials that are commissioned on others for exclusive development on behalf of the client.

2.4. Law of Patent

India’s patent laws deviate from laws in developed countries in the following respects:

Patents are not given for testing methods, agriculture/ horticulture production methods,

and discovery of a new application/

Property of a known item, inventions in atomic energy, inventions that are contrary to the

law, and frivolous inventions.

Plants, animals and biological processes- especially genetically engineered species are

not patentable.

Product patents are not allowed in case of food, drugs, medicines and a few specified

chemicals, unlike in several other countries. Only process patents are allowed in these

areas.

Patent period is shorter - 14 years for products, and 7 years for processes relating to food,

drugs, medicines and specified chemicals, unlike the 20 year protection given in several

other countries.

However, under the TRIPS - India has a transition period of 10 years, expiring on Jan1, 2005, to

enact a product patent system In order to give effect to those provisions. By then, India must

move to a system of product patents in respect of all products except life forms, and enact a sui

generis system of protection to plant varieties which would be in the nature of a separate law and

not governed by patent protection. India has a draft Plant Protection Bill that was introduced in

Parliament in 1999 and is under deliberation.

3. BUSINESS REGULATIONS

India’s business regulatory environment covers all aspects of trade, industrial activity, taxes,

foreign exchange, competition, intellectual property and social security. India administers

policy regulations and procedures through a system of notifications, which requires interested

persons to continually keep track of the latest amendments applying to their business interests.

The regulatory environment in India broadly applies to the following aspects of business:

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Foreign currency regulations: Remittances are allowed only for approved categories of

trade and capital transactions, and cover foreign inward remittances of equity,

sale/transfer of shares to residents, repatriation of profit/dividend, royalties and

technology fee, repatriation of share capital following disinvestment or winding up,

capital gains and savings overseas borrowings, overseas placement of equity, acquiring or

investing in overseas ventures. (Foreign Exchange Management Act, FEMA).

Industrial regulations: Establishment of industrial units attract the provisions of

Industrial Licensing (only in a specified list sectors), local permissions for pollution

control, power and water connections, employment regulations, industrial safety and

working conditions, workmen statutory benefits registrations, use of contract labor, and

other industrial regulations (Industrial Disputes Act, Factories Act, Payment of Bonus

Act, Environment Protection Act, etc)

Regulations for managing business enterprises: Conduct of company affairs,

accounting practices and other compliance (Companies Act, Accounting Standards,

Corporate Governance reporting, Transfer Pricing rules, etc); competition regulations

Regulations concerning taxation (Income Tax Act, Customs Act, Excise and Salt Duties

Act)

Regulations covering capital markets: listing requirements, initial public offerings,

rights and preferential issue of capital, share buyback and delisting, (guidelines issued by

the Securities and Exchange Board of India SEBI) 6. Regulations concerning business

and trade practices and antitrust matters (Consumer Protection Act, Corporate

Governance rules, Substantial Acquisition and Takeovers Act, Competition Policy)

Trade regulations – regulations covering export and import of goods and services (EXIM

Policy, GATT agreements)

Intellectual Property Regulations: Regulations dealing with the proprietary rights and

protection of intellectual property (Patents Act, Trademarks Act, Industrial Designs Act,

Copyrights Act, Geographical Indications Act)

3.1. Foreign Exchange Regulations

Liberalization of trade and investment policies in the 1990s has progressively seen India move

toward liberalising its foreign exchange regulations. Foreign exchange related regulations are

embodied in the Foreign Exchange Management Act (FEMA), which has progressively

simplified foreign exchange transactions:

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For Indian business-entities, the Indian Rupee is now fully convertible on the current

account (covering trade transactions and invisibles – travel, tourism and services),

although not yet on the capital account

Indian companies can raise borrowings and equity funds abroad without prior permission,

within specified ceilings and in accordance with guidelines. Part of these funds can be

retained abroad and invested for specific purposes

The most important FEMA regulations applying to foreign entities and people resident outside

India are:

1. Foreign entities and persons residing outside India shall not make investment in India, in

any form, in any company or partnership firm or proprietary entity, whether incorporated

or not, in the following businesses:

Business of chit funds,

Agriculture or plantation activity

Real estate business or construction of farm houses

Trading in transferable development rights (certificates issued by the Govt. for land

acquired for public purposes)

2. All payments for investments allowed under capital account transactions must be

remitted through official channels and accompanied by a decaration as specified by the

Reserve Bank of India.

3. Foreign investments, which are converted into rupees after receipt into India, can be

repatriated on the capital account, for both principal and profits (dividends), subject to

clearance of all tax dues in India.

4. Foreign nationals/ entities may not acquire or sell immovable property in India without

prior permission of the Reserve Bank of India. However, an Indian company, even being

a subsidiary of a foreign company, can buy land for based industrial activity as specified

in its approval letter. Such title can be sold subsequently, but capital gains from the sale

of such immovable property may not be allowed to be repatriated outside India.

3.2. Industrial Licensing Regulations

India’s New Industrial Policy (first announced in 1991 and modified several times

subsequently) monitors certain types of industrial activities through compulsory

licensing. As of now, licensing is compulsory for the following:

Industries requiring compulsory licensing

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Industries reserved for exclusive manufacture in small-scale industries (a list of nearly

820 products considered to be low technology and labour-intensive)

Industries not falling under the above categories, but falling within the urban limits of

specified cities (indus- tries located within 25 km of highly populated cities require

specific licenses)

Industries not governed by licensing are called Delicensed Industries, and may be

established without a prior approval, and require only filing an Industrial Entrepreneurs

Memorandum (IEM). However, they must follow other guidelines, especially with

respect to foreign investment ceilings specified under the foreign investment regulations.

3.3. Trade regulations

Simplification of export-import regulations has been a highlight of India’s reform process,

especially in the post WTO period. India’s current trade regulations consist of import and export

restrictions applying to specified goods on one or more of the following grounds:

Religious, social or defense security concerns

Safety, hygiene and phytosanitary considerations

Sensitivities of domestic self-sufficiency and availability for internal consumption

Preservation of endangered species and conservation of biodiversity

Barring a short list of goods, all other products are freely allowed for imports and exports,

including for trading purposes. The categories of restrictions in brief are enumerated below:

3.4. Import restrictions

Prohibited items like tallow, animal fats etc

Restricted items-which can be imported against a specific import license or by special

notifications and special permissions. Restrictions may be on account of phytosanitary

considerations for propagating materials (seeds, cuttings, etc.), or on grounds of non-

essentiality such as alcoholic spirits, and certain types of consumer goods.

Canalized items – which are allowed to be imported only though designated State

Trading Enterprises (STEs). At present, agro commodities like edible oil and wheat,

fertilizers and certain petroleum products are canalized. The WTO allows canalizing

agencies even after lifting import restrictions but requires that they operate on

commercial terms and do not cross subsidies any products.

3.5. Export restrictions

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Exports of all categories of goods is freely allowed and encouraged, except for the following:

Prohibited items - on religious grounds (beef for example) or environmental and bio-

conservation grounds- all wild animals and exotic birds and their parts, and endangered

plant species declared under the CITES convention; seashells of certain species

Restricted items – chemicals included in the Chemical Weapons Conventions; cattle,

camel and horses; agriculture products that are seasonal or in which India is not fully

self-sufficient, and requiring an export quantity registration or licence from the Export

Development Authority (skimmed milk powder, pulses, edible oil in bulk, sugar, wheat

and non-basmati rice etc). Restrictions may also be extraneous- such as those specified by

the destination country on health and phytosanitary grounds (as in the case of mango

exports to Japan)

Canalized items- several mineral products- mica, iron ore, other ores, slag and ash;

petroleum crude, naphtha, kerosene and motor spirit; and onion, Niger seeds, are

canalized through nominated state agencies.

Import safeguards – anti dumping, quality standards

All other tariff lines are allowed to be imported/ exported without any quantitative

restrictions. However, all imports attract specified levels of import duties, which can be

varied from time to time, under the provisions of India’s trade policies, including

allowable measures under the WTO with respect to tariff bindings, import safeguards and

anti dumping.

4. BUSINESS REGULATIONS FOR FOREIGN COMPANIES

The Government of India approved new rules on foreign direct investment. They were issued on

March ,26 ,2010 by the Department of Industrial Policy and Promotion (DIPP) and entered into

force on April 1. Under the liberalized measures, the Finance Minister can endorse proposals

involving foreign equity of up to INR1200 crore [1 crore equals 10,000,000 Indian rupees

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(INR)] (about US$268 million as of April 5, 2010) without seeking approval from the Cabinet

Committee on Economic Affairs (CCEA), creating an automatic consideration procedure.

Moreover, foreign investors will no longer need to obtain no-objection certificates (NOC) from

domestic company joint-venture partners in order to invest on their own in the same sectors. The

requirement under Press Note 1/2005 whereby foreign companies needed to obtain an NOC

before investing in the same sector was a major hurdle for diversification of such companies'

operations in India.

All private and public limited companies incorporated under Indian laws are required to conduct

their affairs in accordance with the provisions of the Indian Companies Act, 1956. However,

foreign companies i.e. companies that are not registered in India, operating from a place of

business in India (branch/ liaison offices) is required to:

Notify the Registrar of Companies of their place of business, within 30 days of

establishing the same

Notify the Registrar of its authorised persons in India to receive notices or documents

issued on the company

Display on the premises, the full name of the parent company with the country of origin

Notify the Registrar of any changes in the Memorandum and Articles of the parent

company as well as change of address etc.

File annual statement of operations, authenticated bank account statements, etc duly

certified by a practicing accountant/ auditor.

4.1. Employment regulations for foreign nationals

Foreign nationals are allowed, in principle, to be employed in India either on a short duration or

in regular employment on a non-permanent basis, for periods usually up to three years.

The basic requirements are:

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A valid business visa/working permit

Prior approval by the Reserve Bank of India, for repatriation facilities.

Permission from the Ministry of Home Affairs, for extended stay in India (exceeding

three months)

Permission from the Dept of Company Affairs for appointment of an Expatriate as

Whole-time Director if he was not resident in India during the past twelve months

Clearance from the Dept of Company Affairs for managerial remuneration to the

Managing or Whole-time Director, in excess of specified norms

With the exception of short-term engagements, all other forms of employment of foreign

nationals require prior approval as listed above. Initial permissions are usually granted for terms

up to three years. Although there are no restrictions on the number of expatriates in any

company, the Government policy is to encourage indigenous skills as much as possible.

Foreign nationals in regular employment of Indian Companies (including joint ventures) can

remit up to 75% of their monthly earnings abroad to meet their overseas expenses or maintain the

family etc, after payment of any taxes in India.

Retirement facilities to foreigners allow capital repatriation up to Rs 1 million, besides all

savings generated from bonified income, without any restrictions.

4.2. Capital market regulations

Well-defined and detailed guidelines exist in India for the following types of capital market

operations:

Public issue of shares by companies having a track record/ without a track record

Issue of equity under the book-building route

Issue of Employee Stock Option Plans

Buyback of shares by a company

Substantial acquisition/ take-over of a company shares from the secondary market

Code of Corporate Governance for all public companies

Operating guidelines for Foreign Institutional Investors

Operating guidelines for Venture Capital Companies/ Funds/ Mutual Funds

Code of Conduct of Merchant Bankers, Brokers and Depository participants

4.3. Competition Regulations

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India’s earlier competition laws were based on size-turnover, market share and asset base- of

companies, and need to be reviewed in the context of globalization and open market competition.

A review of India’s current regulations- the Monopoly and Restrictive Trade Practices

Regulations-on the above areas has been proposed through a new National Competition Policy,

currently before Parliament for approval.

Based on international models, the proposed competition legislation focuses on the

following areas:

Agreement among enterprises that may restrict competition: Agreements may be

horizontal (agreements of collusion amongst competitors), or vertical (agreements

between buyer/seller firms). Horizontal agreements relating to collusive tendering, price-

fixing, production controls, etc. as well as vertical agreements for exclusive

supply/distribution contracts and refusal to supply are all considered anti-competitive.

Abuse of dominance: Abuse of dominance will include practices like quantity

restrictions, predatory pricing to eliminate competitors and marketing below costs to

drive out competitors in order to recover market shares, etc. However, in determining

competitive pricing, the pro-posed law makes a significant departure by recognizing the

important benefit of competition- consumer welfare and social benefits and not always

taking an adverse view. In this regard, predatory pricing will be considered adverse only

if used by a dominant undertaking and dealt with on the basis of rule of reason.

Mergers and combinations among enterprises: The proposed law cautions against

monitoring all types of mergers, given that several Indian enterprises do not have

international scale of operations and could benefit by restructuring through mergers and

acquisitions. Therefore, it proposes to have a system of prior notification for mergers

beyond a threshold limit: asset values exceeding Rs 5 bn for the merged entity, and/ or Rs

20 bn for the parent group holding the merged entity. Notifications shall be considered as

approved if no objections or orders are issued within 90 days by the adjudicating

authority.

4.4. Corporate governance

While India’s Companies Act has several regulations dealing with statutory declarations of

business results and general conduct of a company through its Board of Directors, the subject of

Governance is more specific on the responsibilities of the Board of Directors towards ensuring

transparency, unbiased conduct and non-concealment of important and material facts of interest

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to investors and other stakeholders. In this regard, obligatory Corporate Governance guidelines

have been specified for all public listed companies, with the following important provisions:

Composition of the Board of Directors: to include non-Executive Directors. Independent

Directors – who have no pecuniary interest outside their director’s remuneration or

material transactions with the company or its subsidiaries or its promoters that may

influence their judgment- must form at least one-third of a Board’s strength where the

Chairman is a non-Executive Director, and half its strength where the Chairman is an

Executive Director.

Audit Committee: Every company shall have an audit committee of at least three

members, all being non-executive Directors, at least two being independent and at least

one possessing financial and accounting knowledge. The committee must meet at least

thrice a year and perform its role (specified in detail in the guidelines) to overview the

company’s financial reporting process and ensure the correctness and credibility of its

financial statement.

The company must attach a Management Discussion & Analysis Report with the Annual

Report to the shareholders covering important matters on the sector outlook, risks and

other internal aspects of the company.

The Annual Report shall contain a corporate governance section with a detailed

compliance report on the guidelines. And also obtain a compliance certificate from

statutory auditors. The guidelines are mandatory and must be implemented latest by

March 31, 2003 for all companies presently listed with paid up capital of Rs 30 mn or

more; and at the time of listing for all companies seeking listing for the first time.

4.5. Environment regulations

India’s Environment Protection Act deals with all statutory regulations dealing with the

environmental impact of various industrial and commercial activities. The Act addresses

prevention as well as control aspects that potentially affect the quality of environment.

All industrial units require prior environmental clearances under the Water Pollution Act and Air

Pollution Act, which are screened by the state Pollution Control Boards. Industrial units falling

under 17 highly polluting categories- including steel, aluminum, pesticides, refineries, paper,

leather, dyes and pigments, etc- is actively monitored, and are required to set up captive effluent

treatment plants meeting the specified discharge levels for their activities.

Of late, the judiciary has been playing a proactive role in matters concerning public health and

safety, especially in urban areas. The most notable example in recent times is the Supreme

Court’s intervention in control of vehicular pollution in Delhi, which had become one of the

world’s most (air) polluted cities. The court banned all commercial vehicles more than eight

21

years of age from plying in the city, and mandated all public transport to switch over to CNG

from diesel and petrol within a six-month period.

4.6. Technical and quality standards

Businesses are required to observe mandatory quality standards in all products/ services affecting

health, hygiene and public safety. Food, medicines and several service industries are governed by

safety standards instituted by the Ministries of Health, Food Processing and other administrative

authorities governing various services like public transport, civil construction, etc.

Besides mandatory standards, India has its own Bureau of Indian Standards, which develops

national standards for several categories of industrial and consumer products, which differentiate

products and brands based on these qualifying standards. Manufacturers complying with Indian

standards are allowed to use the BIS certification mark on all their products passing the IS

requirements. BIS certification is often included as a pre-qualification in public tenders.

Besides product standards, India has also introduced quality system standards in line with

international standards such as the ISO 9000 series. Certification under quality standards is

increasingly becoming a prerequisite for procurement by large institutional buyers and in

international contracts.

4.7. Business and corporate social responsibility

While profits are the primary motive of business, there is a ground-swell of opinion that

business, being a part of the social system, must seek to serve social causes, as well. In this

regard, ethical and socially responsible conduct is becoming not only desirable values but also

guiding business principles in several companies, world-wide. Internationally, several

businesses follow a formal code of ethics that encompasses one or more of the following:

• Business conduct

• Law and Government

• Community and Society

• Environment

On the other hand, when businesses accept and indulge in corruption, bribes and other forms of

gratification as normal costs of doing business, they give their tacit approval to a value system

that punishes honesty, diligence, merit and excellence as cherished qualities in society.

In India, there are few examples of companies having formal codes addressing social

responsibility and explicitly defining business conduct ethics, partly due to the systemic

inadequacies and challenges in which business enterprises must operate. Indeed, tampering with

Govt. contracts and tenders, obtainingundue information about competitors’ offers, tax evasion

and speed money exist as business practices in India, and ‘good liaison skills’are considered

important for business.

22

5. COMMERCIAL LAWS AND TAX SYSTEM

India has a tax system covering business income, personal income, capital gains, wealth

formation and most forms of commercial transactions. Tax rates have been consistently falling in

the 1990s as a part of economic liberalisation. However, because duties and taxes account for

66% of the government’s revenue, the scope for any drastic reduction in tariffs and tax rates

from existing levels is rather limited.

Indian taxes can be grouped in two categories:

Direct Taxes: Income Tax; Wealth Tax; and Gift Tax, which apply on income

Indirect Taxes: Customs Tariffs; Excise duty; Sales tax; Service tax; Octroi/ entry tax;

Stamp duty (on conveying/ transfer of title); Property tax; etc., which relate to

commercial transactions. Taxes are collected by the central as well as state governments.

The central government levies all direct taxes such as personal income tax, corporate tax, capital

gains tax, and transfer of property, besides some indirect taxes such as customs duties, excise

duties and central sales tax. State Governments levy local taxes such as land revenue, tax on

agricultural income, property tax, octroi, entry tax and local sales tax.

5.1. Taxation of Foreign Companies

Indian tax laws distinguish between domestic and foreign companies in administering tax

rates. Indian Companies are taxed on their worldwide income, while foreign companies

are taxed only on the income that arises from Indian operations.

Indian income includes royalties, technical service fees, dividends, and capital gains on

sale of Indian company shares, besides business income originating from branch or

project operations. Certain categories of business expenditure are also disallowed or

capped, for computation of net income, chief among which are: entertainment expenses,

interest remittances abroad without withholding taxes, administrative costs of overseas

headquarters, etc.

Foreign companies (companies registered and located outside India) not having a

permanent establishment in India are taxed under the withholding provisions of bilateral

Double Taxation Avoidance Treaties, in respect of royalties and fees for technical

23

services, interest on foreign currency loans, dividend and income from specified on

mutual funds, remitted from India.

5.2. Double Tax Avoidance Agreements

India has signed bilateral treaties with several countries, providing tax credit for the foreign tax

paid on overseas income. Credit is generally given for those foreign taxes withheld or paid that

correspond to Indian income tax. The tax credit is limited to the lower of the tax paid abroad and

the Indian tax on the foreign company.

The Indian income tax for overseas companies is determined by dividing the Indian income tax

on the total taxable income (including the doubly taxed income). Foreign taxes, to the extent they

cannot be set off against the Indian tax liability for the year, are permanently lost. Taxation

treaties exist between India and several countries including the Netherlands, addressing the issue

and avoidance of double taxation.

5.3. State government taxes

Local sales tax

Local sales tax is imposed on all sales within the state, and varies from state to state. Different

rates exist for different products groups. Sales tax rates for the same product varied widely

among states, due to policies to attract business and investment, and created trade distortions

besides losses to the exchequer. Several states have also used Sales Tax Holidays as an

investment incentive to new units.

In January 2000, the Union Govt. overruled the States’ jurisdiction and enacted a uniform Sales

Tax policy for the entire country. While existing sales tax holidays granted in various states

continue to remain in force, no new schemes are allowed.

6. FOREIGN INVESTMENT REGULATIONS

India’s present policy framework for inward FDI was introduced by the Industrial Policy

Statement of July 24, 1991. The framework has subsequently evolved and enlarged in line with

24

reforms and structural developments in the economy. The present policy allows foreign investors

to invest in resident entities through either the automatic route or the government-administered

route. Most sectors and activities qualify for the automatic route.

This route allows investors to bring in funds without obtaining prior permission from the

Government, RBI, or any other regulatory agency. However, invested enterprises are required to

inform RBI within 30 days of receipt of funds and also comply with documentation requirements

within 30 days of issue of shares to foreign investors. The following guidelines govern the

foreign investment approval

6.1. Direct investment law

Foreign companies can establish a business presence in India either as foreign legal entities-

liaison office/branch office/project office- or as Indian legal entities- joint ventures/ subsidiaries

in the form of private or public companies incorporated under the Indian Companies Act. Branch

offices and liaison offices do not come under the purview of foreign direct investment.

Approvals for liaison and branch offices are valid for limited time periods (up to three years) and

require periodic revalidation, and are limited in the scope of their activities in India.

6.1.1. Direct investment

Establishing an investment presence can involve setting up one or more of the following types of

business structures in India, under the Indian Companies Act, 1956:

Investing in a joint venture company as a foreign investor (minority, equal or majority

share-holding)

Setting up a holding company (Investment Company) in India with plans for downstream

investment in other activities/Indian companies

Setting up a wholly owned subsidiary in India, 100% owned by foreign shareholders The

business structure depends, besides specific considerations of the parties involved, on the

foreign investment guidelines governing the area/ sector under consideration.

6.2. FDI PROCEDURES AT THE FEDERAL LEVEL

Approval for FDI is granted through the automatic route (which does not require pre-

approval from the government) or government approval (through the Foreign

Investment Promotion Board-FIPB)

In case of automatic approval, investors are required to notify the concerned regional

office of the Reserve Bank of India (RBI) within 30 days of receipt of inward

25

remittances and file required documents with that office within 30 days of issue of shares

to foreign investors. Under the government approval route,

FDI proposals are received by the Department of Economic Affairs (DEA), Ministry

of Finance (MOF). However proposals from nonresident residents and single brand

retailing are received by Department of Industrial Policy & Promotion (DIPP),

Ministry of Commerce & Industry (MOCI).

Foreign investors are also guided by the Foreign Exchange Management Act (FEMA)

administered by the RBI. Portfolio investment is guided by the RBI and Securities

Exchange Board of India (SEBI)

All foreign investment proposals considered by the FIPB are forwarded to it by the

Secretariat of Industrial Assistance (SIA), DIPP. Applications can also be made with

the Indian missions abroad who forward it to the DEA. Information of FDI policies and

procedures are available on the DIPP website.

Entrepreneurs require environmental clearance for 31 types of industries. The industries

include petrochemical complexes, petroleum refineries, cement, thermal power plants,

bulk drugs, fertilisers, dyes, paper etc. There are exemptions in this. Setting up of projects

in environmentally fragile areas are regulated by Ministry of Environment & Forests

guidelines.

Foreign investors can enter India as incorporated entity (Under the Companies Act 1956)

through joint venture or wholly owed subsidiary routes or as unincorporated entity as

liaison/representative office, project office or branch office. There is no restriction on

repatriation of profits or dividends. Any foreign investor who has the RBI approval to

establish an entity other than a liaison office is permitted to acquire immovable property

in India. However they cannot transfer ownership of such property without prior

permission of the RBI.

The SIA has been set up to ‘provide a single window for entrepreneurial assistance,

investor facilitation, assisting entrepreneurs in setting up of projects (including liaison

with other organisations and state governments) and monitoring implementation of

projects’.

Foreign Investment Implementation Authority (FIIA) has been set up to facilitate

quick translation of Foreign Direct Investment (FDI) approvals into implementation, to

provide a pro-active one stop after care service to foreign investors by helping them

obtain necessary approvals, sort out operational problems and meet with various

Government agencies to find solution to their problems.

Source: Centre for the Analysis of Regional Integration at Sussex (CARIS), university of Sussex.

6.3. Registering and approval system

Select Application Forms

Declarations under the automatic approval route are to be made in Form FC (GPR) to:

The Reserve Bank of India

26

Exchange Control Department

Foreign Investment Division

Central Office

Mumbai 400 001

Approvals are normally granted in 30 days.

Applications under the specific approval route are to be made in Form FC/IL to:

The Secretariat of Industrial Assistance

Department of Industrial Policy and Promotion.

Ministry of Industry, Udyog Bhavan, New Delhi

Fax: 91 11 301 1770

Approvals are normally granted in 30 days.

The Ministry of Industries now has an automatic tracking system for all SIA applications, which

can be accessed through its web site www.indmin.nic.in by feeding the application registration

number. Even applications can be submitted electronically

6.4. Liaison and branch offices

6.4.1. Liaison offices The Indian Government does not encourage foreign companies to set up representative offices

for the purposes of internal trading and commercial activities. However, offices are allowed to

carry out liaison work for the normal business activities of the parent company, such as

developing trade relations, collecting market information, inspection and coordination of

purchases for exports to parent company, but without engaging in any direct commercial activity

whatsoever.

Regulations

A liaison office is not entitled to earn any income, commissions or other remuneration in

India

The Liaison office shall not carry out any trading, commercial or industrial activity

without the prior permission of the Reserve Bank of India (usually not given)

All expenses of a Liaison Office need to be met exclusively from overseas remittances

through normal banking channels

Annual statement of remittances received and annual accounts authenticated by an

accountant need to be filed with the Reserve Bank

Posting of foreign nationals as the representative or the head of the liaison office is

permitted, the application form should contain the relevant details; there is no restriction

on employment of Indian staff and other personnel.

27

Permissions for liaison offices are normally granted for a specific period not exceeding 3 years.

Permission is easier for companies in the services industry and more difficult for

manufacturing/trading companies with a supply rather than purchase focus.

Foreign companies can also get permissions to set up temporary project/site offices in India to

execute specific projects/contracts approved by the Govt. of India, and are treated similar to

liaison offices for approvals. The term of approval is based on the proposed duration of their

engagement in the project.

6.4.2. Branch Office

Traditionally, foreign companies engaged in specific service industries like banking, shipping,

airlines, insurance etc have been allowed to set up branch operations, usually on a reciprocal

basis with the investing country. However, the re-cent policy provides for manufacturing and

trading companies to set up branches for carrying out following activities:

Represent the parent company or other foreign companies as buying/selling agents

Conduct research in which the parent company is engaged, provided the results of such

research are made available to Indian companies also Undertake export/ import trading

activities

Promote technical and financial collaborations between Indian and foreign companies.

In this sense, branch offices are allowed to carry out research and commercial activities for the

parent companies and principals. Approvals are easier to get for large trading companies, with

the potential to supplement exports from India, or to MNCs and large industrial companies

known in India.

Applications for a liaison office or branch offices are considered and approved by the Reserve

Bank of India.

6.5. Foreign investment is not permitted in the following (negative list) areas:

Industry Foreign

Directive

Investment

Condition

Atomic Energy, Retail Not Allowed

28

trading (except

single brand

Broadcasting services

Foreign equity

up to a

maximum of

46%

Requires

FIPB approval and is

subject to guidelines of

Ministry of Information

and Broadcasting

Financial services , Stock

Exchange

. FDI and FII

limits capped at

26%

and 23%

respectively

Aviation services, airport developmen

Foreign equity

up to 100%

with condition

Up to 74% under

automatic route and

FIPB approval

thereafter.

Mining services Under automatic route

subject to provisions of

Coal Mines

Nationalization Act

(1973)

Construction; development

services – housing,

commercial premises,

resorts,

Under automatic route;

subject to:

Minimum capitalization

of US$10 million for

WOSs and

US$5 million for joint

ventures with funds to

be brought in within six

months of

commencement of

Business.

Real estate Business Not Allowed

Telecommunication

services – a) ISPs without

gateways, b) Infrastructure

provider of dark fiber,

right of way, duct space

and c)

electronic mail & voice

mail

Automatic

route up to

49%.

FIPB approval

Beyond 49%.

Companies must

divest 26% equity in

favor of Indian public

if they are listed in

other parts of the

World. Also subject to

licensing and security

Requirements.

Agriculture, Plantation,

postal service

Not Allowed

29

Source: Department of Industrial Policy and Promotion (DIPP), 31/mar/2011

Specific prior approval is compulsory in a few sectors: banking, Non Banking Financial

Companies(NBFCs), civil aviation, telecom services, petroleum exploration, venture capital

funds, trading, defense production, atomic energy (specified activities), bulk drugs and

intermediates, mining, advertising and films.

Specific approval is required in all proposals: involving items that require industrial license;

foreign investment being more than 24% in the equity of units manufacturing items reserved for

small-scale industries; where the foreign applicants have a previous venture/ tie-up in India;

involving acquisition of existing shares in an Indian company by a foreign investor; where

proposals fall outside the sector policy /caps or under sectors in which foreign investment is not

permitted under the automatic route.

6.6. Foreign investment in small scale units The Government allows upto 24% equity by foreign companies, in products that are exclusively

reserved for the Small Scale Industries- defined as industrial undertakings with a maximum

investment in plant and machinery of Rs.10 million. There are over 820 products that are

presently reserved, including cotton socks, furniture, etc., which may be of interest to foreign

investor. Approvals for higher levels of ownership, including 100%, can be obtained on

condition of an export obligation of at least 50% of the production from the unit, to be achieved

within three years from the date of Implementation.

6.7. Investment in existing companies

Foreign companies can take equity in existing Indian companies either under the automatic route

or under the specific approval route, in accordance with the same guidelines as applying to fresh

investments. However, the following additional conditions apply for consideration under the

automatic route:

Foreign equity must come either for the purpose of funding and expansion or for

diversification into a sector in which the automatic route applies.

In case no expansion plans accompany the proposal, there should be an expansion of the

equity capital of the Indian Company as a result of inducting foreign capital

In all other cases, i.e. in cases where the equity capital is not expanding, or if there is a

restructuring of equity among existing Indian and foreign shareholders, a specific approval is

required. Foreign investment in existing companies requires board approval of the board and

shareholders in certain cases.

6.8. Foreign investment in trading companies

30

Foreign equity holding is allowed in the following types of trading activities:

Trading is permitted under automatic route with FDI up to 51% provided it is primarily for

export activities, and the undertaking is an export house/trading house/ super trading/ trading

house/ star trading house.

However, under the FIPB route, even 100% FDI is permitted in case of trading companies for the

following activities:

Exports;

Bulk imports with sale from bonded warehouses;

Cash and carry wholesale trading;

Other import goods or services provided at least 75% is for procurement and sale of

goods and services among the companies of the same group and not for third party use or

onward transfer / distribution/sales

Several specified activities as appearing in the policy

6.9. Dispute resolution Businesspersons must take note of the lengthy mainstream adjudication process in India and

Endeavour to use alternative dispute settlement mechanisms as their principal recourse in

commercial disputes/ disagreements concerning their business interests in India.

However, under Indian law, the following types of differences cannot be settled by

arbitration, and therefore must be settled only through civil suits:

Matters of public rights

Proceedings under the Foreign Exchange Regulation Act (FERA) which are quasi-

criminal in nature

Validity of intellectual property rights granted by statutory authorities

Taxation matters beyond the will of the parties

Winding up under the Companies Act

Disputes involving insolvency proceedings

Disputes relating to persons who are not party to the agreement, or affect the public at

large or bring a change in status of individuals or impose fine or imprisonment

Disputes founded on an agreement void on account of its consideration or objects being

unlawful

6.10. Arbitration

India’s Arbitration and Conciliation Act, 1999 provides for domestic as well as international

disputes to be settled by arbitration, provided there is an explicit arbitration clause or a separate

agreement between parties to refer their differences to arbitration. Disputes that have been agreed

to be resolved by arbitration are not admissible in a court of law, unless the validity of arbitration

agreement or the arbitrability of the subject itself is in dispute.

31

India has accepted the United Nations Commission for International Trade Law (UNCITRAL)

model law on International Commercial Arbitration, to bring greater uniformity between its law

and needs of international arbitration.

A few important features of the Indian Arbitration & Conciliation Act are:

Domestic as well as international commercial arbitration are included in its scope

Arbitrators can be of any nationality, unless otherwise agreed by the parties

The arbitration process is not bound by the Indian Evidence Act (witnesses)

Arbitration awards are final and binding on parties, subject to set time limits for

responsive action such as application correction/interpretation, setting aside the award.

Foreign awards can be enforced in India – against proof/evidence of such awards

This enables arbitration to emerge as a complete dispute resolution mechanism supplementing

the mainstream court system. Running the business

7. EUROPEAN INVESTORS IN INDIA

“India has centuries old commercial, political and military ties with the nations of the

Europe, Particularly Britain, Portugal, France and the Netherlands”

32

By European Union

India is an important trade partner for the EU and a growing global economic power. The EU

and India hope to increase their trade in both goods and services through the Free Trade

Agreement (FTA) negotiations that they launched in 2007. The essential of the FTA between

India and EU is described below.

As per the, latest statistics of the European union director general of trade, India is the 9th

largest

import partner of the EU and 8th

largest partner of the export and Trade partner. The below figure

explains that European Union is the number one trade partner of India. These figures explain the

business relation and trade between India and EU has been in the up word direction.

India and EU has seen lot of trade changes in the past decade, as EU is the main trade partner to

the India as in the imports, exports and trade. Below figure explains the facts and figures of India

and EU trade

Source: Eurostats, 17/mar/2011

7.1. EU and India Trade Facts &Figures:

In the recent analysis of European Union about India and its trade, show the below figures

about bilateral trade.

33

The EU is India's biggest trading partner with 20% share of India's foreign trade. India is

now the EU's 9th trading partner – overtaking Brazil and Canada in 2006. Europe is the

first or second market for every one of India's top ten exports.

Europe exported €29.5billion worth of goods and €9billion worth of services to India in

2007. Europe imported €26.3 worth of goods and €6.6billion worth of services from India

in 2007. EU trade with India has more than doubled since 2000. Europe has a trade

surplus with India for both goods and services.

The EU is a big investor in India, with €10.9billion invested in 2007. The EU accounted

for 65% of all FDI flows into India in 2007. Indian investment into

the EU is booming: India's foreign direct investment into the EU increased from

€0.5billion in 2006 to €9.5billion in 2007.

Three quarters of Indian imports are inputs for manufacturing or services trade, so these

tariffs affect the costs of Indian businesses. One of India's core development priorities is

to strengthen and grow its manufacturing sector.

7.2. India Bilateral investment treaties with European countries

The Ministry of Finance website gives the text of a model BIPA signed by India. However there

may be minor differences e.g. in the clauses on compensation for losses, dispute settlement or

promotion and protection clauses etc. However pre-entry national treatment has no been

accorded to any foreign investor.

EU countries with which India has entered into BIPA (and date on entry into or

ratification)

Country Date of signed

Austria 1 March 2001

Belgium 8 January 2001

Bulgaria 2 September 1999

Cyprus 12 January 2004

Czech

Republic

6 February 1998

Denmark 12 August 1996

Finland 9 April 2003

France 17 May 2000

34

Germany 13 July 1998

Hungary 2 January 2006

Italy 26 March 1998

Netherlands 1 December 1996

Poland 31 December 1997

Portugal 19 July 2002

Romania 9 December 1999

Spain 16 October 1998

Sweden 1 April 2001

United

Kingdom

6 January 1995

Source: Ministry of finance, India

7.3.India Trade with world

Source: IMF international monitary fund, 12/april/2010

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf

7.4. EU -27 trade with India

35

Source : EuroStatistics, 17/mar/2011

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf

7.5. European Union and India Free Trade Agreement (FTA):

Economic liberation and foreign direct investment (FDI) have been key drivers of India’s

successful economic advance in recent decades. As per the world trade organization report, India

has seen its overall trade with the European Union in both services and goods grow by the

impressive rate around 7% per year in between 2005 to 2009.

India and EU has the chamber of commerce to develop the trade and increase the investments in

both sides, EU-India summit has held on December-2010 in New Delhi and as well as Indian

delegates had meeting European commission on the same date in Brussels, both parties has been

discussing the further process about the FTA between in India and EU .

As part of our literature and interview process we gone through the interview summery of Mr.

GEOFFREY VAN ORDEN he is the founded chairman of Europe India chamber of commerce

(EICC).

The main aim of bilateral free trade agreements (FTA), to eliminate tariffs between the parties on

substantially all trade and thus provide opportunities. for current and potential exporters to

develop their business and diversify the export base.

The challenge for the FTA is not only to accelerate liberalization in India’s services sectors but

also to facilitate the implementation of a range of complementary reforms designed to improve

36

the quality of regulation. Externally, India faces contrasting challenges in securing access to

European markets in its areas of comparative advantage.

The main cause for the delay of the FTA is Intellectual Property (IP) rights and data exclusivity

in the Pharmaceutical field. When the IP concern to the Indian pharma companies, India is the

biggest manufacturer of the bulk drugs in the world with affordable cost.

India has a thriving generic drug industry. It did not allow patents on pharmaceutical products

until 2005, when it adapted its laws to conform to the World Trade Organization’s intellectual

property rules. Products produced prior to that date are still not patentable, and in many other

respects India’s intellectual property regime is more flexible than that of the EU and the U.S.A.

Moves to limit India’s generics industry would have far-reaching consequences for developing

countries, where access to medicine is most limited, given India’s substantial exports of generics.

As per the report of US national library of medicine and health states that 85 percent of

generic antiretroviral drugs destined for sub-Saharan Africa were produced in India. An increase

in their cost would translate into reduced quantities of drugs available to AIDS patients.

7.6. Indian Pharmaceutical Companies and Patents

The pharmaceutical industry is among the most globally competitive industries in India, with

over one-third of its output being exported. The Indian government and industry realize that a

strong IPR regime is required to ensure an attractive foreign investment climate and for the

Indian pharmaceutical (and other sectors such as IT) to maintain their impressive growth. Indian

pharma companies realize the importance of IPR, both as an asset and as a marketing tool- they

have been benefited from patent protection in other countries. Many of these companies have

established patent cells attached to their R&D

Departments as their customers insist on receiving non-infringement statements. The number of

patent applications in India has increased- a large number of them from the domestic industry-

signaling a growth in the IP culture in India. India is also rapidly emerging as a centre of

innovation and contract research, which requires a strong IPR regime. An implication of the new

Patent Act of 2005 is that the Indian Pharmaceutical industry must innovate. Though Indian

companies have been involved in new models of research and development, production and of

export of generic medicines and have been Expanding their operations in several EU countries

e.g. Finland, UK, no new molecule Has been discovered and patented by an Indian company.

37

7.7. Key issues of concern to the EU in trade facilitation in India

The last session of India and EU FTA discussions has focused on Key issues Has

complained by EU, of burdensome customs registration and documentation

procedures/requirements, lack of transparency/discretionary criteria for valuation by customs

officials and resultant frequent delays in the export of food stuffs, professional equipment,

machinery, textiles and clothing, automobiles and energy and environmental services.

Transparency: The rules of import and export are published and available in the public

domain but these are complex and subject to frequent modifications.

Different implementation/enforcement policies: Many policies are at the discretion of

the customs officials and degrees of enforcement vary.

Complex procedures for calculating customs duties: Tariff structures in India are

complex and non-transparent as are the procedures for calculating import duties.

Delays in customs clearance: While there has been an improvement in the time taken

for the imported goods to be cleared by customs, delays still occur on account of

burdensome documentation requirements, customs valuation and classification issues,

and compliance with pre-import requirements and inspections to assess compliance with

respect to other agencies.

Internal transit procedures: Each state has its own legislation and there are difficulties

in obtaining inland clearance.

Source: Biz@ India, Version 6, December, 2010.

Recent issue of Time magazine printed about the EU and India summit in Brussels,

European Union seeking India to cut off 95% of the import tariff lines, exactly as it is providing,

but India says it will agree to only 90% tariff lines. EU also seeking cut in various sensitive areas

like agricultural procedure, wines and alcoholic beverages, cars, dairy products.EU also keen that

India liberalize the financial services, telecom, retail, postal and professional services.

What are the advantages of EU-India Free trade agreement?

As the result of our data analysis based on statistics and text states that,

The India-EU relationship has been growing steadily since 1962 when diplomatic relations were

Established with the European Economic Communities. A regular political dialogue has been

38

Boosted through the first Summit held in 2000 and, since the 2004 Summit, is taking the shape

of a Strategic Partnership, making India one of the EU’s carefully selected main global partners.

Services is the fastest growing part of the Indian economy and India has offensive interests in

GATS (call centers, down the line software engineering) and (business visas, software engineers,

accountants, lawyers in both directions) liberalization. Both parties are therefore interested in

including services in a FTA agreement.

Potential for 30% increase in each way flows of bilateral FDI as a direct result of signing

an FTA

In recent years the attractiveness of India as a destination market for foreign direct

investment has substantially increased and this has been reflected in an increase in FDI

inflow.

FTA between the EU and India which would improve market access for goods and

services, covering substantially all trade except for public procurement which India is not

willing to include in the FTA. Bilateral trade is expected to exceed €70.7 billion by 2010

and €160.6 billion by 2015.

Services are the fastest growing sector of the Indian economy. Bilateral trade in services

is expected to exceed € 246.8 billion by 2015 by the time the FTA in Services is

implemented, according to the Federation of Indian Chambers of Commerce and

Industry.

Promoting Sustainable Development:

Through their joint work programme, they are further developing their cooperation in research,

environment and energy to address the impacts of climate change. Both sides are actively

pushing for a global agreement on this issue.

Ever-growing trade and investment:

Over the last five years, EU-India trade has more than doubled and investments have multiplied

ten-fold. Both parties are currently negotiating a broad-based Bilateral Trade and Investment

Agreement, which should maximize business opportunities for companies on both sides.

Bringing people together:

Educational exchanges enable increasing numbers of young Indians to study in Europe. Cultural

exchanges are also becoming more prominent and are stimulating greater awareness of cultural

diversity, helping to tackle poverty while improving in particular healthcare and access to good

education.

39

European Union relationship with India and china:

As per the press release of directorial general of trade of EU in March 2011.China is the strategic

partner of European Union; china is the number one exporter to the European Union with 18.9%

and second trade partner after USA.

But India is at the 9th

place in the trade with EU, has only 2.2% of the total trade. At the same

time as we discussed above EU is the number one exporter of India.

Europe's imports from China have grown by around 16, 5% per year for the period 2004-2008

but this growth rate reversed in 2009 and recorded a 13% drop due to the crisis. Nevertheless, in

2009, the EU still imported €215 billion worth of goods from China. China thus remains

Europe’s biggest source of manufactured imports.

But service market for Europe runs a surplus on trade in services with China of €5, 0 billion in

2009 (up from €4, 9 billion in 2008). This is about 27 times smaller than its trade deficit for

goods.

India has significant number in trade with EU the service sector; in 2009 the trade in service is

8.7% in exports and 7.3% in imports. Proving that India is the largest partner for EU in service.

European companies invested €5,3 billion in China in 2009 (up from €4,7 billion in 2008).

China invested €0, 3 billion in 2009 (compared to a net disinvestment of €1,8 billion in Europe

in 2008).

40

Conclusion

The Indian economy is the tenth largest in the world by nominal GDP and the fourth

largest by purchasing power parity (PPP) by the reports of the International monetary fund.

India GDP is divided by sector is service 55.3%, Industry 28.6% and Agriculture 16.1%.

Labour force is 478 million, in that agriculture is 52%, industrial is 14% and service is 34%.

Exports of the India are $201 billion dollar and imports is $327 billon dollar, main business

partners are UAE, China, USA, and EU.

India is 134th

place in easy of doing business in the world by world bank rankings, at the same

time China is 84th

.

Indian economy is mainly depending on three sectors Services, industries and agriculture. With

global industrialization, this sector is the key driver of economy of all countries in the world.

In India industrial growth increasing is not up to the mark when it compares to the service.

Agriculture is also key driver of Indian economy and food needs to the 1.2 billion, India is the

second largest producer of the rice in the world after china. But this industry growing like a snail

walk.

India and China are the rapidly growing economies in the world with it strong labor, industrial

and agriculture. When we compare both countries in the growing relation with the western

countries and European Union, India is in the backward position. Same time china is growing

high in bilateral and strategic partnership with partner countries.

Agricultural industry in India is lacking of technology and equipments, as it compare to china it

is the world leader in agriculture products by using the latest technology and strategic partnership

with the developed countries like European Union, USA and other countries. In the same way

the industrial sector has been facing the same problem in showing the significant growth.

Below table show how India is allowing the FDI’s into the various sectors at the same time it

also indicates how china has the FDI policy. Main fields like agriculture and industries has

strong and difficult to invest and enter of FDI.

Infrastructure in India is in growing stage but, because of the restriction for the foreign

companies, the development has lacking the technology and planning for the new projects. As

India needs the technology to build the sophisticated structure, Europe has the best technology to

develop the infrastructure system. If India can allow the European Union strategic partnership in

its infrastructure development, it can bring new technology and better system to India.

41

India’s autonomous policy on services

SERVICE SECTOR ISSUES

Accountancy FDI not allowed; FSP not allowed undertaking statutory audit of

companies. Only partnership firms allowed with number of partners

limited to 20.

Architecture No cap on FDI. Foreign architects need to be registered by the Council

of Architecture as individuals. Appointment of foreign architects as

consultants to Indian architects subject to case-by-case approval by

Government of India.

Legal FDI not allowed. International law firms not allowed presence. Indian

advocates cannot enter into profit-sharing Arrangements with non-

Indian advocates.

Construction and related

engineering

No cap on FDI. Price preference to PSUs, as well as a large number of

barriers that are external to the sector: Land ceiling; unclear land titles;

minimum area restrictions; minimum capitalization norm; restriction

on repatriation.

Distribution No cap on non-retail segments and 51% limit on FDI in single brand

product retail. Lack of clear responsibilities within the government..

Financial services

(Insurance)

Foreign equity limit of 26% in most segments. Minimum capitalization

norms; Funds of policy-holders to be 27 retained within the country;

Compulsory exposure to rural and social sectors and backward classes.

Financial services

(Banking)

Private domestic equity limited to 49% and foreign equity limited to

74% with 10% voting rights. FDI and portfolio investment in

nationalized banks subject to overall statutory limits of 20%.

Mandatory priority sector Lending and rural branch requirements for

CHINA 2008 - Taxation fully liberalized. And

wholly foreign owned subsidiaries permitted by

2007.

CHINA 2008 - Fully liberalized barring

restrictions on Mode 1. For mode 3, wholly

foreign owned

subsidiaries permitted by 2006.)

Legal FDI not allowed. International

CHINA 2008 - Continued restrictions on business

scope.

CHINA 2008 - Restrictions on business scope

of fully foreign-owned enterprises

CHINA - Continued restrictions on large chain

stores. By 2006, no restrictions on Products

foreign majority control allowed except in chain

stores with more than 30 outlets selling a range of

products.)

CHINA 2008 - By 2004, fully liberalized except

50% foreign ownership limit in life insurance.

CHINA 2008 - Fully liberalized, geographic

limitations phased out gradually by 2006

42

Source: India’s FDI policy and WTO (2010), World Bank, 2006.

domestic banks.

Health & Social Services No cap on FDI. Movement of FSP subject to registration by the

Medical/Dental/Nursing Council of India. FSP cannot provide services

for profit. Responsibilities divided between the Centre and states;

Absence of a Standardized accreditation system.

Recreational, Cultural &

Sporting

FDI is permitted in entertainment services (including theatre, live

bands and cultural services), libraries, archives and museums. FDI is

restricted to 26% through the Government route in print media. FDI is

not allowed in News Agency Services. Lottery, betting and gambling

is not allowed.

Transport 100% FDI in maritime and road transport but significant restrictions in

air and rail transport. Restrictions on inter-state movement of goods;

Overlapping responsibilities and coordination issues between

government departments (e.g., multi-modal transport).

CHINA 2008 - Full foreign ownership not

allowed and needs based

quotas.

43

ABBREVIATIONS

AIDS Acquired Immune Deficiency Syndrome

BIPA Bilateral Investment Promotion and Protection Agreement

BIS Bureau of Indian Standards

CAP Capital

CCEA Cabinet Committee of Economic Affairs

CITES Convention on International Trade in Endangered Species

CNG Compressed Natural Gas

DEA Department of Economic Affairs

DIPP Department of Industrial Policy and Promotion

EC European Commission

EICC Europe India Chamber of Commerce

EU European Union

EXIM Export and Import Policy

FDI Foreign Direct Investment

FEMA Foreign Exchange Management Act

FERA Foreign Exchange Regulatory Act

FII Foreign Institutional Investors

FIIA Foreign Investment Implementation Authority

FIPB Foreign Investment Promotion Board

FSP Financial Service Providers

FTA Free Trade Agreement

GATS General Agreement on Trade in Services

GATT General Agreement on Tariffs and Trade

GDP Gross Domestic Products

IEM Industrial Entrepreneur Memorandum

INR Indian National Rupee

IPR Intellectual Property Rights

44

ISO International Standard Organization

ISP Internet Service Provider

MFN Most Favored Nation

MNC Multinational Corporation

MOCI Ministry of Commerce and Industry

MOF Ministry of Finance

NBFC Non Banking Finance Company

NOC No Objection Certificate

PSU Public Sector Units

RBI Reserve Bank of India

SEBI Security Exchange Board of India

SIA Secretariat of Industrial Assistance

STE State Trading Enterprises

TRIPS Trade Related Aspects of Intellectual Property Rights

UNCITRAL United Nation Commission for International Trade Law

WTO World Trade Organization

45

Sources

Ministry of Labour official website, http://labour.nic.in/welcome.html

Ministry of commerce and industry, Department of Industrial Policy and Promotion (DIPP)

http://www.dipp.nic.in/manual/FDI_Manual_Latset.pdf

Europea, http://ec.europa.eu/trade/creating-opportunities/bilateral-relations/countries/india/

http://trade.ec.europa.eu/doclib/docs/2006/september/tradoc_113390.pdf

IFRI: - The Institut Français des Relations Internationales,

http://www.ifri.org/?page=contribution-detail&id=5569&id_provenance=97

US national library of medicine and health, http://www.nlm.nih.gov/

Time, www.time.com

Economic times, http://economictimes.indiatimes.com/

Biz @ India magazine, version 5, version 6, December 2010.