Provisions for Investment

Investments can be made either in new entities (subsidiaries or joint venture companies) or in existing companies.

a. Investment by way of subscribing shares in a new company
Foreign investors can subscribe to the shares of a new company created for the purposes of implementing the business in an approved sector/ activity, by remitting the subscription amount through banking channels, and receiving shares against the investment.

b. Investment by Way of Acquisition of Shares of an existing company
Foreign investors intending to acquire existing shares from resident Indian shareholders need to comply with the following requirements:

Price of shares transferred by way of sale by resident to a non-resident where the shares of an Indian company are:

• a) Listed on a recognized stock exchange in India ,shall not be less than the price at which the preferential allotment of shares can be made under the SEBI guidelines , as applicable, provided the same is determined for such duration as specified therein, preceding the relevant date, which shall be the date of purchase or sale of shares;
• b) Not listed on a recognized stock exchange in India, shall not be less than the fair value to be determined by a SEBI registered Category I Merchant Banker or a Chartered Accountant as per the discounted free cash flow method.

The price per share arrived at should be certified by a SEBI registered Category I Merchant Banker or a Chartered Accountant.

Investment by Foreign Institutional Investors (FIIs)
A registered Foreign Institutional Investor (FII) may, through the Securities and Exchange Board of India (SEBI), apply to RBI for permission to purchase the shares and convertible debentures of an Indian company under the Portfolio Investment Scheme.

FIIs are permitted by RBI to purchase shares/convertible debentures of an Indian company through registered brokers on recognized stock exchanges in India. They are also permitted to purchase shares/convertible debentures of an Indian company through private placement/ arrangement.

The total holding by each FII/SEBI approved sub-account of FII cannot exceed 10% of the total paid-up equity capital or 10% of the paid-up value of each series of convertible debentures issued by an Indian company. Further, the total holdings of all FIIs/subaccounts of FIIs added together cannot exceed 24% of the paid-up equity capital or the paid-up value of each series of convertible debentures.

c. Investments in Special Economic Zones
The SEZ Policy was introduced by the Government in 2000 with a view to providing a competitive and unproblematic environment for exports. The SEZ Act, 2005 along with the associated Rules (SEZ rules 2006), provides the umbrella legal framework for all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

An SEZ is a specifically delineated, duty free area notified as such by the Ministry of Commerce under the Special Economic Zones Act, 2005 (SEZ Act) which is considered to be outside the customs territory of India for the purposes of carrying out authorized activities.

To date, 581 SEZs have been formally approved, however, very few are operational, and the older SEZs continue to have the largest contribution to export earnings. The main locations for industrial SEZs are Mumbai (Maharashtra), Kandla (Gujarat), Falta (West Bengal), Chennai (Madrad), Noida (Uttar Pradesh), Vishakapatnam (Andhra Pradesh), Indore (Madhya Pradesh) and a few privately owned and developed zones.

Export oriented manufacturers and service providers (including IT and ITES providers, BPOs, contract manufacturers, etc.) have huge growth potential in Indian SEZs. SEZs can manufacture any product except a few restricted or prohibited items as per the Industrial policy (atomic energy, mining, etc This scheme provides a host of fiscal benefits and other incentives. Further details are available atwww.sezindia.nic.in .

d. 100% Export Oriented Units (100% EOU) Scheme
Investments can also be made in 100% Export Oriented Units (EOUs), which are not located in SEZ, but are eligible for several export-related benefits. 100% EOU scheme was introduced by the Government of India (GoI) in 1980 with a view to promoting exports by creating additional production capacities and providing various incentives and benefits granted to registered Industrial units. This scheme is an industrial unit operating under customs bonding, and was undertaken to export its entire production of goods and services, except permissible sales, in the Domestic Tariff Area (DTA). Such units may be engaged in export of all kinds of goods and services (barring trading activities), including repair, remaking, testing, calibration, quality improvement, upgrading of technology and re-engineering activities, etc. for export in freely convertible foreign currency (subject to prescribed conditions).

The following are some of the salient features of the EOU scheme:

• Duty free imports of capital goods, raw material, and consumables as well as tax deductions against export income. Duty free goods (other than capital goods and spares) to be utilized in two years and further extension is also possible.
• These units are permitted to be set up for a varied range of business activities including manufacture, services, software development, agriculture, aquaculture, animal husbandry, floriculture, horticulture and sericulture, without any locational restrictions.
• Trading activities are not covered for the purpose of the benefits expended to these units.
• No license required for import;
• No export/foreign exchange earning commitment to be a positive Net Foreign Exchange Earner (NFE) cumulatively over the initial five years;
• EOUs can sell goods/services locally for payment in foreign exchange;
• Up to 50% of an export’s value can be sold locally with concessional duties and taxes (subject to positive NFE);
• EOUs engaged in manufacture and export of more than one product may sell any of these products in the DTA up to 90% of the FOB value of exports of such products, within the overall DTA sales entitlement of 50% of the FOB value of all exports of the unit.
• Supplies from the DTA to EOUs regarded as “deemed exports”, entitling DTA suppliers to certain export benefits.

The income tax exemptions to 100% EOUs were available for exports effected till 31 March 2010, but have been extended until 31 March 2011, and shall be withdrawn shortly, under sunset clause provisions as required by WTO. For a host of incentives under 100% EoU Scheme, click here.

e. Investment in Software Technology Parks of India (STPI) /Electronic Hardware Technology Parks (EHTP)
EHTP and STP schemes have been announced to enhance the exports of electronic component and information technology industry. These offer a package of incentives and facilities like duty free imports in line with the 100% EOU scheme, and deemed export benefits and tax holidays. Export-oriented IT enabled services like call centre services, data processing, medical transcriptions, etc. are also eligible to be registered under the STP scheme. These enjoy the same benefits as other export units.