Doing business in India Editor-in-chief: Paresh Parekh Editorial board: Miti Shah Meena Khivasara Manthan Dholakia Publishing & Marketing: Pooja Walke Jerin Verghese Artwork: Jaspal Singh Cover image concept: Arjun Kariyal Pooja Walke Logistics: Tripti. Panda Write to us @: Tax. [email protected] ey. com Websites: ey. com/DBI ey. com/in/Tax Services ey. com/in/BudgetPLUS2012 “W e are keen to see FDI investment to surge in India and to that end, a favourable business climate will be helpful in going forward.
We are encouraged consolidation.
That there is a determination to improve the tax code. There is a determination to cap the subsidies at two per cent. All of those measures are good measures. ” Christine Lagarde Chief, IMF (March 2012) “T he structure of the economy has changed since 1991. Our more matured, more diverse and much deeper. They have the resilience to absorb shocks. India’s growth story is intact… ” D. Subbarao Governor, RBI (April 2012) “I believe that, around the world, there is enormous goodwill for India and most people continue to keep faith with the India growth story.
It is natural that they look closely at certain economic indicators, one of them being the exchange rate. Volatility of the exchange rate has reduced in recent weeks. A reassurance on the – both FDI and FII – will bring further stability to the exchange rate. We intend “I t is important for India to continue with its structural reforms to sustain its high growth. The fact that even seven per cent growth is spoken of as not being good proves that the Indian economy has set high bench mark.
India and the World Bank Group have been exceptionally good partners during a time India should take its priorities forward to meet the challenges and opportunities lying ahead. This would ensure continuance of the momentum of the Bank’s successful engagement with India. ” Robert B. Zoellick, President, World Bank Group, March 2012 P Chidambaram Finance Minister, India “D espite challenging economic conditions, India continues to be among the fastest growing economies in the world. The growth might have climbed down to 7% from its normal trajectory of 8. 5%–9. %; nevertheless, it continues to be impressive in the midst of anxiety all around. A large domestic market led by the emergence of a important middle class population, investor-friendly policies, rising foreign exchange reserves, availability of skills and demographic prospects are some of the strong positives that are behind the Indian growth story. ” Chandrajit Banerjee, Director General, Confederation of Indian Industry (CII), 2012 “T oday, India has global responsibilities of a kind that it did not have earlier. Our presence at the high table of global economic policy makers is a matter of some satisfaction.
If India can continue to build on its economic strength, it can be a source of stability for the world economy and provide a safe destination for restless global capital. ” Pranab Mukherjee President and Former Finance Minister, India (March 2012) This book has been prepared by Ernst & Young Pvt. Ltd. (EYPL) to provide busy executives a quick overview of the investment climate, taxation, forms of business organizations, and business and accounting practices in India. This publication should be used as a research tool only. However, the information contained here is in a summary form, and should not be ubstituted for the tax professional’s own work in relation to client matters. In those circumstances, reference should always be made to the original reference material quoted against the related information to ensure added accuracy. The information presented in this book has been validated as of 15 July 2012. Neither EYPL nor any other member of the Global EY organization accepts any responsibility for loss occasioned to any persons acting or refraining from action as result of any material in this publication. This book is prepared for use by Ernst & Young’s clients and professional staff.
Additional copies may be obtained from:: Ernst & Young Private Limited Golf View Corporate Tower B Sector 42, Sector Road, Gurgaon, Haryana, India Tel: +91-124-464 4000 Fax: +91-124-464 4050 Foreword The Indian economy continues to grow at a good pace and holds a strong position on the global map. The country’s GDP has been growing at an average economy is amongst the largest in the world on the basis of Purchasing Power Parity. It is today one of the most attractive destinations for business and natural resources and strong macroeconomic fundamentals. In FY2011 – 12, the country attracted FDI of around US$46. b in various sectors. India’s demographics are very attractive with approximately 65% of the total population falling in the age group of 15 to 64 years. A comparatively stable government, an open democratic set-up, and a strong and reliable judiciary system, add further advantage to the Indian economy. The country’s strong fundamentals such as a growing middle class population, cost competitiveness and strong domestic consumption, coupled with its resilience to counter the challenges of the global economic turbulence, has made it a preferred destination for MNCs from across the world.
With the above perspective in mind, we have developed this guide that will help MNCs simplify the complex decision-making process involved in undertaking foreign operations, which requires an intimate knowledge of a country’s commercial climate, as well as recognition of the fact that this climate is continuously evolving. The companies that are doing business in India, or planning to do so, would be well advised to obtain current and detailed information from our experienced professionals. suggestions at Tax. [email protected] ey. com Paresh Parekh Partner, Tax & Regulatory Services
Ernst & Young India Contents Doing business in India 1 A. India: at a glance…………………………….. 02 B. Key sectors: an overview………………….. 18 C. Investment climate and foreign trade …. 78 D. Entry options in India ………………………. 92 E. Funding of Indian businesses …………… 104 F. Repatriation of funds …………………….. 110 G. Forms of business enterprise…………… 114 H. Companies …………………………………… 120 I. Economic laws and regulations ………… 134 J. Mergers & acquisitions …………………… 52 K. Individuals …………………………………… 158 L. Direct taxes …………………………………. 170 M. Transfer pricing …………………………….. 208 N. Indirect taxes ……………………………….. 216 O. Incentives ……………………………………. 228 P. Appendices ………………………………….. 240 A India: At a glance Doing business in India 3 Did you know ! India exports software to around 90 countries. FY12 was a milestone year for the Indian IT-BPO industry, aggregate revenues crossed the US$100 billion mark.
A. 1. 1 Geological characteristics A. 1. 2 Transportation A. 2. 1 Age structure A. 2. 2 Cultural diversity A. 2. 3 Education and labor force A. 4 4 Doing business in India 1 Total area: 3. 29m sq km Distribution of total area occupied by India 10% 3% 48% 49% 90% Land Water Arable Non-arable Permanent crops Source: CIA World Fact book Capital: New Delhi India consists of 28 states and seven union territories. Bordering countries — China, Nepal and Bhutan to the north; Afghanistan and Pakistan to the north—west; Myanmar and Bangladesh to the east; and Sri Lanka to the south. A. 1. Geological characteristics Climate South India and temperate in North India. The country has four seasons — summer (March–June), monsoon (June– September), post-monsoon (October–November) and winter (December– February). Natural resources Coal (fourth-largest reserves in the world), manganese, bauxite, iron ore, mica, chromites, diamond, limestone, titanium ore, natural gas, petroleum, and arable land form India’s natural resources. 1 “CIA World Fact book,“ CIA website, https://www. cia. gov/library/publications/the-worldfactbook/geos/in. html, accessed 20 July 2012 Doing business in India 5
Flora and fauna Major rivers Coastline species of fauna are found here. Ganga, Yamuna, Brahmaputra, Godavari, Krishna, Cauvery, Narmada and Tapti are the major rivers of the country. The coastline comprises 7,000 km encircling the mainland, the Andaman, Nicobar and Lakshadweep islands. A. 1. 2 Transportation Railways Roadways Waterways Number of airports 64,460 km 4,200,000 km 14,500 km 454 2 Population Population growth rate Birth rate Death rate Life expectancy Sex ratio Households 1. 2 billion (urban: 30%, rural: 70%) 1. 312% per annum 20. 6 (births/1,000 population) 7. 3 (deaths/1,000 population) 67. 14 years 940 females per 1000 males 246 million A. 2. 1 Age structure India has a young population with approximately 65% in the age group of 15 to 64 years. The median age in the country is around 26. 2 years, which is lower than many countries in the world. 2 “Provisional Population Totals India,“ Census of India website, http://censusindia. gov. in/2011census/censusinfodashboard/index. html, accessed 20 July 2012 6 Doing business in India Distribution of population by age- group 6% 29% 65% 0-14 years 15-64 years >65 years Source: CIA World Fact book
India’s median age vis-a-vis other countries (in years) India World Brazil China Russia US Germany 0 10 20 30 40 26. 2 28. 4 29. 3 35. 5 38. 7 36. 9 44. 9 50 Source: CIA World Fact book A. 2. 2 Cultural diversity Religions Languages languages including Bengali, Telugu, Marathi, Tamil, Urdu, and Gujarati. English is widely used in national, political and commercial communication. Festivals India celebrates many festivals including Deepawali, Holi, Guru Nanak Jayanti, Rakshabandhan, Christmas, Janmashtami and Id-ul-Zoha. Hinduism, Islam, Christianity and Sikhism are the four main religions followed in India.
Other religions include Buddhism, Jainism, Judaism and Zoroastrianism. Doing business in India 7 Distribution of population by religion 13% 2% 2% 2% Distribution of population by language 14% 3% 4% 5% 5% 41% 81% 6% 7% 7% 8% Urdu Gujarati Kannada Malayalam Others Hindu Muslim Christian Sikh Others Hindi Bengali Telugu Marathi Source: CIA World Fact book Tamil A. 2. 3 Education and labor force3 Literacy rate: 74. 04% (male: 82. 1%, female: 65. 5%) Education: India has one of the largest school-age populations in the world. It has a well-established education system with more than 1. million schools enrolling in excess of 240 million students. For higher education, India has more than 500 universities, as well as more than 30,000 colleges and 7,000 technical institutions. Labor force: India’s labor force stood at approximately 487. 6 million in 2011. Approximately 4. 2 million people are added to India’s talent pool every year, with 4 million graduates and 0. 26 million post-graduates. Indian Institute of Technology (IIT) and Indian Institute of Management (IIM) are a group of premier institutions in India that offer technical and management degrees, respectively. “Provisional Population Totals India,“ Census of India website, http://censusindia. gov. in/2011census/censusinfodashboard/index. html, accessed 20 July 2012. 8 Doing business in India Distribution of population by education 2% 19% 2% 10% 4% 23% School till standard four School till standard nine Senior/higher secondary College (but not graduate) Source: CMIE, MOSPI 6% Distribution of population by occupation 10% 13% 1% 12% 34% 8% 36% 2% Graduate Postgraduate Illiterate Literate (but not formal) Skilled worker Businessman Petty trader Executive 18% Student Retired Not working Unskilled worker
India is a secular state and the largest democracy in the world with a parliamentary form of government. The Government of India (GoI), Constitution of India in 1950. The GoI is divided into three distinct but interrelated branches — the legislative, executive and judiciary. Government of India Legislative Rajya Sabha (250 seats) Lok Sabha (545 seats) Executive President Vice President Prime Minister Judiciary Supreme Court High Courts District Courts Doing business in India 9 Legislative branch: At the central level, India has a bicameral parliament comprising the Rajya Sabha (Council of States) and the Lok Sabha (House of the People).
The primary function of the Parliament jurisdiction. At the state level, some states operate through a single Legislative Assembly while others have a bicameral structure and operate through a Legislative Assembly and a Legislative Council. Executive branch: The Executive arm comprises the President, the Vice President and the Council of Ministers headed by the Prime Minister. The President: The President of India is the Head of the State and the Commander-in-Chief of the armed forces. The role of the President is primarily ceremonial in nature and he/she acts in accordance with the advice of the Council of Ministers.
The current President of India is Shri. Pranab K. Mukherjee. The Vice President: the Rajya Sabha and acts as the President when the latter is unable to discharge his/her duties. The current Vice President of India is Mohammad Hamid Ansari. The Prime Minister: The real executive power of running the Central Government lies with the Council of Ministers led by the Prime Minister of India (collectively known as the Union Cabinet). The Prime Minister is appointed by the President after the Lok Sabha elections, which Manmohan Singh.
Judiciary branch: The Indian judiciary is independent of the Executive. The Supreme Court is the apex body in the judiciary branch and comprises the Chief Justice of India and 25 associate judges. Apart from the Supreme Court, the judiciary consists of high courts at the state level and district courts at the district level. Political parties of India: Major political parties in India include the Indian National Congress, the Bhartiya Janata Party, Janata Dal, Nationalist Congress Party, The All India Trinamool Congress, the Communist Party of India and the Samajwadi Party.. 0 Doing business in India 4 India has seen a systematic transition from being a closed door economy to an open economy since the beginning of economic reforms in the country in 1991. These reforms have had a far-reaching impact and have helped India unleash its enormous growth potential. Today, the Indian economy is characterized by a liberalized foreign investment and deregulation. India has grown to become a trillion dollar economy with a largely self- India now ranks as the tenth-largest economy in the world and third largest in terms of GDP on PPP basis.
Structural shift from an agrarian to a services-driven economy Distribution of GDP (1970–71) 17. 2% 56. 4% 40% 44% 26. 4% 16% Agriculture and allied activities Industry Services Source: CMIE, MOSPI 4 “RBI Bulletin – July 2012,” Reserve Bank of India website, http://www. rbi. org. in/scripts/ BS_ViewBulletin. aspx, accessed 24 July 2012; “FDI Circular – April 2012,” Department of Industrial Policy & Promotion website, www. dipp. nic. in/, accessed 24 July 2012; “World Investment Report 2012,” United Nations Conference on Trade and Development website, http://unctad. org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_ WebFlyer. spx, accessed 25 July 2012; “Department of Economic and Social Affairs,” United Nations website, http://www. un. org/en/development/desa/publications/index. html, accessed 19 July 2012. Services Industry Agriculture Doing business in India 11 GDP: India is well placed on the global map in terms of GDP growth. The country’s GDP has been growing at an average rate of 8. 5% for averaged at 4. 3%. However, real GDP growth declined in FY12 to 6. 5% of the global economic slowdown. According to CMIE, the GDP in FY13 is expected to witness a revival in and is projected to grow at 7. 3%.
Domestic consumption fuelling economic growth: India continues whose consumption is driving the formation of the expanding middle consuming country from its twelfth position in 2010. As compared to other countries, India has been and continues to be relatively insulated from external shocks due to its strong domestic consumption pattern and savings culture. Savings as a percentage of GDP increased to 32. 3% in FY11 from 23. 5% in FY02. Increasing urbanization and modern technology: Urbanization and innovation have brought about a remarkable change in the lifestyles and consumption pattern of Indians.
Private domestic consumption accounts for approximately 55% of the country’s GDP and is one of the key factors driving overseas investments in the country. Real GDP growth rate 12 9. 6 8. 4 8. 4 10 6. 9 8 9. 5 9. 3 6 6. 7 6. 5 4 2 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12P FY13E Trends in public and private consumption 70000 60000 50000 40000 30000 20000 10000 0 74 72 70 68 66 FY12P FY05 FY06 FY07 FY08 FY09 FY10 FY11 64 INR billion Source: Centre of Monitoring Indian Economy and IMF (CMIE); IMF Source: RBI and CMIE Private consumption expenditure Government consumption expenditure Consumption as % of GDP Note: P stands for provisional data 2 Doing business in India India’s competitive position in the world India’s economy has strong fundamentals and is host to several eminent global corporate giants that are leaders in their respective ranks at 56 among 142 countries. The country ranks higher than many countries in key parameters such market, which ranks 21st in the world. FDI in India: According to UNCTAD’s World Investment Prospects Survey 2012–2014, India is the third-most attractive destination for FDI (after China and the US) in the world. Indian markets have favorable regulatory regime for investors.
FDI in India (US$ billion) 46. 8 37. 7 34. 8 Break up of FDI by sectors (FY12) 50 45 40 35 30 25 20 15 10 5 0 41. 9 34. 8 22. 8 9. 0 9. 7% 14. 3% 8. 9% 5. 5% 4. 9% 19. 9% FY11P* FY12P* FY06 FY07 FY08 FY09 FY10 Chemicals# Services* Housing, real estate & construction Drugs & pharmaceuticals 53. 5% Metallurgical industries Telecommunications Others** Source: RBI Bulletin FDI includes credit portion of direct investment in equity, reinvested earnings and inter-company debt transactions *Provisional Source: Department of Industrial Policy & Promotion, Government of India. Chemicals does not include fertilizers; **Others includes computer software and hardware, power and automobile industries. Doing business in India 13 The services sector attracts the highest amount of foreign capital in India, totaling US$32. 8 billion between April 2000 and April 2012. FDI investment countries: Mauritius has been the largest source of top investors in the country include the nations from the developed world such as the US, the UK, Singapore, Japan, Germany and the Netherlands. Break up of FDI by countries of origin (FY12) 25. 4% 14. 4% Mauritius 8. 1% 4. % 4. 3% 27. 2% 12. 3% Source: Department of Industrial Policy & Promotion, Government of India Germany Cyprus Netherlands Others UK Singapore Japan 3. 9% Foreign exchange reserves and industrial production: The country’s foreign exchange reserves stood at US$287. 4 billion as of 8 June 2012. Industrial contribution to GDP in India stood at US$452 billion in FY12, up from US$424 billion in FY11. 14 Doing business in India Foreign exchange reserves in India (US$ billion) 350 300 250 200 150 100 50 0 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E 145 192 299 241 255 274 260 253
Source: RBI and CMIE Note: E stands for estimated data Index of Industrial Production (% change) 18 16 14 12 10 8 6 4 2 0 15. 5 12. 9 5. 3 2. 5 2. 9 8. 2 5. 8 FY07 FY08 FY09 FY10 FY11 FY12 FY13E Source: RBI and CMIE Note: E stands for estimated data The Industrial sector witnessed a growth of 1. 9% in 4Q12. Industrial output is expected to grow by 5. 8% in FY13 driven by a revival of mining output and acceleration in the growth of electricity generation. India maintained an average gross domestic capital formation as a percentage of GDP at approximately 32% between FY02 and FY11.
Doing business in India 15 A. 4. 1 India’s Financial Market gradually transformed from a highly controlled system to one that is liberalized. Financial market of India Credit market Money market Foreign exchange market Capital market Equity market Debt market Reserve Bank of India (RBI): The RBI, established in 1935, is the central bank of India. The RBI regulates the credit market, the money market and the foreign exchange market in India. It is responsible for formulating the monetary policy, issuing currency, prescribing exchange control norms and acting as a banker to other banks.
Credit market institutions such as commercial banks, regional rural banks, cocommercial banks have outstanding advances of approximately INR46. 1 trillion and deposits of more than INR60. 7 trillion, as on 23 March 2012. 16 Doing business in India The State Bank of India, a public sector bank, is the largest bank in the country. Type of institution Commercial banks Public sector banks Private sector banks Foreign banks Urban cooperative banks Rural cooperative credit institutions Rural cooperative credit institutions Source: RBI. as of March 2011 Total 26 21 32 Grand total 81 1,645 1,674 95,765 As of FY11, public sector banks dominated the banking industry with 74% of the assets held. However private sector banking is growing at rapidly with 11,602 branches at the end of FY11. The RBI has recently proposed granting new banking licenses, which will promote private banking in the country. Capital markets Securities and Exchange Board of India (SEBI) — SEBI, established in 1992, is the regulatory authority for capital markets in India.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the premier stock exchanges of the country. The BSE is the world’s largest stock exchange in terms of number of listed companies with more than 5,000 companies. The NSE is the world‘s third largest stock exchange in terms of number of transactions. Doing business in India 17 Recent interventions and outlook: In the past few years, the GoI and the RBI have taken various measures to check excess liquidity/slow growth using its monetary policy. In October 2011, the RBI increased the repo rate by 25 basis points (bps) to 8. %. However, it reduced the repo rate to 8% in April hit by high credit costs and weakening global demand. in January 2012 and 75 bps in March 2012) to infuse liquidity into the banking system. RBI sounded a bit cautious on the timing and magnitude of rate depreciation. The RBI has not changed its policy repo rate and CRR Outlook: The GoI has also outlined key action points to propel India on to a high growth trajectory Target of doubling the merchandise exports by FY14 taking it to US$500 billion Provision of INR159 billion in the Union Budget FY13 for banks’
Setting up of an Investment Tracking System to ensure speedy implementation of projects that have been delayed on account of various reasons including security clearances, environmental clearances, and land-related matters. B Key sectors: an overview Doing business in India 19 Did you know ! The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are the premier stock exchanges of India. The BSE is the world’s largest stock exchange in terms of number of listed companies with more than 5000 companies. NSE is the world‘s third largest stock exchange in terms of number of transactions.
B. 1 B. 2 B. 3 B. 4 B. 5 B. 6 B. 7 B. 8 B. 9 B. 10 B. 11 B. 12 B. 13 B. 14 B. 15 B. 16 Aerospace & Defence Automotive Banking Capital markets Life Sciences Information Technology Insurance Media & Entertainment Mining & Metals Oil and Gas Ports Power and Utilities Real Estate Retail and consumer products Roads and highways Telecommunications 20 Doing business in India B. 1 Aerospace and defence The Aerospace and defence industry is an emerging sector in India with the Indian military expected to spend roughly US$80–100b over the world in terms of military expenditure.
India is the largest importer of conventional defence equipment in the world. About 65%–70% of India’s defence requirement is imported from global aerospace and defence companies. India’s defence spend has been increasing over time in the light of volatile neighborhood, internal security issues and the need for upgrading/replacement of legacy Russian origin equipment. Currently, India’s national budget for 2012–13 pegged the defence outlay at US$35. 16b. Of this, capital expenditure, which primarily caters to acquisition of defence hardware and modernization requirements of defence services, accounts for US$14. 7b. Of this, the Indian army has the largest share — of more than 50% — followed by the Indian Air Force and the Indian Navy. Capital expenditure is positive as compared to other global economies. The revenue expenditure, which mainly accounts for the “operating expenditure,” is pegged at US$–20. 70b. The Indian aerospace and defence industry is witnessing an unprecedented growth with the industry sector on the threshold of entering a new era where it will assume increased responsibility to make the nation self-reliant in defence production.
With the shortlist announced, India is fast developing into a manufacturing hub for global aerospace corporations wanting to leverage India’s proven skills competitiveness. Doing business in India 21 Regulatory scenario a. Foreign direct investment wherein the defence industry was opened up to 100% for Indian private sector participation, with FDI permissible up to 26% — both subject to licensing and GoI approval. b.
Defence procurement procedures The Defence Procurement Procedures (DPP) essentially lays down the procurement procedure of all capital acquisitions (except medical equipment) undertaken by the Ministry of Defence, the Defence Services and Indian Coast Guard both from indigenous sources and imports. The DPP ensures expeditious procurement of the approved requirements of the Indian Armed Forces in terms of capabilities sought and time frame prescribed by optimally utilizing the allocated budgetary resources. The current version is DPP2011,which was released on 7 January 2011. c.
Offset policy In its quest for self reliance in defence production, the GoI has been continuing its efforts to indigenize the production of defence equipment. One of the major initiatives by the GoI in this regard was the introduction of the “offset policy” as part of DPP-2005. The offset policy provides for a minimum offset of 30% in case of contract with foreign company where the contract is valued at more than INR3 billion (US$55m). The Defence Acquisition Council may, after due deliberation, also prescribe varying percentages above 30% or waive off the requirement for offset obligations in very special cases.
Offset Policy is applicable for all capital acquisitions categorized as: “Buy (Global)”,i. e. , outright purchase from foreign or Indian vendor. Procurement offset is not applicable in case of a bid (with at least 50% of indigenous content in the product); “‘Buy and Make with Transfer of Technology”,i. e. , purchase from foreign vendor followed by licensed production. 22 Doing business in India Offset obligations can be discharged by direct purchase of, or executing export orders for, eligible products and components manufactured by, or services provided by, Indian industries.
Offset obligations can also be discharged through direct foreign investment in Indian industries for industrial infrastructure for services, co-development, joint ventures, and co-production of eligible products and components. The ambit of the offset policy has been enlarged vide DPP in 2011 by including civil aerospace, internal security and bringing training in the list of eligible products and services. Further, the defence procurement policy also allows banking of offset credits. If the vendor is able to create more offsets than his obligations under a particular contract, surplus offset credits can be banked. . Industrial licensing The defence sector is also subject to an industrial license (IL) of an IL, which require, inter alia, (i) that the applicant should be an Indian company/partnership (ii) the majority of the Board of Directors and CEO should be resident Indians (iii) clearance through background checks for foreign collaborators and domestic promoters. License applications are considered and licenses provided by the Department of Industrial Policy and Promotion, Ministry of Commerce, in consultation with the Ministry of Defence. Recent developments and industry outlook
The Indian defence budget is growing in double digits and India has emerged as one of the most promising markets for global aerospace and defence companies. There has been an increasing focus on moving on from a buyer-seller to a collaborator, joint developer etc. The GoI now wants to ensure that its spending power leads to India gradually becoming a net exporter of defence equipment. Doing business in India 23 B. 2 Automotive The Indian automobile industry is estimated to have a total turnover of US$74b for the 12 month period ending 31 March 2012.
Despite global economic slowdown, the Indian automotive sector continued on an upward trajectory with a double-digit growth in FY12. Staying among the top-three markets across a number of vehicle segments, India is the world’s largest three-wheeler, second-largest two-wheeler and heavy commercial vehicle and the third-largest light commercial vehicle market. The country is rapidly being established as a small vehicle product development hub enabled by the large volumes needed for the domestic market and the ability to reduce costs through frugal engineering and manufacturing. There are as many as 12 ultinational players in the original equipment manufacturer (OEM) segment in the Indian market, and a number of expansion or new projects have been announced during 2011–12. Further its proximity to the South East Asian and African markets and well connected ports makes it an ideal location to develop as a small vehicle manufacturing hub. Exports of vehicles have grown at a CAGR of 25% over the period 2007–12 with 2. 9m units exported in FY12, with more than half a million PVs and 1. 95m two wheelers being exported to various parts of the world in FY12. Regulatory scenario FDI of up to 100% is allowed under the automatic route.
The GoI permits 200% weighted deduction on R&D expenditure. Moreover, most state governments offer additional incentives to vehicle manufacturers, given the large investments and employment generation capacity of this industry, in order to encourage them to set up units in their respective states. Among policy drafts, on the anvil is India’s Science, Technology & Innovation Policy 2013, in which, amidst other things, contributions are being sought for focus on engineering and advanced manufacturing for the automotive manufacturing industry to help in fueling and sustaining future growth. 24 Doing business in India
At the beginning of FY13, GoI unveiled a seven-point strategy to boost exports, including extension of import-tax waiver and interest subsidy, aimed at incentivizing domestic manufacturing while encouraging import substitution. It also extended the interest subsidy scheme on automotive vehicle and component companies across India. Among alternate technologies, electric vehicle sales in India took a hefty subsidy scheme offered by the Ministry of New and Renewable Energy has lapsed six months before the rollout of a new, improved policy drafted by the National Council of Electric Mobility (expected somewhere around October 2012).
The impact was felt across twowheeler and four-wheeler segments, with sales dropping by as much as 50%. India’s New Manufacturing Policy announced in 2011 aims to increase the share of manufacturing to 25% of the GDP from its current level of with competitive advantage. Recent developments and industry outlook The entry level, sub-1500cc segment continues to form the largest share of passenger vehicle sales, selling more than 1. 1m vehicles for the year. Being one of the most price-sensitive segments, the growth was lower due to increasing petrol prices and interest rates.
The year also saw rapidly shifting consumer preference toward diesel vehicles, leading to OEMs introducing diesel products across product segments. The demand for diesel vehicles grew to the extent of creating long waiting periods for diesel vehicles, as well as create idle inventory for petrol models. In the face of slowing demand, overcapacity was seen building up across the industry; however, given the emerging dual focus on servicing the domestic market and at the same time building export capabilities, near term excess capacity was seen as unavoidable.
For a price aggressive market such as India, exports enabled scale for automotive manufacturers to compete effectively. India’s emergence as a vehicle and component development continued to be on the automotive industry’s priority list for the year FY12 with emphasis on co-designing and co-development. Doing business in India 25 Domestic vehicle production forecasts (‘000 units) 10 Yr CAGR 14% 18% 10% 11% 35,000 – 9% 15% 5,300 3,000 9. 000 – 10,000 1,900 – 2,100 1,250 510 26,000 39,000 15,900 800 – 590 900 375 M&HCVs 2011 2015 (E) 2W & 3Ws 2020 (E) 810 570 1,100 – 1,200 170 – 100 190 52 Construction equipments* PVs SCV/LCVs Tractors
Source: ACMA – EY Vision 2020 Study, EY analysis According to the industry forecasts, India is poised to become one of production is set to treble from the levels in 2011–12 and the size of the component sector is set to grow from US$42b to US$110b. The passenger car segment in India is expected to grow at upwards of 12% in FY13. After producing more than 3. 1m passenger cars in FY12, the Indian market is looking forward to the launch of almost 50 new models in the coming year across sub-segments. Society of Indian Automotive Manufacturer’s (SIAM) predicts the commercial vehicle (CV) segment to grow between 9% and 11% in FY13.
The CV growth is expected to be propelled by strong demand in the Light Commercial Vehicle segment with the increasing acceptability of the hub-and-spoke model and inter-city transportation. 26 Doing business in India The largest contributor to the automobile sales, the two-wheeler segment in India is expected to grow at the rate of 11% to 13% in the year FY13. Led by motor cycles, the segment witnessed more than 15. 4m two-wheelers being produced in India in FY12. B. 3 Banking Financial markets in India have acquired enhanced depth and liquidity over the years. Steady reforms since 1991 have led to growing rought about a complete overhaul of the Indian banking sector, which was hitherto a highly regulated and administered sector. These reforms encouraged new market entrants, being private players and foreign banks, making the banking sector a more market-driven one with However, in the recent times, weak global economic prospects and their impact on the emerging market economies leading to constraints in availability funding for banks and corporate entities. In India, reforms system. this, more stringent capital and liquidity measures for commercial banks have been implemented and steps have been taken to build provision buffers.
The Indian commercial banks have prescribed Basel III capital and liquidity standards for banks and adopted new prudential compensation practices. In addition to this, various institutional mechanisms and tools to monitor systemic risks have been put in place. Efforts are being made to develop effective macro prudential supervision. The Indian banking sector broadly comprises three types of commercial banking entities, based on the nature of their ownership. These are public sector banks, private sector banks and foreign banks. The public sector banks still continue to dominate the banking space with a Doing business in India 27 eposit market share of more than 75%. Despite all efforts undertaken post-1990s to boost banking in India, the banking sector penetration remains low. Apart from commercial banks, measures have been taken to The banking sector intermediation, as measured by the total loans as a Regulatory scenario Regulator: The sector is regulated by the RBI. Key enactments governing this sector include the Banking Regulation Act, 1949; Reserve Bank of India Act, 1934; and the Companies Act, 1956 (“the supervisory policies to enable a strong capital base, effective risk management and best corporate governance standards in the banking sector.
In recent times, the focus has also been on improving credit delivery, increased vigilance, monitoring salaries of key personnel, FDI policy in banking: The total aggregate foreign investment in private banks from all sources (FDI, FII and NRI) is limited to 74% with a limit of 10% for individual foreign institutional investors (FIIs) with the aggregate limit for all FIIs restricted to 24%, which can be raised to 49% with the approval of the board/general body. The FDI norms are not applicable to public sector banks where the FDI ceiling is still capped at 20%.
Capital requirements: Basel III stipulates that all banks should attain capital to risk (weighted) assets ratio (CRAR) [inclusive of Capital Conservation Buffer (CCB)] of 11. 50% and common equity tier-1 CRAR (inclusive of CCB) of 8% by 31 March 2018 [CRAR (inclusive of CCB) of 9. 625% and common equity tier-1 CRAR (inclusive of CCB) of 6. 125% to be achieved by 31 March 2015]. Domestic and foreign banks have been allowed by RBI to augment their capital funds by issuing certain hybrid instruments. 28 Doing business in India Developments in the banking sector and industry outlook
Financial inclusion to drive banking growth: In pursuance of the announcement made in the Monetary Policy Statement of April certain unbanked villages with a population of 2,000. Under this policy, banks have been able to cover 99. 7% of the unbanked policy, has now mandated SLBCs to prepare a roadmap to cover all unbanked villages with a population of less than 2,000. The RBI extended the scope of the business correspondent (BC) model to allow listed companies with large distribution network in rural areas to act as BCs, which marked the entry of telecom operators and large FMCG companies in the BC model.
Focus on mobile banking to drive penetration of banking services in India: Since only 40% of the adult population in India has access to banking services, while approximately 70% own a mobile commercial banks. Several leading banks have tied up with telecom operators and handset manufacturers to provide mobile banking facility. In order to further augment the facility, the RBI recently removed the ceiling of INR 50,000 per customer per day mandated in 2009 under the guidelines on mobile banking. Given this, banks are now free to place per transaction limits based on their own risk perception with the approval of its Board.
Granting of additional banking licenses: During the Union Budget of 2010–11, the GoI, in consultation with the RBI, announced that it may consider granting additional banking licences to private sector players. Pursuant to this announcement, the RBI issued a discussion paper requesting public comments on minimum capital requirements of new banks, promoter’s participation, foreign shareholding, eligibility of industrial houses and NBFCs. Doing business in India 29 Detailed discussions on the above issues have been held by various industry bodies.
Based on the comments provided, the GoI released the revised draft guidelines for granting banking licenses. Setting up of electronic payments systems: National Payments Corporation of India has set up an Inter-bank Mobile Payment Service (IMPS) and is in the process of rolling out an indigenous payments network, “RuPay”. These initiatives are likely to reduce process of payment transfer quicker. Revision in rules to set up foreign banks in India: In 2005, the RBI announced a roadmap for the set up of foreign banks in India.
The roadmap inter alia proposed two phases to achieve a wholly owned phase, foreign banks were permitted to establish presence in India by way of setting up a WOS or conversion of the existing branches into a WOS. The second phase proposed to accord full national acceptance to WOS structures set up by foreign banks in India. As a key step toward implementing the roadmap, the RBI issued a discussion paper in January 2011. The discussion paper lays down the intent behind adopting WOS as the preferred structure, proposed framework to make this structure operational along with incentives to existing/new banks to set up a WOS vis-a-vis a branch.
Banking Laws Amendment Bill, 2011: The Banking Laws Amendment Bill, 2011 (Bill) was recently cleared by the Cabinet Committee on Economic Affairs (CCEA). The key changes proposed by the Bill are: rights from 10% to 26%. 30 Doing business in India B. 4 Capital markets Capital markets the last decade, which spans several dimensions of development such as accessibility, regulatory framework, market infrastructure, transparency, liquidity and the types of instruments available. All these factors have culminated in the emergence of a much deeper and resilient primary as well as secondary capital markets in India.
Regulatory scenario SEBI was established as a statutory body in 1992 to achieve the following: Regulate and promote the development of the securities market and protect the interest of investors Regulate the functioning of capital markets and issue detailed guidelines relating to capital markets, disclosures by public companies, and investor protection Formulate regulations to govern various intermediaries and investors The SEBI has proactively introduced measures to improve the integrity of the secondary as well as primary markets through better governance.
Additionally, the SEBI has introduced reporting requirements for various capital market participants to enable increased transparency. Dealings in securities are also governed by the provisions of The Securities Contracts (Regulation) Act, 1956. Mutual funds The entry of private sector mutual funds in 1993 has given the Indian retail/corporate investors a wide choice of fund houses. The number of SEBI registered asset management companies in India stood at 51. Doing business in India 31 The chart below indicates the movement in assets under management (AUM) over the years: 13,979 500,000 Rs in Crores 400,000 300,000 47,000 200,000 25 100,000 Mar-65 Mar-87 Mar-93 Mar-03 Mar-04 Mar-05 Mar-06 4,564 79,464 139,616 149,554 231,862 Mar-07 326,388 Mar-08 Mar-09 417,300 600,000 505,152 700,000 Mar-10 Mar-11 592,250 Years Movement in Assets Under Management In order to widen the class of investors, attract more foreign funds, reduce market volatility and to deepen the Indian capital markets, the invest in Indian equity markets and corporate bonds, in addition to allowing them to invest in equity and debt schemes of SEBI-registered Mutual Funds (subject o prescribed conditions and limits). QFI denotes a person who is resident in a country, other than India, that is a member of Financial Action Task Force (FATF) or a member of a group, which is a member of FATF and is a signatory to International Organization of Securities Commission’s Multilateral Memorandum of Understanding (MMU) or a signatory of a bilateral Memorandum of Understanding with SEBI. Mar-12 587,217 Movement in AUM 32 Doing business in India Foreign Institutional Investors markets.
In addition, the sustained nature of FII investments has reiterated their belief in India’s growth story, thus sending strong positive signals about the prospects of India as an investment destination to the global investment community. The number of SEBI registered FIIs and sub-accounts stood at 1,767 and 6,278 respectively at the end of December 2011. Net FII investment in 2011–12 amounted to approximately INR 937b (US$17b approx) as compared to INR1464b (US$26. 56b approx) in 2010–11. The Indian regulatory regime has adopted a cautious approach toward allowing foreign institutions to invest in the country.
Over the years, the regulations have been liberalized gradually across several dimensions such as investment limits, eligibility criteria and the instruments permitted for FII investments. Of late, infrastructure is one sector where the regulations pertaining to foreign investment have been notably relaxed. The overall limit for foreign investments in long-term infrastructure debt is US$25b. Of the same, US$22b is for FII investments and the balance US$3b pertains to QFI investments. Venture Capital Funds (VCF) The visibility of VCF has increased over the last couple of years with several large funds looking actively at investments in India.
The number of SEBI registered VCFs and Foreign Venture Capital Investors (FVCIs) stood at 205 and 164, respectively during 2011–12. Investments by VCFs and FVCIs in venture capital undertakings stood at approximately US$10. 78b as at 31 March 2011. latter’s contribution of an amount aggregating to at least US$1m at the time of registration with the SEBI. Doing business in India 33 Alternative Investment Funds (AIF) Investment Funds) Regulations, 2011 (AIF Regulations). AIFs are segregated into Category I, II and III. All AIFs are required to mandatorily seek registration in one of the categories.
The existing Regulations. The funds registered as venture capital funds under the VCF Regulations will continue to be regulated by the said regulations till the existing fund/scheme is wound up. Such funds/schemes will not be allowed to launch any new scheme or increase the targeted corpus Commodities markets The commodities market is another rapidly growing market in India. commodity derivatives exchange, National Multi Commodity Exchange of India, was permitted to commence operations. Currently, there are Forward Market Commission website – www. fmc. gov. in). nd sale of commodity are: Multi-Commodity Exchange of India Ltd. National Commodities and Derivatives Exchange Ltd. National Multi-Commodity Exchange of India Ltd. Indian Commodity Exchange Limited Ace Derivatives and Commodities Exchange Ltd. Indian commodity derivative markets are regulated under the Forward Contracts (Regulation) Act, 1952 (FCRA). The Act proposes a threetier regulatory structure for the industry, including: Government of India, which is the primary regulator Forward Markets Commission (FMC), which acts as an intermediary between the government and the exchanges The exchanges 4 Doing business in India Key functions of the FMC include providing limits on speculative open positions, placing price limits for all commodities and providing directives for margin requirements. Foreign investment is permitted in commodity exchanges, subject to a composite ceiling of 49%, with a FDI limit of 26% and FII limit of 23%. FDI is allowed with exchanges are restricted to the secondary markets only. Derivative markets The market for exchange-traded derivatives has evolved rapidly in India over the last decade and the country today boasts of one of the most active derivatives markets across the globe.
In fact, the turnover of derivatives trading on the National Stock Exchange of India (NSE), which increased from US$0. 55b in 2000–01 to US$6,128. 21b in 2011–12, has already surpassed that of the equity markets. Index options are the most popular type of derivative instrument and account for the highest share of the total derivatives turnover. Credit default swaps (CDS) for corporate bonds became the latest derivative instrument permitted in India when the recent guidelines for CDS issued by the RBI became effective from 24 October 2011.
The RBI has included EXIM, NABARD, NHB and SIDBI as users permitted to participate in the CDS market. Debt markets The debt market in India, especially the corporate bond market, has not kept pace with the growth of equity markets in India. Some of the reasons for the slow growth of corporate debt markets in India include poor transparency, absence of pricing of spreads against the benchmark yield curve, an inadequate supply of paper from corporate entities, large issuance of government securities and low-risk subordinated debts by banks. Doing business in India 35 Corporate Debt Markets – Number of trades 31589 28195 8300 11203 8327 3787 4089 Mar-08 12522 9501 4902 7408 8006 4465 7919 5460 Mar-09 BSE Mar-10 NSE Mar-11 FIMMDA Mar-12 Corporate Debt Markets – Volume of trades (INR billion) 4097. 41 2920. 23 1959. 55 1519. 19 615. 34 409. 58 495. 05 533. 24 373. 21 314. 53 234. 79 Mar-08 Mar-09 BSE Mar-10 NSE 1559. 56 1398. 61 395. 82 417. 57 Mar-11 FIMMDA Mar-12 However, the government has been taking initiatives for the development of a robust corporate bond market in India. The move to introduce CDS for corporate bonds, as mentioned above, is a step in that direction. 36 Doing business in India B. 5 Life sciences
The Indian life science market is witnessing dynamic changing trends such as large acquisitions by multinational companies and increasing investment by domestic and international players in India, deeper penetration into the rural markets, growth and availability of health care. Industry overview and outlook Pharmaceutical formulations and bulk drugs The Indian pharmaceutical market is highly fragmented with the top 10 players accounting for nearly 38% of total sector revenues, which was estimated at US$21. 5b in 2011. The pharmaceutical market is expected to grow at a CAGR of 14. 3% to reach US$36. b by 2015 India accounts for nearly 8% of global pharmaceutical production1 which makes it the third- largest pharmaceutical manufacturer worldwide2. Pricing is a critical aspect for pharmaceutical companies operating in India. The number of drugs in the essential drugs list has increased from 74 to 348. This price cap will potentially impact the revenues of pharma companies operating in India. Nearly 18 of the top 20 global pharmaceutical companies have set up their subsidiaries in India3. They also enter in marketing arrangements with domestic players to expand the reach of their products.
The share of formulations and Active Pharmaceutical Ingredients (APIs) stood at 82:18 in FY11 as against 69:31 in FY074. 1 “India- World Pharmaceuticals Market- Q1 2012,” Epsicom, 16 July 2012, via ISI Emerging Markets. 2 “A brief report on pharmaceutical industry in India, March 2012,” CCI website, http:// www. cci. in/pdf/surveys_reports/indian-pharmaceuticals-industry. pdf, accessed 17 July 2012. ims/Global/Content/Corporate/Press%20Room/Top-Line%20Market%20Data%20&%20 Trends/2011%20Top-line%20Market%20Data/Top_20_Global_Companies. pdf, accessed 19 July 2012. “Initiating coverage on Indian Pharmaceutical sector,” Spark Capital Advisors (India) Pvt. Ltd. , September 2011, via ThomsonONE. com Doing business in India 37 The domestic pharmaceutical market amounted to US$14. 3b in 2011. The market has grown at 16. 3% y-o-y in 20115. India’s total pharmaceutical exports were estimated at US$7. 2b in 2011, growing at a CAGR of 18. 1% between 2007 and 20116. The US is the largest market for India’s pharmaceutical exports7. The exports are expected to reach US$16. 7b by 20158. India accounts for more than 45% of the world’s requirement of bulk drugs9. Biotechnology
The Indian biotechnology sector is largely dominated by domestic players with only four foreign players featuring in the list of top-20 biotech companies in FY1110. informatics and bio-industrial segments. The Indian biotech industry amounted to nearly US$3. 7b in FY11, growing at a y-o-y rate of 21. 5%11. Bio-pharma is the largest industry segment, accounting for nearly 62% of total revenues, followed by the bio-services (19%) and bio-agri (14%) segments12. Prospects for the biotechnology equipment market in India are seemingly bright. The Indian biotech industry is projected to reach US$10b by 201513. “Pharmaceuticals,” Indian Brand Equity Foundation website, http://www. ibef. org/ download/Pharmaceuticals50112. pdf, accessed 17 July 2012. 6 “Pharmaceuticals,” Indian Brand Equity Foundation website, http://www. ibef. org/ download/Pharmaceuticals50112. pdf, accessed 17 July 2012. 7 “India pharma exports to double,” Hindustan Times website, http://www. hindustantimes. com/business-news/WorldEconomy/India-pharma-exports-to-double/Article1-766513. aspx, accessed 17 July 2012. 8 “Pharmaceuticals,” Indian Brand Equity Foundation website, http://www. ibef. org/ download/Pharmaceuticals50112. df, accessed 17 July 2012. 9 “History,” Bulk Drug Manufacturers Association (India) website, http://www. bdmai. org/ history. php, accessed 17 July 2012. 10 “BioSpectrum ABLE Biotech industry survey 2011,” ABLE India website, http:// www. ableindia. in/pdf/9th_survey. pdf? bcsi_scan_debb0e326e6a7dd8=0&bcsi_scan_ 11 “BioSpectrum ABLE Biotech industry survey 2011,” ABLE India website, http:// www. ableindia. in/pdf/9th_survey. pdf? bcsi_scan_debb0e326e6a7dd8=0&bcsi_scan_ 12 “BioSpectrum ABLE Biotech industry survey 2011,” ABLE India website, http:// www. ableindia. n/pdf/9th_survey. pdf? bcsi_scan_debb0e326e6a7dd8=0&bcsi_scan_ 13 “Biotechnology,” Indian Brand Equity Foundation website, http://www. ibef. org/industry/ biotechnology. aspx, accessed 16 July 2012. 38 Doing business in India Exports accounted for a 51% share of the total biotech sector, with bio-pharma (52% of the total segment sales) and bio-services (92%) accounting for a major share of revenues from exports14. A new autonomous body called the National Biotechnology Regulatory Authority is being established under the draft Biotechnology Regulatory Authority of India Bill, 2012.
Contract Research and Manufacturing Services (CRAMS) The Indian CRAMS market was estimated at US$3. 8b in 2010, growing at a CAGR of nearly 51% from 2007 to 201015 and is expected to reach US$7. 6b, with a CAGR of 41. 4% from 2010 to 2012. With reducing R&D productivity, increasing costs of manufacturing and research, and shrinking pipelines, MNCs are engaging themselves in outsourcing manufacturing and drug discovery to low cost destinations such as India. capabilities are some of the factors driving the growth of CRAMS in India. Contract research The contract research market was estimated at around US$1. b in 2010, growing at a CAGR of 65% from 2007–2010. The Indian contract research market accounts for 6% of the global contract research market16. Contract manufacturing The contract-manufacturing market was estimated at nearly US$2. 3b in 2010, growing at a CAGR of 51% during 2007–2010 and is projected to reach in the range of US$7–8b by 201517. 14 “BioSpectrum ABLE Biotech industry survey 2011,” ABLE India website, http:// www. ableindia. in/pdf/9th_survey. pdf? bcsi_scan_debb0e326e6a7dd8=0&bcsi_scan_ 15
“CRAMS India: Overview and outlook,” ICRA website, www. icra. n/Files/Articles/ CRAMS%20Note,%20Overview%20and%20Outlook. pdf, accessed on 12 July 2012. 16 “CRAMS India: Overview and outlook,” ICRA website, www. icra. in/Files/Articles/ CRAMS%20Note,%20Overview%20and%20Outlook. pdf, accessed on 12 July 2012 17 “Healthy prospects for Indian CRAMS sector supported by Custom Manufacturing and increasing presence in Contract Research,” ICRA website, www. icra. in/Files/ Pressrelease/PR-2011-(CRAMS). pdf, accessed 12 July 2012. Doing business in India 39 The market represents nearly 5. 5% of the total global market18 India has more han 200 plants that have been approved by the United States Food and Drug Administration (USFDA) and the UK Medicines and Healthcare Regulatory Agency. Additionally, India accounts for nearly one-third of a total of 431 Abbreviated New Drug Applications (ANDAs) approved by the USFDA in 201119 Medical devices and equipment and it ranks amongst the top-20 in the world. It is the fourth-largest medical device industry in Asia after Japan, China and South Korea The Indian industry was valued at US$2. 4b in 2010, growing at a CAGR of 12% for 2007–2010.
However, the size of the industry is still small as per capita spending is just around US$2 in 2010. The industry is forecasted to reach US$4. 8b by 2015, growing at a CAGR of 15. 6% (2009–2015). Medical devices sales in the country are steadily improving as a function of overall health care expenditure. In 2010, medical device sales contributed nearly 4. 4% of total health care expenditure in the country. It is projected that the sales of medical devices will increase to 4. 5% of total health care expenditure in the country by 2015.
The private sector contributed nearly 77. 4% to health care expenditure in 2010. Orthopedic implants are expected to grow at a CAGR of 18. 7% between 2009 and 2015. Dental products and consumables are expected to grow at CAGRs of 17. 4% and 17. 1%, respectively during the same period. Growing private sector participation in health care and the GoI’s initiatives are likely to drive the growth of the industry in the near future, especially in rural areas. In addition, the rising per capita income of people in the country will enable the doubling of per 8 CRAMS India: Overview and outlook,” ICRA website, www. icra. in/Files/Articles/ CRAMS%20Note,%20Overview%20and%20Outlook. pdf, accessed on 12 July 2012. 19 “Indian pharma companies obtains 144 ANDA approvals from US FDA in 2011,” Pharmabiz website, http://pharmabiz. com/NewsDetails. aspx? aid=66831&sid=2, accessed 12 July 2012 20 “India’s Medical Device Regulation Bill Not Dead Yet”, Medtech Insider, http:// medtechinsider. com/archives/22988, accessed 25 July 2011 40 Doing business in India capita spending on medical devices by 2015 from US$2 currently.
Moreover, medical device manufacturers are eyeing the opportunity presented by the growth witnessed in medical tourism. In light of these factors, the medical devices market in India is expected to offer a competitive environment to both SME companies and foreign multinational entities. MNCs are expected to continue to dominate the medical devices industry in India, especially the high-technology product category, due to their scale of operations and extensive service networks. The domestic industry is expected to meet low- to midtechnology product demand.
Further, the development of favorable regulations, along with IP protection in sync with global norms, is expected to enable opportunity and drive the next phase of industry growth. Clinical trials The size of the Indian clinical trials market was around US$400m (INR 23. 1b) in 201121. India’s share of this market is expected to increase from 2. 1% in 2011 to 2. 9% in 2015 to reach almost US$1b (INR 43. 9b)22. The number of new trials registered in the country declined from 365 in 2010 to 230 in 2011, losing to competition from countries such as China and Eastern European countries23.
Foreign CROs undertake Phase II and Phase III clinical trials whereas the Indian players specialize in conducting bio-availability, bioequivalence (BA/BE) studies and data management. Mandatory requirement to register clinical trials with Clinical Trials Registry-India (CTRI) and the country’s increasing compliance with WHO Good Clinical Practice (WHO-GCP) norms are some of the key drivers for the future24. 21 “India losing out on clinical trial biz pie,” Financial Express, 9 July 2012 via Factiva, ©2012 Indian Express Online Media Pvt. Ltd. 22 “Clinical trials market -India,” Netscribe Pvt.
Ltd. , April 2012, via ISI Emerging Markets 23 “Clinical trials market -India,” Netscribe Pvt. Ltd. , April 2012, via ISI Emerging Markets 24 “Clinical trials market -India,” Netscribe Pvt. Ltd. , April 2012, via ISI Emerging Markets Doing business in India 41 Regulatory scenario Foreign Direct Investment regulations According to existing foreign direct investment regulations, investment in pharmaceutical company is categorized as under: permitted under automatic route in the pharmaceuticals sector: 100% FDI permitted under the Government route. . e. ,with the prior approval of FIPB According to the Press Note issued by the GoI, we understand that the policy for foreign investment in India is under review and currently under deliberation. The extant policy is for the interim period and is Other regulations The main regulatory body for the Indian pharmaceutical industry is the Central Drugs Standard Control Organization (CDSCO), which falls under the ambit of Ministry of Health and Family Welfare.
Drug Controller General of India (DCGI) is the controlling body for CDSCO and is responsible for the approval of new drugs and clinical trials as well as establishment of quality standards. The regulator also monitors State Drug Authorities, which are primarily responsible for granting drug manufacturing and retailing licenses. Order (DPCO) and are regulated by the government through National Pharmaceutical Pricing Authority (NPPA). Further, the GoI is also proposing to bring certain medical devices within the ambit of DPCO. The Department of Pharmaceuticals was promulgated on 2 July 2008 under the Ministry of Chemicals and Fertilizers.
The department was established with the objective to provide increased focus on development of the pharmaceutical sector in India and to regulate complex issues related to affordability and availability of medicines, R&D, the protection of intellectual property (IP) rights and international commitments related to the pharmaceutical sector, all of which require integrating work with other ministries. 42 Doing business in India Drugs The GoI has issued a Uniform Code of Pharmaceuticals Marketing Practices to check marketing practices of pharmaceutical companies for doctors prescribing their drugs.
The GoI has revised the National List of Essential Medicines with a total of 348 medicines in the list and categorizing them according to their therapeutic areas. The GoI has issued a draft National Pharmaceuticals Pricing Policy, 2011 to replace the earlier Drug Policy of 1994 and to put in place a regulatory framework for pricing of drugs so as to ensure availability of essential medicines at reasonable prices while providing opportunity for innovation and competition to support the growth of the industry.
The DGFT has implemented barcoding on export consignment of pharmaceuticals and drugs for tracing and tracking purpose. The trace and track technology has been made compulsory for tertiary level packaging with effect from 1 October 2011. Further, the second phase of barcoding will become mandatory from 1 July 2012 along with the third phase of barcoding on primary level packaging. The GoI has constituted the new Drugs Technical Advisory Board chairman of the statutory body constituted under the Drugs and Cosmetics Act. The DTAB is the highest decision-making body under the union health ministry on technical matters.
Clinical trial CDSCO has issued a draft guidance on requirement of submission of chemical and pharmaceutical information including stability study data for approval of clinical trials/BE studies. Other key changes The Government has constituted the National Apex Committee for Stem Cell Research and Therapy (NAC-SCRT) to review and monitor stem cell research in the country. Doing business in India 43 B. 6 Technology In the backdrop of an uncertain global economic environment, the Indian IT industry has continued to exhibit resilience and achieve sustainable growth.
This has been due to its adaptability and ability to continuously reinvent itself, its continued focus on moving-up the value chain, rising technology spends particularly by the Government, differential investments in areas such as cloud computing, etc. It has evolved as a major contributor to India’s GDP and plays a vital role in driving growth of the economy, in terms of employment, export promotion, revenue generation and standard of living. According to the IT Annual Report 2011–12, issued by the Department of Information Technology, it is estimated that the IT industry’s contribution to India’s GDP has increased to 7. % in 2011–12, from about 7. 1% in 2010–11. The Indian software and services exports (including ITES and BPO exports) are estimated at US$68. 7b in 2011–12, as compared to US$59b in 2010–11, an increase of 16. 4%. Although the IT sector is export driven, its revenues from the domestic market have also been substantial — the domestic sector is estimated at US$19b in 2011–12, as against US$17. 3b in 2010–11, an increase of around 9. 8%. India also continued its dominant position as the leading outsourcing market as compared to other emerging economies.
It is estimated that India–based resources account for around 60% to 70% of the offshore delivery capacities available across the leading multinational IT players. Regulatory scenario As part of its trade policies to attract foreign investment in India and to promote exports, the GoI had introduced the SEZ scheme, and SEZs. This policy continues to be extended under the proposed new DTC, under which IT units operating in an SEZ can continue to avail such SEZ tax holiday, provided they commence operations in such an SEZ, on or before 31 March 2014. 4 Doing business in India With a view to strengthening the existing framework under the IT (Amendment) Act, 2008, the GoI has also introduced certain rules in relation to implementation of reasonable security practices and data privacy requirements by corporate organizations, for protecting sensitive personal information collected by them. Recent developments and industry outlook The Indian IT industry continues to have a positive outlook given its strong fundamentals, growth and maturity of the domestic market, and services, and e-commerce.
Nevertheless, the industry will need to cope with factors such as pricing pressures, increasing competition from low-cost jurisdictions and the economic downturn in traditional mature markets. From an IT policy standpoint, the GoI has undertaken various The GoI has recognized the importance of IT-ITES and Electronics hardware manufacturing in the country, both for strategic and economic reasons, and has released vision documents and draft policies for these key sectors, over the past year.
The “Draft National Policy on IT” seeks to achieve the twin goals of bringing the full power of IT within the reach of the entire country and harnessing the capability and human resources available locally, to enable India to emerge as the Global Hub and Destination for IT-ITES by 2020. The “Draft National Policy on Electronics” envisions creating a globally competitive ESDM industry, including nano-electronics, to serve both the domestic and international markets. The GoI has also constituted an Empowered Committee to identify suitable technology and investors, for setting up Semiconductor Fabrication facilities in the country.
Also, the continued introduction and implementation of various government-sponsored projects and e governance initiatives, such as the UID project, National Knowledge Network, etc. , are expected to boost demand for IT in the country. Doing business in India 45 The phenomenal growth of the IT-ITES sector has seen it become one of the biggest employment generators and has also spawned the mushrooming of several ancillary industries. Direct employment in the IT industry is estimated at 2. 77m in 2011–12, an increase of more than 9%. Further, indirect employment of more than 8. m is estimated the growth to be more than 14m jobs (directly and indirectly) by 2015 and around 30m jobs by 2030. With the current dynamic business environment, the Indian IT industry and embrace new business models, which will offer customers a “transformational” business proposition, strengthen innovation and skilled talent pool in the country. B. 7 Insurance The Indian insurance industry has undergone a major transformation over the past decade and has evolved into a considerably competitive market. A growing middle-income segment, rising income levels, increasing awareness bout insurance, higher investments and infrastructure spending have laid a strong foundation to expand the insurance market in India. The total penetration of insurance (premium as a percentage of GDP) has increased manifold from 1. 90% in FY00 to 5. 10% in FY11. This progress has been further aided by better products, e. g. , whole life, auto assistance, wellness and emergence of wide-ranging distribution channels, e. g. , bancassurance, broking, corporate agency, online insurance etc. Regulatory scenario The Insurance Regulatory and Development Agency (IRDA) regulates the insurance and reinsurance business in India.
The IRDA Act of 2000 addresses issues related to ownership, solvency, investment portfolio construction, commission structures, reporting formats and accounting standards. 46 Doing business in India The minimum paid up equity capital requirement has been set at INR1b (US$18. 14m approximately). The insurance business is a capital intensive one and companies are likely to require regular capital infusion for funding expected losses and meeting solvency requirements. FDI (including FII and NRI investments) by a foreign partner is currently capped at 26% in an Indian insurance company joint venture.
The Insurance Laws (Amendment Bill), 2008 was introduced in the Parliament in December 2008. The same was referred to the Parliamentary Standing Committee on Finance, which submitted its report in December 2011. Some of the key amendments proposed in the Bill are as follows: Increasing FDI limits in the insurance sector from 26% to 49%. Introducing “Health insurance business” as a separate category of insurance (the other categories being life and general insurance); minimum paid-up capital of INR500m (US$10m approximately) prescribed for standalone health insurance companies.
Allowing foreign reinsurance companies to set up their branches in India. Recent developments and industry outlook Years 2010 and 2011 have witnessed path-breaking changes across several dimensions of the insurance landscape, be it products, distribution, fund raising or strategy. Various regulatory changes that have come up are as follows: To make the Unit Linked Insurance Plans (ULIPs) a long-term protection contract IRDA made several structural changes in ULIPs, such as increasing the lock-in period, doing away with excesses, etc.
These measures changed the overall landscape for private insurers, which had around 80% of their product portfolio consisting of ULIPs. This reduced the attractiveness of ULIPs for insurers, distributors and customers to some extent. To increase persistency and bring discipline among agents IRDA has issued strict license renewal norms such as need for minimum business requirement. Doing business in India 47 To improve claims ratio and solvency margin, IRDA has increased the third-party motor premium from April 2011.
To promote healthy competition and improve service standards, health insurance portability has come into force from 1 October 2011. This allows the consumers to shift their insurance companies To safeguard policyholder’s interest and improve customer satisfaction, outsourcing of “non-core” activities was allowed by the IRDA. To provide a framework for amalgamation and consolidation in the general insurance industry, of Amalgamation and Transfer of General Insurance Business Regulations.
The Scheme provides a two-stage approval of the to be obtained after the Scheme has been examined by the other regulators including the High Court/Income Tax Appellate Tribunal). To provide a framework for divestment to public by the promoters in case of life insurance companies who have completed 10 years, Companies Regulations governing raising capital and divestment of shares through public offer for sale by promoters of Indian life insurance companies who have completed 10 years of operations. These regulations require a life insurance company to seek IRDA’s approval before approaching SEBI for public issue of shares.
The insurance sector in India has been through a bumpy ride for some time now. Although, in the last decade, the premium income has grown at a CAGR of 20%, the pace of growth is expected to slow down to around 15% for the next 10 years. The sector is going through a transition phase. IRDA has been increasing its checks on the market practices adopted by insurance the industry in the market. Regulatory changes for pension plans and ULIPs are expected to push insurance companies to increase the term of the policies, reduce mis-selling of policies and promote traditional policies, which are not in vogue any more. 8 Doing business in India B. 8 Media & Entertainment With more than 623 television (TV) channels1, 145m pay-TV households, more than 80,000 newspapers with a readership close to 182m2 entertainment (M&E) industry provides attractive growth opportunities for global corporations. The industry is estimated to achieve a growth rate of 13% in 2012 to touch INR825b and is projected to reach INR1,500b by 2016, at a CAGR of close to 15%3. Regulatory scenario The Ministry of Information and Broadcasting (MIB) is responsible for laws, rules and regulations related to information and broadcasting, cable services.
The Cinematograph Act, 1952 and the Prasar Bharati (Broadcasting well as national television and radio. Cinema exhibition rules and have enacted laws on these. In 2011, News Broadcasters Association4 issued a new set of guidelines called NBA News Access Guidelines for general entertainment footage providing that live telecast of any general entertainment channel (GEC) cannot take place for more than eight minutes per day. Further, the Indian Parliament sanctioned the Cable Television Networks (Regulation) Amendment Bill, 2011, which aims at digitization of the cable sector in the country by 31 December 2014 in a phased manner. Pitch Madison Report 2012 2 Indian Readership Survey and Registrar of Newspaper 3 Industry outlook 4 The News Broadcasters Association is a private association of different current affairs and news television broadcasters in India. Doing business in India 49 FDI and FII investment by segments Segment Broadcasting FM radio Cable network DTH 26 (FDI+ NRI+ PIO+ portfolio investment) 49 (FDI+ NRI+ PIO+ portfolio investment) 49 (FDI+ NRI+ PIO+ portfolio investment), subject to maximum FDI component of 20 74 (total direct and indirect foreign investment including portfolio and FDI) 49 (FDI+FII) 26 (FDI+FII) 100 Sectoral limits (%)
Headend-in-the-sky Setting up an up-linking facility hub Up-linking news and current affairs channel Up-linking non-news and current affairs channel Print media Publishing of newspaper and periodicals dealing with news and current affairs Publication of Indian editions of foreign magazines dealing with news and current affairs specialty magazines, journals and periodicals Publication of facsimile editions of foreign newspapers Others Advertising Films, music and live entertainment 26 (FDI+NRI+PIO+FII) 26 (FDI+NRI+PIO+FII) 100 100 100 100
Source: Ministry of Commerce and Industry Department of Industrial Policy and Promotion 50 Doing business in India Recent developments and industry outlook Segmentwise recent developments: TV — The television distribution industry is gearing up to embrace the digitization process and broadcasters have expanded their regional footprint to establish pan-India networks. The new date metros) is 1 November 2012. This, alongwith the expansion of digital distribution technologies, has led to the consolidation of the distribution business to capture pan-India arkets and will revolutionize the way to deliver content to the ultimate customers. Print — Newspapers account for 42% of all advertising spend in India, the highest among any medium. The top ten English newspapers added 0. 123m readers in the latest round of the readership survey conducted by the Media Research Users Council (MRUC) in collaboration with Hansa Research. The print players are in the process of getting their digital strategy in place to be ready for the opportunity being presented by new content and digital delivery formats. onsumer engagement. Indian audiences are actively consuming for 50% of Indian mobile value-added service revenues. Digital piracy. Low-budget, content-driven movies based on high-quality scripts are gaining acceptability among mainstream audiences. Animation and Visual Effect Centre of Excellence will be set up funds and crowd funding. To encourage industry-level cooperation, share creative talent production agreements with Poland, Italy, Northern Ireland, New Zealand and other countries. Doing business in India 51
Radio — Since the opening of the sector to private players in March 2000, the GoI is taking steps to provide a thrust to the sector. In this backdrop, the GoI is expected to commence e-auctions for Phase III of FM radio from December 2012. The auctions will be spread over a period of three years to increase the number of private FM radio channels from 245 currently to around 839, covering another 227 cities with a population of more than 0. 1m. Sports – After successfully hosting the Indian Premier League (T20), 2010 Commonwealth Games and Formula One race, the notion of India being a single-sport country has changed.
This momentum, combined with a young population and a rising propensity to spend on entertainment, has made way for FIA GT1 championship, and World Superbike series with others being in the pipeline. Large private groups have entered long-term agreements to develop sports other than cricket. The sports industry is also spurring the growth of ancillary businesses such as online ticketing and sports and talent management. Others — Earlier, copyright of literary, dramatic or musical work were assigned to the producers and the artistes did not earn royalty income.
With the Copyright (Amendment) Act 2012 coming into force, artistes are declared as owners of the copyright and it will now become mandatory for broadcasters — both radio and television — to pay royalty to the owners of the copyright each time their work is broadcast. Industry outlook digitization and digital media. With the launch of 3G and expected 4G services and the mobile phone user base of more than 750m subscribers, the scale and impact of potential digital content consumption is enormous. onsumption comes from non-metro cities (Tier-2 and Tier-3 a market”, and provide global M&E companies with a variety of opportunities to deliver localized content. 52 Doing business in India exciting opportunities to counter declining revenues. For example, the newspaper industry, which is facing declining readership in many international markets because of digital media, continues to thrive in India, driven by increasing literacy rates, consumer spending and the growth of regional markets and specialty newspapers.
Also, with favorable demographics and an increase in disposable incomes, the propensity to spend on leisure and entertainment is likely to continue growing. While there are many opportunities to tap, there are also unique challenges in the areas of content localization, distribution and pricing, regulations and piracy. In view of the above, there is likelihood of M&E players scaling up B. 9 Mining & metals The mineral wealth of a country is pivotal to its industrial development, since minerals provide basic raw material for most industries.
As an ancillary activity of the manufacturing industry, mining contributes to wealth creation through foreign exchange and employment generation. India develops 87 minerals, which include 4 fuels, 10 metallic, 47 nonmetallic, 3 atomic and 23 minor minerals (including building and other material). The country holds abundant reserves of key minerals such as iron ore, bauxite, dolomite, gypsum, limestone and mica. In fact, India is one of the leading producers of key minerals such as iron ore and bauxite.
The mining sector is an important segment of the Indian economy and along with the quarrying sector contributes more than 2% to the country’s economy. Doing business in India 53 Regulatory scenario The Mines and Minerals (Development and Regulation) Act 1957 (MMDR Act) lays down the overall framework for the regulation of mines and the development of minerals in India (except petroleum and natural gas). According to the Mineral Concession Rules 1960 (MCR 1960), which was framed under the MMDR Act, the Central Government gives concessions to all minerals other than atomic and minor minerals.
State governments, on the other hand, frame rules for the mining of minor minerals. The Ministry of Mines is the main regulatory body for the administration of the MMDR Act for all mines and minerals (excluding coal, natural gas and petroleum). Key bodies under the Ministry of Mines include the Geological Survey of India (GSI), the Indian Bureau of Mines and the Directorate General of Mines Safety. At the state level, respective regional arms of the Directorate of Mining & Geology regulate industry activity. Meanwhile, the Ministry of Coal is responsible for the development of coal reserves in India.
FDI up to 100% is allowed under the automatic route for mining and exploration of metal and non-metal ores, including diamond, gold, silver and precious stones. However, no FDI/private investment is permitted in coal and lignite mining, except for captive consumption by power, cement, and iron and steel companies. Further, FDI up to 100% is allowed under the government approval route for mining and mineral separation of titanium bearing minerals and ores, subject to prescribed conditions. Recent developments and industry outlook
In an effort to improve prospecting and mining activity in India, the GoI issued the National Mineral Policy in 2008. Succeeding the earlier National Mineral Policy 1993, this policy envisages an improved regulatory environment and more transparency in the allocation of mining concessions. 54 Doing business in India As a way forward to the policy, the GoI is currently undertaking a comprehensive review of key acts and regulations such as the MMDR Act. A draft bill, The Mines and Minerals (Development and Regulation) Bill 2011 (MMDR Bill), approved by the Cabinet but pending before Parliament, is proposed to substitute the old MMDR Act.
The amended legislation is expected to improve the country’s regulatory environment; making it more transparent and simple; inculcate clarity on grants of mineral concessions and help build a sustainable development framework for the Indian mining sector. In terms of industry outlook, India’s mineral basket is all set for unprecedented growth due to the rich mineral reserves. In such a scenario, the GoI, the industry and state governments must collaborate to showcase the country’s mineral potential globally. B. 10 Oil and gas India is the world’s fourth-largest consumer of primary energy, the consumption of which has grown at a CAGR of 6. % between 2001 and 2011 as compared to a global average of 2. 7%1. The country’s primary energy requirement is expected to more than double over the next two decades. Oil and gas currently accounts for 38. 9% of its primary commercial energy consumption, and this share is projected to increase marginally over the next two decades2. During the last decade, India’s oil and gas consumption has been rising in line with the growth in GDP. However, stagnant domestic oil production has been unable to keep pace with the rising demand, due to which the country’s dependence on imported oil is also going up.
The consumption of oil has risen at a CAGR of 4. 3% during 2001– 2011, while the production has risen at a CAGR of 1. 7% in the same period3. As a result, the country imported nearly 1 “Primary Energy: Consumption (from 1965),” BP Statistical Review of World Energy June 2012, accessed 1 August 2012 2 Hydrocarbons Vision 2025,” Ministry of Petroleum and Natural Gas, “Primary Energy: Consumption by fuel type,” BP Statistical Review of World Energy June 2012, accessed 1 August 2012 3 “Oil: Consumption,” BP Statistical
Review of World Energy June 2012, accessed 1 August 2012; “Oil: Production,” BP Statistical Review of World Energy June 2012, accessed 1 August 2012 Doing business in India 55 three-fourth of its crude oil requirements in 2010–114. India’s natural domestic production and inadequate transmission and distribution infrastructure. The consumption of gas has risen at a CAGR of 8. 7% during 2001–2011, while the production has risen at a CAGR of 5. 7% in the same period. The demand for natural gas far exceeds the consumption of gas has risen at a CAGR of 8. % during 2001–2011, while the production has risen at a CAGR of 5. 7% in the same period5. supplies in the country6. 77 2012. The Indian oil and gas industry has been traditionally dominated by national oil companies. Private companies such as Reliance Industries Ltd. , Essar Oil Limited, Hindustan Mittal Energy Limited and Gujarat Gas Corporation Ltd. have emerged as prominent players across the country’s industry segments over the past decade. Foreign players that have a presence in the Indian oil and gas sector include BP Plc, Cairn Energy and Royal Dutch Shell. Petroleum Planning and Analysis Cell 5 “Natural Gas: Consumption,” BP Statistical Review of World Energy June 2012, accessed 1 August 2012; “Natural Gas: Production,” BP Statistical Review of World Energy June 2012, accessed 1 August 2012 6 “Petroleum Statistics: monthly production,” Ministry of Petroleum and Natural Gas; “Trend of Import of LNG in India (2003-04 to 2011-12),” Infraline Energy database, accessed 31 July 2012, http://www. infraline. com/Details/Import-of-LNG-inIndia%C2%A0-2003-04-to-2011-12-176940. htm il,” Petroleum Planning and Analysis Cell, accessed 31 July 2012Petroleum Planning and Analysis Cell 56 Doing business in India Regulatory scenario The industry is under the administrative ambit of the Ministry of Petroleum and Natural Gas (MoPNG). An FDI of up to 100% under the automatic route (subject to sectoral policy regulation) is permitted companies. The Petroleum and Natural Gas Regulatory Board (PNGRB) has been constituted as an independent regulator for the midstream and downstream segments of the industry.
In the upstream segment, the Directorate General of Hydrocarbons (DGH) continues to function as a quasi-regulator under the aegis of the MoPNG. Recent developments and industry outlook Energy security and prevailing geo-political scenario have been the key drivers for oil and gas trade agreements. India has recently entered agreements for natural gas import through transnational pipelines and LNG import. India signed a gas import agreement for TurkmenistanAfghanistan-Pakistan-India (TAPI) pipeline to import 38 mmscmd gas by 2018.
GAIL, India’s gas transmission NOC, has recently signed a long-term gas sourcing agreement with US-based Cheniere Energy to import 3. 5 MMT LNG per year. In the upstream segment, the New Exploration Licensing Policy (NELP) has given a boost to private investment and an added impetus to exploration and production (E&P) activity — production sharing nine rounds of NELP8. In 2011, BP and RIL announced a US$7. 2b partnership deal, which is one of the largest FDIs in the country9. Vedanta’s acquisition of a majority stake in Cairn India for US$8. 67b was completed in December 201110. “Bidding Rounds,” Directorate General of Hydrocarbons website, www. dghindia. org, accessed 30 July 2012 9 BP and Reliance commence strategic alliance for India,” RIL press release, http://www. ril. com/downloads/pdf/PR30082011. pdf, 30 August 2011 10 “Completion of Acquisition of a Controlling Stake in Cairn India Ltd. ” , Vedanta media release, http://www. vedantaresources. com/uploads/vedantaresourcesplc_ 11 “Evaluation of Shale Resources,” Press Information Bureau website, http://pib. nic. in/ newsite/AdvSearch. aspx, accessed 29 March 2012
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Doing Business in India. (2016, Oct 02). Retrieved from https://graduateway.com/doing-business-in-india/