PROJECT REPORT ON ANALYSIS OF BUSINESS ENVIRONMENT IN INDIA

N.L.Dalmia Institute of Management Studies &Research Mumbai 2002 04

INDEX INDIA A brief History Some important Fact Government Structure and Economic Climate Structure of Government of India - Financial System -Reforms Type of Economy General Economic Trends The Market Currency Leading Industries Energy Chemicals and Utilities Technology, Communications and Entertainment Financial Services Retail Health Sciences Infrastructure Investment Climate and Foreign Trade -Foreign Investment Framework -Foreign Investment Policy -Economic Policies and Incentives for Foreign Investment -Foreign Direct Investment -Country Wise Share in Approvals - Foreign Portfolio Investment -Investment in Export Trading Companies - Foreign Investment Promotion Board Foreign-Exchange Controls - Foreign Exchange Policy - External Commercial Borrowings Economic Laws and Regulations -Indian Contract Act, 1872 -Intellectual Property Rights Protection -Labor Laws -Anti Trust Regulations Special Investment Considerations -SEZs - Incentives for SEZ Units - Other Incentives Major Trading Partners and Leading Imports and Exports Companies -Private Co.s -Public Co.s -Foreign Co.s

Page # 4 4 7 9 13 15 16 25 27 27 28 30 36 37 38 41 42 42 43 43 44 44 45 45 46 46 46 47 47 47 48 49 52 55 55 55 57 57 60 61 61 61

Structures used by Foreign Corporations Taxes on Corporate Income -Corporate Income Tax -Rates of Income Tax - Dividend Income -Minimum Alternate Tax -Tax Incentives -Foreign Tax Relief Other Significant Taxes -Excise/Cenvat -Customs -Service Tax -Sales Tax -Octroi -Value Added Tax Financial Reporting & Auditing Funding of Indian Business SWOT of India Bibliography

62 63 64 65 65 65 66 66 66 66 67 67 68 68 69 70 71 74 76

Brief History
The Indus Valley civilization, one of the oldest in the world, goes back at least 5,000 years. Aryan tribes from the northwest invaded about 1500 B.C.; their merger with the earlier inhabitants created the classical Indian culture. Arab incursions starting in the 8th century and Turkish in 12th were followed by European traders, beginning in the late 15th century. By the 19th century, Britain had assumed political control of virtually all Indian lands. Nonviolent resistance to British colonialism under Mohandas GANDHI and Jawaharlal NEHRU led to independence in 1947. The subcontinent was divided into the secular state of India and the smaller Muslim state of Pakistan. A third war between the two countries in 1971 resulted in East Pakistan becoming the separate nation of Bangladesh. Fundamental concerns in India include the ongoing dispute with Pakistan over Kashmir, massive overpopulation, environmental degradation, extensive poverty, and ethnic and religious strife, all this despite impressive gains in economic investment and output

Some Facts

hern Asia, bordering the Arabian Sea and the Bay of Bengal, between Burma 3

Pakistan

3,287,590 sq km 973,190 sq km 314,400 sq km

ate

varies from tropical monsoon in south to temperate in north

upland plain (Deccan Plateau) in south, flat to rolling plain along the Ganges, deserts in west, Himalayas in north

ral Resources coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite titanium ore, chromite, natural gas, diamonds, petroleum, limestone, arable land ral Hazards droughts; flash floods, as well as widespread and destructive flooding from monsoonal rains; severe thunderstorms; earthquakes ulation 1,049,700,118 (July 2003 est.) Growth Rate 1.47% (2003 est) gions Hindu 81.3%, Muslim 12%, Christian 2.3%, Sikh 1.9%, other groups including Buddhist, Jain, Parsi 2.5% (2000) guages English enjoys associate status but is the most important language for national, political, and commercial communication; Hindi is the national language and tongue of 30% of the people; there are 14 other official languages: Bengali, Marathi, Tamil, Urdu, Gujarati, Malayalam, Kannada, Oriya, Punjabi, Assamese, Kashmiri, Sindhi, and Sanskrit; Hindustani is a popular variant of Hindi/Urdu

widely throughout northern India but is not an official language definition: age 15 and over can read and write total population: 59.5% male: 70.2% female: 48.3% (2003 est.) Government federal republic ital New Delhi ministrative Divisons 28 states and 7 union territories*; Andaman and Nicobar Islands*, Andhra Pradesh, Arunachal Pradesh, Assam, Bihar, Chandigarh*, Chhattisgarh, Dadra and Nagar Haveli*, Daman and Diu*, Delhi*, Goa, Gujarat, Haryana, Himachal Pradesh, Jammu and Kashmir, Jharkhand, Karnataka, Kerala, Lakshadweep*, Madhya Pradesh, Maharashtra, Manipur, Meghalaya, Mizoram, Nagaland, Orissa, Pondicherry*, Punjab, Rajasthan, Sikkim, Tamil Nadu, Tripura, Uttaranchal, Uttar Pradesh, West Bengal ndependence 15 August 1947 (from UK) nstitution 26 January (1950) egal System based on English common law; limited judicial review of legislative acts; 4

racy

uffrage

accepts compulsory ICJ jurisdiction, with reservations 18 years of age; universal

Natural

resources:

Irrigated land:

Structure of Government of India

The union government, as India's central government is known, is divided into three distinct but interrelated branches: legislative, executive, and judicial.

Parliament consists of a bicameral legislature, the Lok Sabha (House of the People-the lower house) and the Rajya Sabha (Council of States--the upper house). Parliament's principal function is to pass laws on those matters that the constitution specifies to be within its jurisdiction. The President of India has a specific authority with respect to the function of the legislative branch . The President is authorized to convene Parliament and must give his assent to all parliamentary bills before they become law. According to its Constitution , India is a " sovereign, socialist, secular, democratic republic." India has a federal form of government. However, the central government in India has greater power in relation to its states, and its central government is patterned after the British parliamentary system. Real national executive power is centered in the Council of Ministers (cabinet), led by the prime minister. The president appoints the prime minister, who is designated by legislators of the political party or coalition commanding a parliamentary majority. The president then appoints subordinate ministers on the advice of the prime minister. The legislatures of the states and union territories elect 233 members to the Rajya Sabha, and the president appoints another 12. The elected members of the Rajya Sabha serve 6-year terms, with one-third up for election every 2 years. The Lok Sabha consists of 545 members; 543 are directly elected to 5-year terms. The other two are appointed. Each state also has a presidentially appointed governor who may assume certain broad powers when directed by the central government. The central government exerts greater control over the union territories than over the states, although some territories have gained more power to administer their own affairs. India's independent judicial system began under the British, and its concepts and procedures resemble those of Anglo-Saxon countries. In India there is a single integrated system of Courts, at the apex of it is the Supreme Court, which comprises Chief Justice, and 25 other Judges . The exclusive original Jurisdiction of the Supreme Court extends to any dispute between the Government of India and one or more States, or between the States themselves . The High Courts stand at the head of States' judicial administration . There are 21 High Courts in the country, three of them with jurisdiction over more than one State. Every High Court has a Chief Justice and such other Judges as the President may from time to time appoint. The Civil and Criminal Jurisdictions of the High Courts are primarily governed by the Codes of Civil and Criminal Procedure. Lower Courts. In India, states are divided into districts (zillas) having district courts. The district judges preside over civil cases and the sessions judges address criminal cases. Further below the district level, there is a hierarchy of judicial officials. At the village level, disputes are frequently resolved by peoples courts (lok adalats) . Lok Adalats are voluntary agencies for resolution of disputes through conciliatory method. Law Commission Sixteen Law Commissions have so far been constituted by the Government on judicial reforms, and these have submitted 174 reports on various subjects relating to law, justice and their reforms. The sixteenth Law Commission, appointed with effect from

September 1, 2000 for a period of three years, is also headed by Shri Justice B.P. Jeevan Reddy. Department of Company Affairs The Department of Company Affairs is the primary agency responsible for the development and efficient functioning of the corporate sector comprising the joint stock companies. The objectives in this regard are sought to be achieved by the Department mainly through administration of the Companies Act, 1956 and the Monopolies and Restrictive Trade Practices Act, 1969. Apart from the aforesaid Acts, the responsibility of discharging the functions of the Central Government relating to the Administration of the Partnership Act, 1932, the Companies (Donations to National Funds) Act, 1951 and Societies Registration Act, 1860 also rests with the Department Political Parties India has over 100 political parties, including national, regional and local parties. Among the major national parties are the Congress(I), the Bhartiya Janata Party and the Communist Party of India. India has a tradition of strong opposition parties. The leader of the opposition party in Parliament is accorded statutory recognition, and is a major force in the day to day functioning of the Government .

Indian Financial System

Indian Financial System is broadly classified into two groups : 1. 2. Organised sector Unorganised sector

The financial system is also divided into users of financial services and providers. Financial institutions sell their services to households, business and government who are the users of financial services. The providers of financial services are : 1. 2. 3. 4. 5. Central bank Banks Financial institutions Money and Capital markets Informal financial entreprises

The organised financial system comprises the following subsystems : 1. 2. 3. a. b. 4. The banking system The co-operative system Development banking system Public sector Private sector Money markets 7

5.

Financial companies/institutions

The unorganised financial system comprises of money lenders, indigenous bankers, lending pawn brokers, landlords, traders, etc. There are also a host of financial companies, investment companies, chit funds, etc. in the unorganised sector. These are not regulated by the Central Bank or the government in a systematic manner. .

Indian Banking System

Indias financial system, which comprises banks (public sector, private sector and foreign banks) and financial institutions has kept pace with the growing needs of corporate and other borrowers. The interest rates are now more in line with market forces and the banks and financial institutions have combated the reduction in interest rates and pressure on their margins by constantly innovating and targeting attractive consumer segments. Central Bank The Reserve Bank of India (RBI) is the countrys Central Bank and was established on 1 April 1935 in accordance with the provisions of the RBI Act, 1934. RBI has been established essentially to regulate and supervise the Indian financial system. In addition, it has also been entrusted with the responsibility of formulating, implementing and monitoring the Monetary Policy of India. The RBI also prescribes exchange control norms to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Types of Banking Institutions Commercial banks (public sector banks, private sector banks, foreign banks), cooperative banks and regional rural banks broadly make up the banking system in India. While commercial banks typically cater to short and medium term financing requirements, national and state level financial institutions meet longer-term requirements. The public sector banks have a higher percentage i.e. 65 percent of their total branches in the rural and semi-urban centers while the corresponding number for private banks (both old and new private banks) is 54 percent. Foreign banks, on the other hand, have most of their branches (99 percent) in urban or metropolitan centers. RBI at present permits these banks to operate as branches of their overseas parents. Public Sector Banks The public sector banks comprise the State Bank of India including its 7 associate banks and 19 other banks owned by the Government. These banks form the dominant banking group in India and account for approximately 80 percent of total deposits, 8

74 percent of loans and 70 percent of total bank branches (46,118 out of a total of 66,186 bank branches). The Government continues to be the majority shareholder in all the public sector banks, although its average holding has fallen following the public issue of shares as well as the return of capital to the Government by these banks. Private Sector Banks The private sector banks comprise 22 old banks and 11 new banks (operating a total of 5,376 branches). 9 licenses for new banks were issued in 1993 and two more were issued in 2002. The growth in size of the new private sector banks has been rapid and in financial year 2002 they garnered a share of 7.4 percent of total bank deposits and 11.5 percent of total bank loans. ICICI Bank merged with its parent ICICI Ltd in March 2002 to become the second largest commercial bank in the country. It is expected that going forward mergers and acquisition activity shall increase in the Indian banking industry. Foreign Banks The foreign banks network in India comprises of 36 foreign banks (with over 200 branches) and 26 foreign bank representative offices in India. During financial year 2002, foreign banks had a share of 5.4 percent of total bank deposits, 7 percent of total bank loans and 0.3 percent of total bank branches. Foreign banks are dominant in the metropolitan areas and only a few have extended their branch networks into other urban centers. Co-operative Banks Co-operative banks cater to the credit needs of specific communities or groups of people in a region and operate in both urban and rural areas. These have been established under the respective State Cooperative Societies Acts, and are controlled administratively by State authorities, though their banking activities come within the purview of RBI. Regional Rural Banks Regional Rural Banks were established under an Act of Parliament with the Central Government, State Governments and various sponsor public sector banks all taking holdings in them to improve credit delivery in rural areas. Financial Institutions There is a two-tier structure of financial institutions in India 15 institutions at the national level (referred to as All India Financial Institutions [AIFI]) and 46 institutions at the State level. The AIFIs comprise term lending institutions, specialized institutions and investment institutions (comprising seven in insurance and one

in asset management). The Government holds a majority stake in these institutions, either directly or through banks and other institutions. The State Level Institutions include 18 State Finance Corporations and 28 State Industrial Development Corporations. Apart from investments in equity, these financial institutions provide project finance, equipment leasing, corporate loans, short-term loans and bill discounting facilities to corporates.

Reforms
The Government has from time to time enacted legislations to deal with specific issues pertaining to the Indian banking and finance industry. The most notable amongst these is the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SRFAESI). SRFAESI provides a legal framework for securitisation, asset reconstruction companies and strengthening of creditors rights and is therefore an important structural development for the Indian banking system. Recently introduced, it is expected to improve the propensity of defaulters to settle their outstanding dues. Money Supply & Banking Gold reserves as on February 13, 2004 were US$4.29bn (Rs194.3bn) and special drawing rights (SDRs) were US$2mn (Rs110mn). Money supply (M3), expanded 13.7% year on year (yoy) as on February 6, 2004 as against a 16.5% yoy increase in previous year. Growth in M3 since March has been 12.7%. Money supply as on February 6, 2004 stood at Rs19444bn. Net RBI credit to Government has registered a sharp 63.7% yoy decline during the current year and stood at Rs401.5bn as on February 13, 2004. Bank Credit outstanding as on February 6, 2004 stood at Rs8061.8bn, 14.1% yoy lower than a year ago. The Reserve Bank of India in the Mid Term Monetary and Credit Policy announced on November 3, 2003 kept the Bank rate and CRR unchanged at 6% and 4.5%, respectively. WPI Inflation has been inching up since August and stood at 5.91% for the week ended February 7, 2004. Insurance Sector The insurance industry in India was traditionally a domain of the Government insurance behemoths such as Life Insurance Corporation (LIC) in life insurance, General Insurance Corporation (GIC) and its four subsidiaries in the non-life insurance segment, along with Export Credit and Guarantee Corporation in general insurance. However, in August 2000, the insurance sector was opened to private participation and since then, 12 new life insurance and 8 new general insurance companies have entered the market as joint ventures with major global insurance companies. The LIC dominates the life insurance sector with a life insurance fund of over Rs 2,000 billion and market share of 92 percent.. The Insurance Regulatory and Development Authority (IRDA), established under an act of Parliament regulates the insurance and reinsurance business in India.

Type of Economy
1

India stands as a vibrant and diverse country whose economy is increasingly integrating with the world economy. The sweeping economic reforms in the last decade have had far reaching consequences. The business environment in the country is considered conducive for achieving high level of sustainable growth. To begin with, when India regained its independence in 1947, it encouraged selfsufficiency. This was to build up Indias industry and diminish its dependence on foreign trade. Economic growth was inadequate until the Government lessened state control on the economy during the 1970s. The Government was still in control over certain industries in the early 1990s, and economic growth was achieved with the help of loans by foreign countries till 1991. But this was also the same time as that of the Gulf War, which dealt a severe economic blow to India with a spurt in oil prices. Post the economic reforms in 1991, the spirit of economic freedom revived bringing sweeping changes in its wake. The ambitious economic reforms aimed at decontrolling the economy and stimulating foreign investment has moved India firmly into the front ranks of the rapidly growing Asia Pacific region and unleashed the latent strengths of a complex and rapidly changing nation. Presently, India is one of the key emerging markets in the world. The countrys skilled managerial and technical manpower match the best available in the world and a middle class whose size rivals the population of the USA or the European Union, provide India with a distinct cutting edge in global competition. GE Capital terms it unique, PepsiCo finds it one of the fastest growing and Motorola is sure it will turn into a major sourcing center. Indian operations have occupied center stage in these giants global networks.

General Economic Trends

Economic Indicators According to data released by the Central Statistical Organization, (CSO) GDP at factor cost at constant 1993-94 prices grew at 4.3 percent in 2002-03, as against 5.6 percent in 2001-02. Failure of the crucial northeast monsoon rains in 2002 caused unprecedented drought conditions in the country, and a 12.5 percent decline in agricultural production over 2001-02. This combined with sluggish global economic conditions and regional problems such as the Iraq invasion and the SARS crisis, impacted economic growth in 2002-03. The current year 2003 has brought abovenormal rains, prospects of a bumper crop harvest, and expectations of real GDP growth of 6.5 percent in 2003-04. As per CSO estimates released recently, during the first quarter of 2003-04, the GDP at factor cost, 1993-94 prices is estimated to have grown by 5.7 percent on a quarter-on-quarter basis, indicating that the expected economic recovery is underway.

The Index of Industrial Production (IIP), which is computed on a monthly basis with 1993-94 as the base year, grew by 5.8 percent on an average during 2002-03 as against 2.6 percent during 2001-02. In November 2003, Index of Industrial Production grew by 7.4%, the highest growth recorded in the past 24 months. The countrys foreign-currency assets have been steadily increasing. Foreign currency reserves, excluding gold and SDRs, swelled from US $51 billion at end- March 2002 to US $71.9 billion at end-March 2003, up 41 percent. This has continued in 2003-04. The reserve figure crossed the $100 billion mark in February 2004. The primary drivers of this reserve accretion have been the countrys burgeoning services exports, which have created a current account surplus, as well as strong capital inflows comprising foreign direct investment (FDI), foreign institutional investment and portfolio investments and nonresident Indian deposits.

Growth in foreign-exchange reserves has facilitated a further relaxation of foreign exchange restrictions and a gradual move towards greater capital account convertibility. The healthy foreign exchange reserves position, strong capital inflows and significant growth in exports have led to a consistently appreciating Rupee. The Rs / US $ exchange rate, which stood at 48.37 as at end-March 2002 and increased to 48.86 in June 2002 has been declining thereafter. As at end-March 2003, the exchange rate was 47.55, and in October 2003, it was ruling at 45.35. The rupee further strengthen its position and the exchange rate was 44.66 as of March 2004.

Facilitated by low inflation and easy liquidity conditions on the monetary front, interest rates continued to remain soft during 2002-03. The RBI reduced the benchmark Bank Rate by 25 basis points to 6.25 percent in October 2002 and by another 25 basis points to 6 percent in May 2003. With this, the Bank Rate has been reduced by 500 basis points in the last five years, and it is at its lowest level since 1973. Additionally, the Cash Reserve Ratio was reduced by 50 basis points to 5 percent from 1 June 2002, by 25 basis points to 4.75 percent from 16 November 2002, and yet again by 25 basis points to 4.5 percent from 14 June 2003. However, banks have not shown similar aggression in cutting their prime lending rates (PLRs), which have been reduced from 11 percent to 12 percent to 10.75 percent to 11.50 percent during 2002-03. Further, it is to be noted that there is immense competition among banks for good quality credit and deals are typically clinched at sub-PLR rates.

Economic affairs (facts & expected) for the year 2004-05

Indian economy is expected to grow by 8.1% in the current fiscal year on the back of a double-digit growth in agriculture. Buoyed by strong revenue collections from companies amid a rapidly expanding economy, the Government has revised its FY04 fiscal deficit target to 4.8% from an earlier estimate of 5.6%. The countrys foreign exchange reserves stood at US$107.51bn as on February 13, 2004. Net FII investment for the month of January 2004 stood at US$ 697.5mn. FIIs have invested Rs59 bn (upto Feb 24) in the Indian equity markets since the beginning of the year. MFs were net buyers for the month of January 2004 at Rs 9.4bn. Exports growth has slowed down to 13.3% to US$ 42.5bn in the first nine months of 2003-04 (against 17.9% last year), while imports have risen by 24.7% yoy to US$ 55.2 bn during the period. GDP, Agriculture and Industry The Central Government expects GDP to grow by 8.1% in the current fiscal year, on the back of the best monsoon in a decade. In FY04, the agriculture sector is estimated to grow by 9.1%. On the back of a booming economy and rising consumer demand, the manufacturing sector is expected to register a growth of 7.1%. The services sector, which contributes over 50% to the GDP, is likely to grow by 8.4% in FY04. As per the

revised estimates of RBI, FY04 GDP is expected to grow by 7-7.5% in the current fiscal. Industry is expected to grow at 6.1% and Services by 8.3% as per CMIE estimates. Agriculture sector is expected to grow robustly by 10.7% in FY04 as against a decline of 5.2% in FY03. The overall agricultural production is expected to grow at 13.8% in 200304. Foodgrains production is likely to grow by 14.2% and non-foodgrains by 13.1% in 2003-04.

Industrial Growth India's industrial production grew by 6.2% during Apr-Nov 2003, as per the quick estimates of Index of Industrial Production (IIP). Cumulative growths during the Apr-Nov 2003 over 2002 in mining, manufacturing and electricity sectors were 3.9%, 6.8% and 3.1% respectively.

In November 2003, Index of Industrial Production grew by 7.4%, the highest growth recorded in the past 24 months. During Apr-Nov 2003, IIP grew by 6.2%. The growth was witnessed among most of the product groups. The fastest growing groups were paper products, transport equipment, beverages and tobacco, basic metals and wood products. Consumer Goods have registered a good growth in the first eight months of current fiscal, driven by 8.2% growth in non-durables. Durables, which grew in double digit from FY00 to FY02, declined in FY03 and have registered a 7.6% yoy growth in the

first eight months of FY04. Basic goods grew by 4.5% yoy in Apr-Nov 2003-04. Capital goods continued its high growth trajectory and registered an 8.8% growth during AprNov 2003. Intermediaries recorded a growth of 5.4% in the first eight months of FY04.

Energy Coal production in November and December 2003 recorded an impressive growth of 7.4% and 6.3% respectively. In the budget for 2004-05, coal production is projected at 404.2mn ton. During Q3 FY04, crude oil production was up by 2.6%. Cumulative production during the first nine months of FY04 was at 24.85mn ton. Hydel power generation registered 11.5% increase during Apr-Jan 2004. Cumulative power generation growth was lower at 3.3% during Apr-Jan 2004 as against 4.2% increase recorded in the corresponding period last year. Foreign Trade Exports during Apr-Dec 2003 are valued at US$ 42.5bn compared to US$ 37.5bn, a growth of 13.3% as against a growth of 17.9% registered in the same period last year. Imports during the first nine months of 2003 are valued at US$55.2bn representing an increase of 24.7% yoy as against 14.7% yoy in the corresponding period last year.

Capital Market
FIIs remained net buyers in the equity market for the month of January,2004 with inflows to the tune of Rs31.8bn. Net FII inflow upto February 24, 2004 has remained positive at Rs27.3bn (US$599mn).

Source: www.indiainfoline.com FII investment trend in the equity market in the current year is given in the table below: FII investment in Equity

Mutual Funds were net buyers in Indian equities in January 2004 at Rs9.4bn. However, in he first 23 days of February mutual funds were net sellers at Rs5.3bn.

Source: www.indiainfoline.com, MF investment trend in the equity market in the current year is given in the table below: Mutual Fund investment in Equity

Primary market
Total floatations on the Primary market were at Rs252bn during the first ten months of FY04. Among these, total amounts raised from domestic primary capital markets were at Rs.231.9bn. Funds raised through private placements were at Rs185bn in Apr-Jan 04

as against Rs273bn during the same period last year. IPOs contributed to the extent of Rs42.3bn as against Rs54.8bn in Apr-Jan 03. Initial Public Offers Primary market being lackluster for the past few years is once again buzzing with a lot of action. Following is the list of the public issues, which have already hit the market and which will be available in the next couple of months.

The Market
One of the important factors responsible for the strong interest of foreign investors in India is the size and potential for growth of the domestic market. Sweeping sociological changes have been brought about by rapid urbanization, explosion of electronic media, education and increasing domestic and foreign travel and changing nature and composition of expenditure, with growing emphasis on brands, product quality, features and convenience. Consumer Markets The vast and growing Indian market is a reality. The increase in number of households headed by salary earners, professionals and businesspersons and the emergence of a thriving consumer finance business are expected to continue

the consumerism boom. Expenditure on consumer durables such as washing machines, refrigerators and color televisions has shown an impressive growth since the 1990s. India offers one of the largest markets in the world for manufactured items of mass consumption such as clothing, footwear, detergents and cooking oil. Rural Markets Rural areas, where nearly 72 percent of Indians live, have witnessed rapid market growth in recent times, driven largely by agricultural growth, income redistribution, and inroads made by audio-visual media. The rural share of the market for durable goods has grown steadily over the last few years, and in items such as bicycles, mechanical wristwatches, radio / transistors etc the share of the rural market has been in excess of 75 percent. Marketing Infrastructure India has an extensive sales and distribution network. It is estimated that there are over one million market intermediaries-wholesalers, stockists, transporters and retailers that are involved in the distribution of a variety of consumer goods. Marketers use this network to access nearly 3,800 cities and towns and over half a million villages. While urban areas have a range of distribution outlets from large supermarkets and superstores to the smaller neighborhood retail stores, almost every village in India is catered to by small shops that are part of the local supply network. Consumer Finance Extensive banking networks of the country support widespread sales and distribution network. Consumer financing is an accepted form of consumer goods marketing in India. The presence of several non-banking finance companies engaged in leasing and hire-purchase activities have also given a fillip to consumer good sales. The credit card market too has shown tremendous growth in recent years. Industrial Market An average annual growth rate of 5.3 percent in industrial production over the period 1996-97 to 2002-03 has stimulated rapid growth in the market for plant and machinery, chemicals, plastics, instruments, components, metal products and transport equipments. Over this period, capital goods production grew at an average of 6.5 percent annually, while basic and intermediate goods grew at an average of 4 percent and 5.9 percent respectively. Production of consumer goods grew at an average of 5.8 percent during the same period. During 2002-03, capital goods and consumer goods grew the fastest, at average rates of 10.5 percent and 7.1 percent respectively.

Currency
1

Indias monetary unit is the Indian rupee (Rs). Under the Constitution of India, only the Central Government may legislate matters relating to currency and coinage. The RBI is the sole authority empowered to issue currency in India. RBI notes are fully backed by approved security, including bullion, foreign securities, rupee coins and rupee securities of the Indian government. The Indian rupee is divided into 100 paise. The denomination of currency notes and coins used are Rs 1,000, Rs 500, Rs 100, Rs 50, Rs 20, Rs 10, Rs 5, Rs 2 and Re 1.

Leading Industries
India has built a diverse industrial sector, which is currently one of the largest in the developing world. The major industries are automobiles and auto ancillaries, iron and steel, aluminum, textiles and garments, pharmaceuticals, chemicals and petrochemicals, oil and gas and other hydrocarbons, electricity, telecommunications, information technology and business processing outsourcing services, healthcare and biotechnology. The country is fast emerging as a leading sourcing base for global players in auto and auto ancillaries, pharmaceuticals, IT and business process outsourcing services, research and development services and engineering services. Since the commencement of economic reforms in 1991, successive Governments have implemented strong measures to liberalize the business environment and boost industrial growth. The elimination of licensing requirements for all but six industries has ushered in an era of competition and imparted dynamism to the industry. Substantial reduction in import tariffs on raw materials and intermediate products, coupled with rationalization of excise duties, have eased access to inputs and reduced costs. Forward-looking export-import policies have enhanced the competitiveness of the countrys exports, and created an environment conducive to rapid growth in exports. In order to enable industry to imbibe state-of-the-art technology and global best practices, the Government has been welcoming FDI and foreign collaborations; FDI limits in almost all industries have been progressively liberalized and approval procedures simplified. In addition, public sector enterprise reforms have received a strong fillip during the last three to four years, with the earlier disinvestment process being replaced by definitive privatization through the sale of enterprises to strategic investors to place them on the path of profitability and long-term growth. Lastly, the Government of India and several State Governments are in the process of investing significantly in sprucing up the countrys infrastructure roads, seaports, airports, electricity and telecommunications to enable the country realize its growth potential.

Energy, Chemicals and Utilities

Oil and Natural Gas India is the sixth largest consumer of primary energy in the world. Over the years,

the countrys primary energy consumption has grown at a rate faster than that of the world. The principal driver of this growth has been growth of the Indian economy. Crude oil import requirement is expected to reach 190 million metric tonnes perannum by 2011-12. The requirement of additional refining capacity is pegged at 40 million tonnes per annum by the year 2010 to meet domestic consumption. Further, extensive oil and gas distribution infrastructure such as cross country pipelines, port terminals, and strategic reserves are also required to be developed to meet with the projected energy requirements. On supply side, the scenario seems encouraging with new oil and gas discoveries by companies such as Cairn and Reliance. The country is expected to witness many more discoveries in the near future with the opening of new blocks in deep water, shallow offshore and onland areas through the National Exploration Licensing Policy (NELP) of the Government. Under NELP, the Government has completely revamped its policy of awarding blocks and has come out with attractive terms for private investors. The Government has also delivered on its commitment to award blocks and sign contracts in a speedy manner. Discoveries particularly in the KrishnaGodavari basin have been amongst the largest made anywhere in the world during the year 2002. Power The countrys power industry essentially comprises utilities owned by Governments both at the Federal and the State levels and those owned by the private sector. Initially, the power sector was under the complete control of power ministries of the State Governments. This control was later extended to the Federal Government. The Federal Government undertakes both generation and distribution activities. Distribution is undertaken through a number of the Government owned generators while transmission activities are carried out through the Power Grid Corporation of India. The involvement of the State Governments in the power industry is through the State Electricity Boards (SEBs). The private sector is comparatively small and operates approximately 11 percent of the countrys total capacity. Tata Power and Reliance Energy are the key players in the private sector. Private companies have a small presence in distribution and operate only in six states. Mining With its abundance of natural resources, to which minerals hold particular importance, India produces 4 fuel minerals, 11 metallic minerals, 52 non-metallic and 22 minor minerals, a total of 89 mineral products. The total value of mineral production was approximately US $11.902 billion in 2001-02, of which the value of minerals other than petroleum and natural gas was around US $6.716 billion. The metallic production is accounted for by iron-ore, copperore, chromate, zinc concentrates, gold, manganese ore, bauxite and lead concentrates. Amongst the nonmetallic minerals, more than 90 percent of the aggregate value is shared by limestone,

magnesite, dolomite, barytes, kaolin, gypsum, apatite and phosphorite, steatite and fluorite. FDI is allowed in the mining sector and most proposals for FDI in the mining sector are eligible for investment without obtaining the Government permission, provided the prescribed ceiling are adhered to.

Technology, Communications and Entertainment

Information Technology The Information Technology (IT) industry in India comprises, software services, manufacture and trading of computers and computer peripherals and IT enabled services (ITES). Indias IT industry is amongst its fastest growing industries and it grew at the rate of 17 percent during 2003, recording revenues of Rs 7.93 billion. In fact, during the period 1999-02, the Indian IT industry recorded a compounded annual growth rate (CAGR) of more than 40 percent, which is approximately double the growth rate of IT industries in many of the developed countries. The key driver for this growth has been the increase in revenues from software services. The share of software services in the overall IT industry in India has been increasing continuously, growing from 42.11 percent in 1995 to more than 75 percent in 2003. The Government has from nascent stage recognized IT as an important vehicle in the development of the country. According to a World Bank study, India is the preferred location for software vendors for its quality and cost. In view of the advantages and opportunities that exist in India with respect to the IT industry, many leading IT multinationals have set up operations in India. These include Microsoft, Novell, Oracle, Sun Microsystems, Dell Computers, IBM, Unisys, SAP, Adobe, Cadence, Computer Associates, Motorola, Digital, HP and Texas Instruments. The hardware industry in India has largely catered to the needs of domestic consumers, with marginal exports. The domestic hardware industry has focused attention on producing and developing low-cost computing solutions including personal computers. Major players in this sector include foreign players like IBM, Dell, HP / Compaq, Acer, Apple etc and Indian players such as Zenith and HCL. Given the availability of relatively cheap and high quality human resources, the second largest English speaking population in the world and its location in a convenient time zone, India offers excellent opportunities for outsourcing. In fact the Indian ITES sector is dominated by the captive back office operations of large multinational companies. The following facts emphasize the ITES outsourcing opportunities that exist in India:

According to a recent Merrill Lynch survey, 46 percent of the US Fortune 500 companies have expressed the view that they will look to India for outsourcing. According to NASSCOM-McKinsey report, the revenues from IT enabled services have increased by 70 percent to Rs 4.1 billion in 2000-01 as compared to Rs 2.4 billion in 1999-00, providing employment to over 70,000 people. According to International management consultancy major, Jones Lang LaSalle, India has the lowest average wage rates of US $33.75 per week in the call center industry compared to the US $400 per week in USA and US $470 per week in Australia. Leading companies such as GE, American Express, HSBC, Royal and Sun Alliance, Le Meridian, Air Infotech, British Airways and iDLX have established shared services centers in India.

The Government has resolved to make India a global IT power and a front-runner in the age of Information Revolution. In keeping with its commitment to governance, it is expected that operations such as provident fund, pension, pay and accounts offices, passports, income-tax, customs and central excise shall be fully computerized. Telecommunications The telecom industry is one of Indias fastest growing industries and comprises fixed line and mobile telephony. In 2002-03, total number of new telephone connections was 8.94 million, of which 2.68 million were basic services connections (including wireless in local loop mobile) and 6.26 million were cellular services connections. Fixed line telephony comprises three distinct market segments, local i.e. basic services, national long distance (NLD) and international long distance (ILD). Historically, the basic services sector was the monopoly of the state owned/ controlled operators such as Bharat Sanchar Nigam Limited (BSNL), Mahanagar Telephone Nigam Limited (MTNL) and Videsh Sanchar Nigam Limited (VSNL). However, subsequent to the Government introducing liberalization policies, the segment is now equally represented by private players such as Reliance Telecom, Bharti Telenet and Tata Teleservices. Services can be provided by telecom operators by building and utilizing their own network facilities or using built up networks of infrastructure providers, a separate license category. NLD services have traditionally been provided by BSNL and MTNL. Reliance, VSNL and Bharti are the new entrants in the sector. Historically, ILD was the exclusive domain of the partially state owned carrier, VSNL. However, the Government terminated VSNLs monopoly over ILD services with effect from 31 March 2002. . The Indian mobile telephony segment, presently is experiencing robust growth which is witnessed by a manifold increase in subscriber base, penetration into rural markets, etc. The operators in this segment operate mainly on the GSM and CDMA platforms. The key players operating on the GSM platform include Bharti,

Hutchison, BSNL, Idea Cellular and BPL Mobile while Reliance and Tatas dominate the CDMA market. A very recent development in the Indian telecom industry is the unified license regime proposed by TRAI. In its proposal, TRAI has recommended the Government introduce the unified license that permits free, unrestricted entry to all segments of the Indian telecom industry. This proposal has been cleared by the Group of Ministers and is expected to be finalized in the near future. Entertainment The Indian entertainment industry has outperformed the Indian economy and is one of the fastest growing sectors in India. The current size of the industry as a whole is estimated at Rs 166 billion and is expected to grow at a CAGR of 20 percent to Rs 419 billion by 2007. Currently, there are 35 companies in the industry that are listed on the Indian stock exchanges. The Indian entertainment industry can be broadly categorized into films, television, television software, music, radio and live entertainment and event management. Films. The immense popularity of films as a source of entertainment and vast cultural diversity of the Indian population has been instrumental in making India the largest producer of films in the world. This segment is poised to grow at an impressive rate in the future, driven primarily by expansion in exhibition infrastructure and development of multiplexes, availability of finance from institutional sources, exports of film and animation software, etc. It is expected that revenues of this sector will touch Rs 93 billion by 2007 at an approximate CAGR of 15 percent. Television. There has been a rapid growth in television penetration and the number of television channels with the entry of private television channels in the early 1990s. Currently, television reaches 40 percent of the total population, 78.7 percent of the urban population and 39.8 percent of the rural population, according to the findings of the National Readership Survey 2001 (NRS 2001). From a near zero base in the early 1990s, the number of cable television households have grown at a scorching pace to a current estimate of 41.5 million. Today, India is the third largest country after USA and China in terms of number of cable viewers. Further, it is expected that the industry would grow to a size of approximately Rs 70 billion by 2005. In order to bring transparency in the cable television industry, the Government has introduced Conditional Access System (CAS), which essentially stipulates that all pay channels shall be routed through an addressable system. Direct to home (DTH) television is expected to make a beginning in India soon and more players are expected to enter this segment shortly. DTH has the potential to penetrate remote areas where television viewing was not possible due to absence of last mile access.

Television software. Television software has been witnessing growth since 1985 when the national channel Doordarshan decided to go for commissioned and sponsored programmes. The subsequent meteoric rise in the number of private channels, especially regional channels, resulted in a burgeoning demand for television content. Music. The Indian music industry is characterized by dominance of Hindi film music, capital intensiveness and generation preferences. The current industry size is estimated to be Rs 10.4 billion in revenues with future growth potential of Rs 16.4 billion by 2007. This industry is currently undergoing a phase of gradual reinvention with increased focus on development of non-Hindi film music segment, market and product expansion and organized music retailing. Radio. The radio industry in India can be segmented into Medium Wave (MW), Short Wave (SW) and Frequency Module (FM) based on the frequency of the stations. In its entirety, radio broadcasting reaches to 99 percent of the Indian population and is also the most cost effective mass medium. Despite advancement in television broadcasting, radio continues to be an important and in some places, the sole source of entertainment. Recently, the radio segment has witnessed a jump in listener ship with the launch of new FM radio stations in the metros pursuant to the privatization of FM radio. Radio currently accounts for approximately 1.9 percent of the total ad spend and this share is expected to grow further. The market size is projected to grow to Rs 6.2 billion by 2007 from the existing size of about Rs 1.6 billion Live entertainment and event management . Event management in India, which was born somewhere in the mid-1980s, has grown into a highly professional and tech-savvy industry over the years. In 2001, the industry managed over 1,000 events, including 22 international events. According to industry sources, while the industry as a whole is expected to grow at approximately 50 percent per annum, the live entertainment sector is expected to witness growth in the region of 25 percent to 30 percent per annum.

Financial Services
Indias financial services sector is in a process of rapid transformation and reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The financial services industry can be broadly divided into banking, capital markets (asset management / mutual funds and portfolio investors), insurance companies and non-banking financial intermediaries / institutions. Non Banking Financial Institutions Non-Bank Finance Companies (NBFCs) NBFCs provide loans and hire purchase

finance, mostly for retail assets. NBFCs are required to be registered with RBI, which has extensive supervisory and regulatory powers over NBFCs. Housing Finance Companies (HFCs) As the name suggests, the primary objective of these companies is to extend finance to the public for housing purposes. The sector was earlier dominated by Housing Development Financial Corporation (HDFC), which had a 66 percent share in 1998. However, large banks have rapidly gained market share in the last two years reducing HDFCs share to an estimated 42 percent in 2002. Credit Rating Agencies The following entities rate corporate debt, including debentures and commercial paper: CRISIL, Indias first credit rating agency, ICRA; and CARE. They also rate the credit risk of companies; a factor often used by nationalized banks in evaluating loan applications. Other aspects of the financial services industry Key Stock Exchanges India has 23 recognized stock exchanges, which operate under government-approved rules, bylaws and regulations. These exchanges constitute an organized market for securities issued by the Central and State governments, public sector companies and public limited companies. India has modernized the operations of its stock exchanges through the introduction of screen-based trading. The Stock Exchange, Mumbai (BSE) (earlier known as Bombay Stock Exchange) was hitherto Indias premier stock exchange. However, the National Stock Exchange (NSE), which commenced operations in 1994, and which provides nation-wide trading facilities to investors through an established nationwide information technology network, now executes a higher proportion of trades transacted on stock exchanges.

Retail Industry
Organized retailing is a decade old industry in India with an overall market share of 2 percent. Currently, the estimated total sales of organized retailers are Rs.175 billion. The sector has witnessed robust growth during the last two years which could mainly be attributed to the establishment of international quality formats modified to suit the Indian purchase behavior; entry of several domestic and international players; development of retail-specific properties; improvement in retail processes and turnaround in operations of some existing retailers.This growth in organized retail is being driven by a number of structural, social, and demographic and macroeconomic factors as well. The increasing globalization of the Indian economy has led to growing exposure to foreign markets resulting in increasing demand for international shopping experience in India. The Indian retailing industry has been witnessing some exciting developments. Some of such key developments are as follows: Emergence of Region-Specific Formats

Emergence of Discount Formats Entry of International Players Development of malls Improvement in Retail Operating Efficiencies Improving Profitability and Retail Revenues

Major retail players having prominence in the organized retail market include Shoppers Stop Limited, Pantaloon Retail (India) Limited, Trent Limited etc. The retail industry is poised for expansive growth over the next few years. The industry is in an investment mode and requires substantial funds for expansion and growth.

Health Sciences
The health sciences industry comprises of the following segments: Drugs and Pharmaceuticals; Biotechnology; Heathcare; Information Management companies; Pure Research and Development (R&D) companies; Contract Research Organisations; and Medical equipment suppliers.

Drugs and Pharmaceuticals In terms of volume, India is the fifth largest pharma market in the world. However, owing to the relatively lower prices of drugs in India, it is ranked only thirteenth in value terms. Pharma exports have recorded a CAGR of 21 percent during the last five years. In addition, over the next five years, exports are expected to grow at a CAGR of 23 percent. India being a signatory to the GATT is committed to honor global product patents from 2005. Hence, it is likely that multinational pharma companies may introduce their latest products into the Indian market thereafter. Going forward, Indian pharma companies are well positioned to exploit the US $80 billion global generics market created by several blockbuster drugs going off patent in the next five years. The domestic pharma market is expected to grow at a CAGR of 9.7 percent over the next five years owing to an increase in population, higher purchasing power, pruning of the number of drugs under price control, and introduction of new drugs by multinational companies. The Indian pharma industry consists of both multinational as well as domestic players. Major MNCs present in this sector include, Glaxo Smithkline, Pfizer, Novartis, Aventis and Merck. Major Indian companies present in this sector include Cipla, Ranbaxy, Nicholas Piramal, Sun Pharma, Dr Reddys, Wokhardt, Torrent Pharma and Lupin. The primary strengths of Indian companies are a large pool of highly qualiied and experienced scientists with immense knowledge of chemistry, excellent 2

manufacturing facilities recognized by the US FDA and other international counterparts. Increasingly, global pharma companies are regarding India as a manufacturing base. India is also an attractive market for contract research organisations, on account of its cost effective capabilities. Biotechnology The Indian biotech industry comprises of human and animal biotech, agriculture biotech (including seeds), industrial biotech and bioinformatics. During the last five years, activity in modern biotechnology such as genetic engineering, immunological techniques, cell culture methods, hybridoma technology has intensified. The Government has been increasing the budgetary outlays for biotechnology from just Rs 404 million in 1987-88 to Rs 2,356 million in 2002-03. Several states such as Maharashtra, Andhra Pradesh, Tamil Nadu, Karnataka, Delhi and Kerala have taken initiatives to encourage entrepreneurs to set up biotech industries. Some of the key initiatives include announcement of separate biotech policies, setting up of biotech parks, and setting up of expert task forces for guidance on policy issues. India is taking steps to rationalize its policies to be in conformity with provisions of the WTO. Agricultural biotechnology promises to be an important business segment. There are sizeable opportunities for foreign bioscience companies seeking research and business alliances with Indian companies. India offers a huge market for agribiotech products as the countrys economy is substantially dependent on agriculture. India is expected to gain leadership in bioinformatics owing to its large resource pool of molecular biologists, statisticians and software programmers. The global bioinformatics market is around US $2 billion, which is expected to grow to US $60 billion by 2005. According to experts, India is well placed to garner a 5 percent share of this global market. There is an increasing trend to outsource low cost R&D functions by MNCs. This represents a tremendous opportunity for Indian companies to carry out contract research for overseas companies. The current global spend on outsourced R&D is an estimated US $7 billion, which is expected to grow at 30 percent per annum over the next five years Healthcare The healthcare industry includes medical care providers physicians, specialist clinics, nursing homes, hospitals, medical diagnostic centers, and pathology laboratories.The size of Indias healthcare industry is currently an estimated Rs 4,860 billion,which is roughly 5.2 percent of the countrys GDP. Demand for healthcare is expected to see explosive growth with rise in life-style diseases such as cardio-vascular disorders and cancer. According to the National Health Policy 2002, an increased fund allocation for the industry is envisaged in the next few years Government spending is expected to go up to 2 percent of the GDP by 2005 and 6 percent of the GDP by 2010.

Information Management companies Information Management companies are information driven organizations that provide non-technical support to organizations in the healthcare industry. Typically, their services include providing customer companies with information on the efficacy of marketing initiatives undertaken, efficacy of medical facility, administration and deliveries, etc. Currently, MNCs such as IMH and Battaerd Mansley have a presence in the information management segment in India. As the healthcare industry grows, one could expect tremendous demand for such niche services.

Infrastructure
Roads India has an extensive road network of more than 3.3 million kilometers making it one of the largest in the world. Roads occupy an eminent position in transportation as they carry an estimated 70 percent of freight and 85 percent of passenger traffic in the country. Traffic in road is growing at 7 to 10 percent annually while vehicle population has been growing, during the past few years, at around 12 percent annually. The Government has formulated several policy initiatives to attract private investment. Till date, 34 projects have been taken up by the private sector and an investment of Rs 60 billion has been committed by them. 18 such projects have been completed and toll is being collected by them. Ports India has about 13 major ports and 184 operable minor and intermediate ports (of which 139 are operable) along the 5,560 kilometers long Indian coastline. Major ports handled around 75 percent of the countrys port traffic a total traffic of 313 million tonnes during the year 2002-03. With the entry of private sector into port operations, the power to fix and revise tariffs has been entrusted to an independent authority, the Tariff Authority for Major Ports. Foreign equity upto 100 percent is permitted in construction and maintenance of ports and harbors and in projects providing support services to water transport, such as operation and maintenance of piers, loading and discharging of vehicles without requirement of an approval. Civil Aviation India is one of the fastest growing markets in the world in both passenger and cargo traffic. India has world-class international and domestic airports (shared

with defense). Currently there are 7 scheduled private operators and 22 non-scheduled operators operating these services. Private operators cater to 52.6 percent of the domestic air traffic. With growing tourism & commercial activity India is sure to see a boom in civil aviation.

Investment Climate and Foreign Trade

Foreign Investment Framework The Foreign Direct Investment (FDI) regime has been progressively liberalized during the course of the 1990s (particularly after 1996). Most restrictions on foreign investment have been removed and the procedures have been simplified. With very limited exceptions, foreigners can invest directly in India, either wholly or as a joint venture. Today, there are very few industries wherein foreign investment is prohibited. It is allowed in virtually all sectors, subject to Government permission in certain cases. Moreover, investment ceilings, which are applicable in certain cases, are gradually being removed. Foreign Investment Policy Indias economic policies are designed to attract significant capital inflows into India on a sustained basis and to encourage technology collaborations between Indian and foreign entities. Policy initiatives taken over the last few years have resulted in inflows of foreign investment in diverse sectors of the economy. India welcomes FDI in virtually every sector, except those of strategic concern such as defense (opened up recently to a limited extent), railway transport and atomic energy and where the existing and notified sectoral policy does not permit FDI beyond a certain ceiling. Economic Policies and Incentives for Foreign Investment Following are the select notable features of the foreign investment policies and incentives: No Government approval required for FDI in virtually all the sectors / activities, except a small negative list notified by the Government. Decisions on all foreign investment proposals are usually taken within 30 days of application. Free repatriation of capital investment and profits thereon is permitted, provided the original investment was made in convertible foreign exchange. Indian capital markets are open to foreign institutional investors. Indian companies are permitted to raise funds from international capital markets. Special investment and tax incentives are given for exports and sectors such

as power, electronics, software and food processing. Single window clearance facilities and investor escort services have been provided in various states to simplify the approval process for new ventures.

Foreign Direct Investment In pursuance of the Governments commitment for implementation of the economic reforms and with a view to further unshackle Indian industry from the rigors of approvals and controls, the Government of India permits FDI on an automatic basis, except with respect to a small negative list. Country Wise Share in Approvals The diagram below shows the country-wise break up of FDI approvals during the period April 1991 to December 2002. United States and Mauritius have contributed the maximum to the countrys aggregate FDI inflows followed by United Kingdom, Japan and South Korea.

Foreign Portfolio Investment Besides direct investment in India, nonresidents can also make portfolio investments. Foreign institutional investors (FIIs) are allowed to invest in the primary and secondary capital markets in India under the Portfolio Investment 3

Scheme (PIS). FIIs must register themselves with SEBI and comply with the exchange control regulations of the RBI. Foreign pension funds, mutual funds, investment trusts, asset management companies, nominee companies and incorporated / institutional portfolio managers or their power of attorney holders are allowed to invest in India as FIIs. They may invest in securities traded in both the primary and secondary markets. These securities include shares, debentures, warrants, and units of mutual funds, Government securities and derivative instruments. No permissions are required from the RBI so long as the FIIs purchase and sell on a recognized Indian stock exchange. The FIIs can invest either their own proprietary funds or the funds of their clients. Investment in Export Trading Companies Trading is permitted under automatic route with FDI up to 51 percent provided it is primarily export activities, and the undertaking is an export house / trading house / super trading house / star trading house. In addition to the Automatic Route, 100 percent FDI is permitted under the Government Route for trading activities involving: Exports; Bulk imports with ex-port / ex-bonded warehouse sales; Cash and carry wholesale trading; and Other import of goods or services provided at least 75 percent 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.

Foreign Investment Promotion Board The FIPB is a specially empowered board chaired by the Secretary, MoF, set up specifically for expediting the approval process for foreign investment proposals. The FIPB has flexibility to examine all proposals in totality, free from predetermined parameters or procedures. Its approach is liberal for all sectors and all types of proposals. While applications are subject to stages of negotiations, it is important for the investors to convince the FIPB on the benefits to the Indian economy from the project. Some of the other parameters that the FIPB considers while evaluating proposals are the levels of investment proposed, the technology to be inducted, the export potential or the import substitution factors and employment potential.

Foreign Exchange Controls

Foreign Exchange Policy Indias journey on the exchange control front is one well traveled. Since 1991, the countrys foreign exchange reserves have surged from US $2 billion to

approximately US$ 100 billion in March 2004. This achievement has been well supported by an increasingly liberalized exchange control policy of the Government. The Foreign Exchange Management Act, 1999 (FEMA) virtually provides for full convertibility on capital and current account transactions for nonresidents. The key changes under FEMA relate to the removal of rigid and stringent controls over transactions with nonresidents. With the introduction of FEMA, the objective of the Government has shifted from the conservation of foreign exchange to promoting an orderly development and maintenance of the foreign exchange market in India. External Commercial Borrowings (ECB) Debts raised in foreign currency fall within the purview of the definition of ECBs, and are regulated by the MoF and the RBI. The guidelines issued by the MoF have prescribed various schemes through the use of which corporates and institutions may raise ECBs. Indian corporates are permitted by the Central Government to raise ECBs for the purposes of expanding their existing capacity and for infusing fresh investments into their venture. In general, foreign loans raised by Indian corporates are subject to regulations on inter-alia period of maturity of loan, interest rate and end use restrictions, depending on the quantum of the loan. .

Economic Laws and Regulations

Economic laws and regulations include Indian Contract Act, 1872, intellectual property rights protection, labor laws, anti trust regulations, consumer protection act, arbitration and company law Indian Contract Act, 1872 The Indian law of contract is based on common law principles of contract, and is codified as the Indian Contract Act in 1872 (ICA). Through subsequent amendments, the provisions concerning certain specific forms of contract including contract of partnership, contract of carriage and contract for sale of goods were removed from the ICA and enacted into separate legislation. Today, the Act includes the following general principles of contract: the formation of a contract; competence of contracting parties; validity of a contract; breach of contract; and damages.

Intellectual Property Rights Protection The term Intellectual Property, in the international legal parlance covers patents, industrial designs, copyrights, trademarks, know-how and confidential information. The laws relating to Intellectual Property in India are still undergoing changes and are in the process of being harmonized with corresponding laws in developed countries. As a signatory to GATT and TRIPS agreements in the capacity of a member of WTO, India is required to lay down minimum norms and standards with respect to following areas of intellectual property: Copyrights and other related rights Trademarks Patents

Copyright Act, 1957 Indias copyright law, laid down in the Indian Copyright Act, 1957 as amended by Copyright (Amendment) Act, 1999, fully reflects the Berne Convention on Copyrights, to which India is a party. India is also an active member of the World Intellectual Property Organization (WIPO), Geneva. The law of copyright in India has been amended from time to time to keep pace with changing requirements. The amendments made to the copyright law from time to time, have ushered in comprehensive changes and brought the copyright law in line with the new developments in satellite broadcasting, computer software and digital technology. Trademarks A Trademark may consist of a word or invented word, signature, device, letter, numeral, brand, heading, label, name written in a particular style, the shape of goods other than those for which a mark is proposed, or any combination thereof of one undertaking from that of other undertakings. Such distinguishing marks constitute matter subject to protection under the provisions of the Trade Related Intellectual Property Rights (TRIPS) Agreement. The Trademarks Act also provides for the procedure of assignment and transmission of trademarks. Patents The Indian Patents Act, 1970 provides for the grant, revocation, registration, license, assignment and infringement of patents in India. A patent is a monopoly right granted to a person who has invented a new and useful article or an improvement of an existing article or a new process of making an article. Following is a list containing the concept of patent and its essential ingredients. Novelty; 3

 Inventiveness; and Industrial Applications Any infringement of patent is punishable under the terms of this Act. To harmonize the law pertaining to patents and other form of intellectual property and to fulfill its obligations under the WTO agreement, India has become an active party to the International Convention for the Protection of Industrial Property (Paris Convention), GATT and TRIPS agreements. Labor Laws India is a member of the International Labor Organization and complies with conventions that it has ratified. It has enacted comprehensive legislation to provide a good working environment for labor and to protect their interests. The Government continuously reviews various labor laws to keep them in line with changing circumstances. These laws address various issues such as resolution of industrial disputes, working conditions, labor compensation and insurance. The various labor laws applicable to employers in India have been outlined. Employees Provident Fund and Miscellaneous Provisions Act, 1952 The Employees Provident Fund and Miscellaneous Provisions Act, 1952 (EPFMPA) seeks to provide financial security for employees in an establishment by providing a system of compulsory savings. The EPFMA provides that the employees contribution shall be at least equal to the contribution payable by the employer in respect of him. However, the employee is entitled to contribute more than such minimum contribution, if he so desires. Industrial Disputes Act, 1947 The Industrial Disputes Act, 1947 (IDA) provides for investigation and settlement of industrial disputes or certain other matters in an industrial establishment relating to lockouts, lay-offs and retrenchment etc. It provides the machinery for conciliation and adjudication of disputes or differences between employees and employers and vice versa, between workman and workman and between employer and employer. The IDA applies to any Industrial establishments or undertaking, which means an establishment or undertaking in which an industry is carried on. Payment of Bonus Act, 1965 The Payment of Bonus Act, 1965 (PBA) provides for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and for matters connected therewith. The PBA is applicable to factories and establishments employing 20 or more persons on any day during an accounting year. The Government has been empowered to extend its provisions to any other establishments employing ten or more employees.

The PBA is applicable to persons, other than apprentices, employed on a salary or wage not exceeding Rs 3,500 per month, in any industry, to do any skilled or unskilled, manual, supervisory, managerial, or administrative work etc., whether the terms of employment are express or implied. Payment of Gratuity Act, 1972 The Payment of Gratuity Act, 1972 (PGA) provides for a scheme for the payment of gratuity to all employees engaged in factories, mines, oilfields, plantations, ports, railway companies, shops and other establishments employing 10 or more employees in the preceding twelve months. The PGA is applicable to all employees employed on wages to do any skilled, semiskilled, or unskilled, manual, supervisory, technical or clerical work, whether the terms of such employment are express or implied and whether or not such person is employed in a managerial or administrative capacity. Workmens Compensation Act, 1923 The object of the Workmens Compensation Act, 1923 (WCA) is to compensate an employee for any injury suffered during the course of his employment. The WCA is applicable to provide for the payment of compensation by certain classes of employers to their workmen (as defined under the WCA). The Industrial Employment (Standing Orders) Act, 1946 The Industrial Employment (Standing Orders) Act, 1946 (IEA) seeks to require employers in industrial establishments to provide for conditions of employment for employees. The IEA requires the employer to clearly define the conditions of employment to its workers by issuing standing orders / service rules relating to the matters set out in the Schedule of the IEA. The Minimum Wages Act, 1948 The Minimum Wages Act, 1948 (MWA) seeks to determine the minimum rates of wages in certain employments specified in the Schedule of the Act. The MWA applies to any person who is employed for hire or reward to do any work in a scheduled employment and includes an outdoor worker to whom any articles or materials are given for doing some work either at home or at any other premises. The Payment of Wages Act, 1936 The Payment of Wages Act, 1936 (PWA) seeks to regulate the payment of wages to certain classes of employed in an industry. It seeks to ensure that the wages payable to the employees covered under the PWA are disbursed by the employers within the prescribed time limit and that no deductions other than those authorized

by law are made by the employers.

Anti-Trust Regulations
The antitrust laws are designed to preserve the free enterprise of the open marketplace by making illegal certain private conspiracies and combinations formed to minimize competition. Most violations of antitrust laws involve either price fixing (entities conspiring to set fixed market prices / rates) or unfair allocation of customers or markets (entities agreeing to limit their units / areas of trade). In line with global norms and to prevent monopolies from creating restraints on trade or commerce and reducing competition in India, the Government of India has evolved an antitrust regulatory framework that revolves principally around the following legislations: Monopolies and Restrictive Trade Practices Act, 1969 (MRTP Act), which is in the process of being replaced by the Competition Act, 2002 (No. XII of 2003) (Competition Act); Consumer Protection Act, 1986 (CP Act); and Certain provisions under the Companies Act, 1956 These laws are designed to maintain economic liberty and to eliminate any unfair restraints on trade and competition. The following are salient features of each of the above legislations. Monopolies and Restrictive Trade Practices Act, 1969 The Competition Act received the assent of the President of India on 13 January 2003 and was published in the Gazette of India on 14 January 2003. The Act intends to repeal the MRTP Act. However, as of date, except for certain provisions relating to the formation and establishment of the Competition Commission of India (CCI) and selection of the Chairman and members of the CCI, no substantive provision of the Act is in force and the same would come into force as and when notified by the Central Government. The MRTP Act is still in force. The MRTP Act governs the activities / practices of all undertakings, however not including Government undertaking in India. It encompasses within its ambit, essentially the following types of prohibited trade practices, namely, Restrictive Trade Practice, Unfair Trade Practice and Monopolistic Trade Practice: Competition Act The Competition Act, which seeks to replace the MRTP Act, has been enacted with a view to promoting and sustaining competition in markets in India. The Competition Act seeks to achieve the following objectives: To promote and sustain competition in markets. To protect the interest of consumers. To ensure freedom of trade. To provide for the establishment of the Competition Commission of India. The major provisions of the Competition Act relate to the following areas: 3

Prohibition of Anti-Competitive Agreements Prohibition of Abuse of Dominant Position Regulation of Combinations

Consumer Protection Act The Consumer Protection (CP) Act is a legislation, which has been enacted for protection of consumer interest and for that purpose to provide for the establishment of consumer councils and other authorities to settle consumer disputes. The CP Act aims to regulate the activities of a manufacturer or Service provider to ensure that the consumer does not suffer from defective goods and / or deficiency of services. Arbitration The Arbitration and Conciliation Act, 1996 has been enacted to replace three previous laws dealing with various aspects of arbitration. This Act is essentially based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985. It has consolidated into one statute, the law relating to domestic arbitration, international commercial arbitration, enforcement of foreign arbitral awards and conciliation. It allows the contracting parties to decide upon the venue / place and procedure of the arbitration proceeding.

Special Investment Considerations

Special Economic Zones (SEZs) Facts The Exim Policy provides for setting up of SEZs in the country with a view to provide an internationally competitive and hassle free environment for exports. Units may be set up in an SEZ for manufacture, trading, re-conditioning and repair or for services activity. Units in the SEZs have to be net foreign exchange earners but are not subject to any pre-determined value addition or minimum export performance requirements. The policy provides for setting up of SEZs in the public, private, joint sector or by State Governments. The Central Government also converted some of the existing EPZs into SEZs such as the EPZs at Kandla and Surat (Gujarat), Santa Cruz (Maharashtra) and Cochin (Kerala) from 1 December 2003. The Government till date has approved 21 locations for setting up of SEZs. Some of the SEZs approved of set up are at Positra (Gujarat) in the private sector and by the State Governments at Dronagiri (Maharashtra), Nanguneri (Tamil Nadu), 3

Kulpi (West Bengal), Paradeep (Orissa), Bhadohi, Kanpur and Greater Noida (Uttar Pradesh), Kakinada (Andhra Pradesh), Indore (Madhya Pradesh) and Hassan (Karnataka) on the basis of proposals received from the State Governments. Incentives for Special Economic Zones Units No license required for import. Duty free import of capital goods, raw materials, consumables and spares. Profits from export of articles, things or computer software of a unit set up in an SEZ, computed in accordance with a prescribed formula, are exempt from income tax. The exemption is available for a maximum period of ten years. This exemption, however, is available only till the financial year ending 31 March 2009. For all new SEZ units that have commenced production after 1 April 2002, 100 percent tax exemption would be available for five years, followed by a 50 percent deduction for further two years. Duty free procurement of capital goods, raw materials and consumable spares from the domestic market. Manufacturing, trading or service activity allowed. Domestic sales on full custom duty subject to import policy in force. No fixed wastage norms. Full freedom for subcontracting. Subcontracting of part of production permitted abroad. No routine examination by customs of export and import cargo. Facility to realize and repatriate exports proceeds within 12 months. Facility to retain 100 percent of foreign exchange receipts in Export Earners Foreign Currency Account. Duty free import / procurement from domestic tariff area of specified goods for setting up of factory in the SEZ is permitted. SEZ trading units permitted to sell goods in the domestic tariff area in accordance with the import policy in force. State level incentives Various incentives are offered by State Governments to encourage investment and attract capital. These commonly take the form of investment incentives, power tariff incentives and other fiscal benefits. Investment Incentives This involves the state financing a certain percentage of the fixed capital cost of a project. Various states have designate areas as A, B, and C according to their level of development. The level of incentive provided by a state varies and is generally larger for investments made in backward areas. Further, the terms and ceiling of the incentives vary across states, depending on the nature of industry that the state is trying to promote.

Power Tariff Incentives Power tariff incentives are extended by State Governments in various ways, such as exemption from the payment of electricity duty, freeze on the tariff charged for new units for a few years after commencement of production, assurance of uninterrupted electricity supply, concessional rates of billing subject to certain conditions and fiscal incentives for purchase and installation of captive power generation sets. Other incentives Some states extend other incentives to small-scale units or priority industries as defined in their industrial policy statements. An indicative list of such incentives that may be offered is: Concessional rate of interest on loans granted by State Finance Corporations. Price preference on goods made by small-scale industries in purchases made by government and semi-government organizations. Exemption from the payment of octroi (entry tax) for a certain specified period. Preferential allotment of land and sheds in industrial areas to small-scale industries. Grant of interest free loans in lieu of deferred sales tax.

Major Trading Partners and Leading Imports and Exports

Trading Partners The United States has replaced the former Soviet Union as Indias major export market. Japan is Indias largest trading partner in Asia and third largest trading partner worldwide. Australia is a primary source for supplies of cooking coal, pulses, wool and non-ferrous metals. Foreign Trade Policy The new Export and Import Policy (EXIM) announced by the Government seeks to complete the process of Indias integration with the global economy by removal of quantitative restrictions and seeks to provide fresh direction to exports by setting up Agricultural Export Zones and providing special benefits to SEZs. The new EXIM policy is outward looking and liberal and is the logical conclusion to Indias commitments under the WTO agreement. Most goods are freely importable on payment of specified customs duty. A small number of goods fall in the prohibited / restricted list of imports. Such restrictions are generally on grounds of national security, health and environmental protection. There are no quantitative restrictions on import of capital goods and intermediates. Further, import of second hand capital goods older than 10 years is permitted only against import licenses. Other Incentives Duty drawback available for imported raw materials for export production. Duty free import of raw materials possible for export production in specified 4

conditions. Concessional duty rate available for capital goods under the Export Promotion Credit Guarantee Scheme. Imports from certain countries permissible at reduced rates. Raw materials, intermediates and components meant for manufacture of goods for export, can be imported duty free against an advance license. Input - output norms have been laid down to determine the amount of duty free import of inputs allowed for specified products to be exported. Issue of duty free license under this scheme is subject to achievement of positive value-addition and export obligations. Exports & Imports Export of goods is allowed freely, except for few restricted items. Exports are the major focus of Indias trade policy, and a thrust area in the new economic policy of the country. The export promotion package compares favorably with incentives offered anywhere in the world. It makes a special effort to attract foreign investors to set up EOUs and units in SEZs. Exports: US $52.37 billion (2002-03) Principal Exports: Traditional exports include cotton yarn and textiles, readymade garments, leather goods, gems and jewellery, and agricultural products. However, information technology services, engineering products, and chemicals and pharmaceuticals are rapidly growing export segments now. Principal Markets for export: USA, Canada, UK, Germany, Japan, Italy, France, Netherlands and Belgium in the OECD region, UAE and Saudi Arabia in the OPEC region, Brazil and Mexico in the Latin American region, and China, Hong Kong, Singapore, Bangladesh and Sri Lanka from the Asian region. Imports: US $61.44 billion (2002-03) Principal imports: Capital goods, crude petroleum and petroleum products, gold, precious and semi-precious stones, chemicals, edible oils, electronic goods and coal. Principal Markets for import: USA, UK, Japan, Germany, Belgium and Switzerland in the OECD region, Iran, Kuwait and Saudi Arabia in the OPEC region, South Africa from the African region, China, Hong Kong, Malaysia, South Korea, Singapore, Indonesia and Thailand in the Asian region and Australia.

Tariff Liberalisation The current trade policy is characterized by rationalized tariff levels and removal of quantitative restrictions. There has been a consistent decline in the rates over the past 7 years, from peak rates of 350 percent in June 1991 to 35 percent in 2000-01. Most capital goods imports attract a basic customs duty at the rate of 25 percent. Import duties on equipment are lower for projects in specific sectors. The tariff structure is favorable for companies wanting to import equipment to set up projects in the infrastructure sector. The Union Government has boosted the upbeat economic sentiment, and in an effort to sustain the feel good factor announced a set of significant customs and excise duty reductions across all sectors. These changes have come into effect from January 2004. Specifically, the peak rate of basic customs duty has been reduced from 25% to 20% and the special additional duty (SAD) at 4% has been abolished. Significant excise duty concessions have also been extended to sectors, prominent amongst which are infrastructure, IT, telecom and electronics.

Companies
Forms of Enterprise Following are the principal forms of business organization in India: Corporations both public and private Partnerships Sole proprietorships Corporations incorporated in India and foreign corporations having presence in India are regulated by the provisions of the Companies Act, 1956. The Companies Act, 1956, has been enacted to oversee the functioning of corporations in India. The registrar of companies and the Company Law Board, both working under the Department of Company Affairs, have been entrusted with the responsibility to ensure compliance with the provisions of the Companies Act, 1956. Brief Description of Major Types of Corporate Forms Corporations in India may be broadly classified into public sector and private sector corporations. Private Corporations A private corporation incorporated under the Companies Act, 1956 has the following characteristics: the right to transfer shares is restricted; the maximum number of its shareholders is limited to 50 (excluding employees); no offer can be made to the public to subscribe to its shares and debentures; and

no invitation or acceptance of deposits from persons other than members, directors or relatives is allowed.

Public Corporations A public corporation is defined as one that is not a private corporation. A subsidiary of a public corporation is also treated as a public corporation. A public corporation is required to have a minimum paid up capital of Rs 0.5 million. Foreign Corporations Foreign corporations that are incorporated outside India but having presence in India in the form of representative offices, project offices, branch offices, etc. are also governed by the Companies Act, 1956, which contains special provisions for regulating such entities.

Structures Typically Used by Foreign Investors

Foreign corporations conducting business in India may operate in various forms. Common business structures employed by foreign investors in India are private limited companies (mostly wholly owned subsidiaries of the foreign companies), liaison offices, branches offices, and project offices. These business structures are discussed in the following paragraphs: Subsidiary Companies Foreign corporations can set up their subsidiary companies (in the form of private companies) in India. The subsidiary company, incorporated under the laws of India, is treated as a domestic company for tax purposes. Following are some of the features of a subsidiary company: Funding could be via equity, debt (both foreign and local) and internal accruals; Indian transfer pricing regulations shall apply; and No approval required for repatriation of dividends. Branches Foreign corporations engaged in manufacturing and trading activities abroad may open branch offices to conduct business in India. The branch office can carry the same or substantially the same activities as the ones carried on by the foreign corporation overseas. For opening a branch office in India, foreign corporations require a specific approval from the RBI. Such approval prescribes the activities that a branch office may undertake in India. A branch office is also required to register itself with the

registrar of companies and comply with certain procedural formalities prescribed under the Companies Act, 1956.

Representative Offices Foreign corporations are permitted by RBI to open liaison offices in India for undertaking liaison activities on its behalf. These offices act as a communication channel between the foreign corporation and Indian customers. The setting up of a liaison office in India is also subject to the conditions outlined in the permission granted by RBI. The liaison office also requires registration with the registrar of companies. The RBI permits liaison offices to undertake only specific activities in India. Project Offices A foreign corporation, which has secured a contract from an Indian company to execute a project in India, may establish a project office in India without obtaining prior permission from the RBI. The exchange control norms also prescribe the following additional requirements: the project should be funded directly by inward remittance from abroad; or the project should be funded by a bilateral or multilateral international financing agency; or the project must be cleared by an appropriate authority; or the Indian company awarding the contract should have been granted a term loan by a public financial institution or a bank in India for the project. However, the foreign corporation would be required to furnish a prescribed report to the concerned regional office of the RBI under whose jurisdiction the project office is set up. Like a branch office, a project office is also treated as an extension of the foreign corporation in India and taxed at the rate applicable to foreign corporations.

Taxes on Corporate Income

` India has a well-developed tax structure, with the authority to levy taxes divided between the Central Government and the State Governments. The Central Government levies direct taxes such as personal income tax, corporate tax and indirect taxes such as customs duty, excise duty, central sales tax and service tax. The States are empowered to levy professional tax and state sales tax apart from various other local taxes such as entry tax, octroi, etc. In the wake of economic reforms, the tax system has undergone tremendous changes in the past eight to ten years. The tax rates have been rationalized and compare favourably with most other countries. Further, tax laws have also been simplified to ensure better compliance. The Indian fiscal year begins on 1 April and ends on 31 March. A corporations tax year also generally ends on the same date as the financial statement year-end. All

corporations are required to file tax returns by 31 October and must file them even in the event of a loss. Nonresident corporations must file the Indian income tax return if they carry on business in India or have any office in India or earn income from any Indian source, asset, and property or business connection. All corporations having Indian taxable income must register with their respective jurisdictional tax authorities. Corporate tax liability is required to be estimated and discharged by way of advance tax in four instalments on 15 June, 15 September, 15 December and 15 March during the tax year beginning on 1 April and ending on 31 March. The balance taxes, if any, must be paid on or before the date of filing the return. Corporations not adhering to due date of filing deadline are not permitted to carry forward their net operating losses / revise their returns. Corporate Income Tax For Indian income tax purposes, a corporations income essentially comprises income from business, net taxable capital gains realized on any disposition of the corporations capital assets and residual income arising from non-business activities. Corporations resident in India (whether owned by Indians or nonresidents) are taxed on their worldwide income arising from all sources. Nonresident corporations are essentially taxed on income earned from a business connection in India or from other Indian sources. A corporation is deemed to be resident in India if it is incorporated in India or if its control and management is situated entirely in India. If a tax treaty exists between India and the country in which the taxpayer is resident, the determination of whether a nonresident is taxable in India may be restricted or modified, and lower rates may apply, subject to provisions of the tax treaty. In general, Indias tax treaties provide that residents of the other country are subject to Indian tax on business profits derived from undertaking business in India only if the nonresident has an Indian permanent establishment. Rates of Corporate tax Resident corporations are subject to tax at a basic rate of 35 percent enhanced by a 2.5 percent surcharge. Nonresident corporations are subject to a basic tax rate of 40 percent also enhanced by a 2.5 percent surcharge. However special rates have been prescribed in respect of royalties or fees for technical services earned from India. Dividend Income. Dividend income is exempt in the hands of the recipients. However, resident corporations are required to pay a dividend distribution tax at the rate of 12.5 percent on dividends declared, distributed or paid by them. The above rates may be subject to more beneficial provisions contained in the tax treaty entered into between India and the country in which the taxpayer is resident.

Minimum Alternate Tax The Indian tax laws provide for a Minimum Alternate Tax, to be paid by corporations on the basis of profits disclosed in the financial statements. Corporations must pay 7.5 percent (plus 2.5 percent surcharge) of book profits as tax, if the tax payable as per regular tax provisions is less than 7.5 percent of its book profits. Book profits for this purpose is computed by making prescribed adjustments to the net profit disclosed by corporations in their financial statements. Tax Incentives The Government of India has been extending a host of incentives and concessions to eligible corporations in certain specific industries. Broadly, the tax incentives include tax holidays for corporate profits, accelerated depreciation allowances and deductibility of certain expenses subject to fulfillment of prescribed conditions. Foreign Tax Relief Tax treaties entered into India and several other countries govern foreign tax relief for the avoidance of double taxation. If no such agreement exists, resident corporations may claim a foreign tax credit for the foreign tax paid by them. The amount of credit granted is the lower of Indian tax payable on the income that is subject to double taxation and the foreign tax discharged.

Other Significant Taxes

Excise Duty / Central Value Added Tax Excise duty is a tax applicable on the manufacture of goods within the country. Excise duties are governed by the Central Excise Act, 1944, and the Central Excise Tariff Act, 1985. Basic excise duty is levied at a uniform rate of 16 percent. Further there is levy of additional duty of Excise and Special Excise duty on specified products. Excise duty is mostly levied on advalorem basis (i.e. on the basis of value). However, there are commodities, which attract excise duty at specific rates, which are based on quantity or weight. The Excise law provides for a Central Value Added Tax (CENVAT) Credit Scheme, which limits the cascading effect of duty incidence on a number of excisable goods that are used as inputs / capital goods for use in manufacture of other excisable goods. Under the scheme, CENVAT credit can be claimed on the excise duty, special excise duty and additional duty of customs imposed on raw materials and capital goods, whether purchased locally or imported. This credit can be utilised for payment of excise duty on the finished products. Customs Duty

Customs duty is levied on import of goods into India. A downward trend in customs duty rates has been seen over the past few years. The peak rate of basic customs duty has now been reduced to 20 percent. The levy and the rate of customs duty are as per the Customs Act, 1962 (the Customs Act), and the Customs Tariff Act, 1975 (the Tariff Act), respectively. Customs duty on imports comprise the following: basic customs duty; additional customs duty; and special additional customs duty of 4 percent (now removed w.e.f January 9 th 2004.

The rates of basic customs duty are specified under the Tariff Act for each item and vary according to the description of the said goods. Additional duty is equivalent to the excise duty that would have been payable if the goods were manufactured in India. The primary basis for valuation of goods under the Indian customs law is the transaction value. The transaction value of the goods is the price actually paid or payable by the buyer to the seller. Service Tax Service tax is a tax levied on certain identified taxable services provided in India by specified service providers. Currently, over 60 services are included within the service tax ambit. Service tax is a destination based consumption tax and export of services are not liable to service tax. The service tax rate has been increased from 5 percent to 8 percent with effect from 14 May 2003 and consequently all existing taxable services provided on / after 14 May 2003 attract service tax at the rate of 8 percent. Generally, the liability to deposit service tax is on the service provider. In case the service provider is a nonresident / person from outside India, not having an office in India, the person liable to service tax is the service recipient in India. Sales Tax Sales tax is levied on sale of movable goods. This tax is imposed either by the Central Government or by the State Government depending upon whether the sales are in the nature of inter-state sales or intra-state sales. In the event the sale takes place within a state i.e., an intra-state sale, the relevant state sales tax legislation would be applicable. However, if the sale involves movement of goods from one state to another within India, i.e., inter state sale, then the Central Sales Tax Act would be applicable. Sales tax is paid by the seller and passed on to the buyer by including the amount of sales tax paid in price of the goods. Therefore, even though the incidence of sales tax is on the seller, the eventual impact is essentially borne by the buyer. Inter-state sales generally attract sales tax at the rate of 4 percent. This rate has been proposed to be reduced to 2 percent and eventually to NIL once the value added tax regime is introduced across India. Octroi / Entry tax

Octroi / Entry tax is a levy on the entry of goods into a particular municipal / State jurisdiction for use, consumption or sale. Depending on the municipal/ State jurisdiction where the goods are proposed to be used, consumed or sold, either Octroi or Entry tax may be levied. Octroi is predominantly a municipal specific levy. Within the state there may be several jurisdictions where Octroi / entry tax may be levied depending on the specific rules thereof. Value Added Tax The existing sales tax structure prevailing for more than five decades is expected to give way to a new Value Added Tax (VAT) based taxation regime in future, bringing in its wake a fundamental shift in the way business transactions are taxed, and consequently in the way they are managed. VAT is expected to bring about a significant change in the nature of business systems including sourcing, distribution/sales network, costing and pricing, warehousing, accounting, compliance procedures and IT systems. VAT, an indirect tax on consumption, is proposed to be levied on the value addition that occurs in relation to a product at each stage as it moves through its productiondistribution chain. However, unlike VAT internationally, VAT in India will be initially confined to goods only and services are initially proposed to be kept outside the purview of VAT. VAT as proposed to be introduced in India is likely to replace the local sales tax regime only. That means that Central Sales Tax and other indirect taxes such as customs duty, excise duty, service tax etc. are going to continue in the manner they operate today. While the existing local sales tax is mostly applicable only on the first sale of goods within a particular State, VAT is to be applicable on every stage of sale with a mechanism of credit for input VAT paid. It is expected that in VAT regime there would be only 4 tax slabs : 0 percent for essential commodities. 4 percent on industrial inputs and capital goods and items of mass consumption. demerit rate of 20 percent on luxury items such as tobacco, liquor etc. all items not covered above at a Revenue Neutral Rate (RNR) of 10 percent to 12.5 percent.

Other Taxes Transfer of assets attracts stamp duty. Some states impose real estate taxes based on assessed values. Municipalities levy tax on real estate in their jurisdiction.

Financial Reporting and Auditing

4

Sources of Accounting Principles Companies in India follow fundamental accounting principles and practices. The Accounting Standards Board of the Institute of Chartered Accountants of India (ICAI) issues Accounting Standards to be followed by companies. Accounting Standards are based largely on the International Financial Reporting Standards and relate to the accounting treatment of items such as depreciation, fixed assets, inventory valuation, revenue recognition, investments, construction contracts and accounting for foreign-exchange transactions. All the 28 Accounting Standards issued to date are mandatory and companies are required to disclose their policies on these standards in the financial statements (the applicability of these standard varies depending on the listing status of the companies and their turnover). Statutes / Bodies Governing the Reporting Requirements The Securities Exchange Board of India, the Companies Act, 1956, the Income tax Act, 1961, the department of company affairs and the RBI, primarily govern the financial reporting requirements of companies in India. Further, the Central Government, through special acts and orders, also governs the financial reporting requirements.

Fundamental Concepts Accounting Methodology The fundamental accounting concepts of going concern, consistency and the accrual of income and expenses need not be disclosed in the financial statements. Departures from these basic concepts, however, must be disclosed. All significant accounting policies should be disclosed in one place in a separate statement or schedule to the financial statements. The effect of any material changes in accounting policies must be quantified and the reasons for such changes explained. If, any material change is not quantifiable, the fact should be stated.

Funding of Indian Businesses

Share Capital The Companies Act, 1956 permits companies to issue only the following two kinds of share capital: Preference share capital (preferred stock); and Equity share capital (common stock).

The restriction is, however, not applicable to private companies which are not subsidiaries of a public company. Redeemable preference shares issued by a company must be redeemed within 10 years. Pricing of new issues of share capital has been substantially freed from the administrative control authority that prevailed earlier. The issue of capital is governed by guidelines issued by SEBI, the body that regulates and oversees the functioning of the Indian stock markets.

Debentures and Public Deposits Companies can raise funds by issuing debentures, bonds and other debt securities. They can also raise funds by accepting deposits from the public. However, the Act strictly forbids debentures from carrying voting rights and prescribes the manner and the source from which deposits can be invited and accepted. Debentures can be redeemable or perpetual, bearer or registered and convertible or non-convertible. Disclosure, Reporting and Filing Requirements Disclosure Requirements Financial statements should consist of the following items: A balance sheet; (in the standard format detailed in Schedule VI of the Companies Act, 1956) An income statement; Notes to the financial statements; An auditors report ; and For listed companies and companies with a turnover exceeding Rs 500 million, a cash flow statement.

Annual Reporting Requirements Reporting. Companies in India are required to comply with various reporting requirements. The requirements are greater for public companies than for private companies. The significant documents that need to be filed are the annual return, balance sheet and profit and loss account and the auditors and board of directors reports and charges. Annual financial statements must be sent to all shareholders and debentures holders . Listed companies must send annual financial statements to their stock exchange. In addition, listed companies have to publish half yearly financial statements. At every annual general meeting, the board of directors are required to present the companys financial statements comprising a balance sheet and a profit and loss account (income statement) and the auditors and board of directors reports to the

shareholders. The formats of the balance sheet and the profit and loss account are prescribed by the Companies Act, 1956 and companies are required to publish annual accounts in those formats. Filing Requirements After the annual financial statements have been presented to the AGM, three certified copies of the same must be filed with the registrar of companies within 30 days of adoption by the shareholders. Double Tax Relief and Tax Treaties If a foreign source income of a resident is taxed in a country with which no double taxation avoidance agreement exists and such income is also taxed in India, then resident taxpayers may claim a tax credit in respect of such doubly taxed income to the extent of taxes paid in the source country or the rate of tax in India, whichever is lower. Taxpayers have the option to choose between the provisions of the tax treaty or the Act, whichever is beneficial to him.

SWOT Analysis of India as a commercial destination Strengths: Developing Economy Cheap Human Resource Availability of Natural Resources Knowledge pool Secular State Population Liberal economy Technologically growing at an immense pace English speaking people Political Stability High GDP Growth Forex Reserve Weaknesses Infrastructure Problems Bureaucratic Bottlenecks

Legal hassles High Tax Rates Complicated Tax Structure Corruption Labour problems

Opportunities Growing Market Rising Standard of Living Tax Benefits if units set up at specified locations (SEZ, EPZ etc.) Inexpensive labour Globalization & Liberalization Advancing Technology Brand INDIA (India Rating going up steadily) Threats Coalition Government Natural Hazards Labour Unrest Capital Market Volatility Other Developing economies

Bibliography Websites www.ciionline.org

www.indiainfoline.comwww.indiainfoline.com www.cmie.com www.indiainfoline.com www.ficci.com www.finmin.nic.in www.irdaindia.org www.petroleum.nic.in www.nasscom.org www.indiaoppi.com www.rbi.org.in www.sebi.com www.trai.gov.in Books & Journals