The new majority government at the helm of India has created a buzz and excitement in the business world, missing over the past two years. Indian businesses grappling with inertia after the euphoria of 2007-10 are on a new growth trajectory.
While the Indian economy and its growth will be the hotbed of progress in the near future, the real opportunity would be for Indian businesses to follow their peers in the US, Germany, Japan, South Korea, China, etc., and become multinational companies.
To keep on growing and hedge their growth risks, Indian businesses will have to leave the cosy environs of our sheltered economy and go global, by learning to access the international capital markets, buy into overseas businesses and control sales and distribution channels in the international markets like their competitors. Unless they think global, they will remain susceptible to economic shocks in the future.
Platforms for growth
For an Indian business growth opportunities are available overseas on three main platforms: (1) technology – research and development has been the greatest strength of the Western world and one of the weak points in India; (2) capital markets – abundant capital and lower cost of funds, given the depth of the capital markets and lower inflation in the developed world; (3) foreign consumer markets – capturing distribution and marketing channels.
Efforts in all of these areas require capital investments in convertible currencies. Indian businesses have been starved of capital and foreign exchange due to currency restrictions that still exist in India and the stringent currency control under the draconian albeit erstwhile Foreign Exchange Regulation Act, 1973. With this history business houses have grown in a risk-averse environment during the pre-liberalization era in India resulting in defensive international expansion plans as a first instinct. Foreign exchange control is now covered by the more balanced Foreign Exchange Management Act, 1999.
Rules of thumb
Any Indian business that plans on capturing foreign markets to access foreign currency funds, acquire technology or capture market share and sell in foreign market needs to keep in mind four rules of thumb before taking the first steps.
(1) As a corporate entity, an Indian company is permitted to invest and spend up to 400% of its net worth duly certified by a chartered accountant, under the automatic route.
(2) As an individual, an Indian national is permitted to invest up to US$125,000 in foreign businesses, securities or any assets under the automatic route.
(3) In a joint venture with a foreign company, the above two rules apply, except that an Indian company cannot offer more than 50% of the performance guarantee in an overseas joint venture.
(4) Investments in joint ventures and wholly owned subsidiaries are also permitted through special purpose vehicles (SPVs).
Limitations and cautions
The following broad limitations and cautions are prescribed by the Reserve Bank of India (RBI) when making overseas investments, in addition to other technical limitations.
(1) Investments into Nepal are permitted in Indian rupees only. Investments in Bhutan may be made in Indian rupees or in free currencies. In the case of Pakistan, all the above activities require an express approval from the RBI.
(2) The Indian company should not be in the defaulters or caution list of the RBI or Credit Information Bureau (India) Ltd.
(3) For investments above US$5 million, valuation by a chartered accountant, certified public accountant or a Securities and Exchange Board of India (SEBI) approved merchant banker is mandatory.
(4) For any sort of investment through swap of shares, an approval from the Foreign Investment Promotion Board is required as well as valuation by an investment banker registered with SEBI or a peer body in the country of the investee company.
The above regulations are applicable when planning a new company or wholly owned business overseas, a joint venture, the acquisition of a technology source or investment for the purpose of setting up distribution channels.
There are specific guidelines for acquiring oil and gas assets and income-generating real estate assets, setting up overseas trusts, creating SPVs for acquiring assets, bidding for distressed companies and purchasing foreign assets that are negative in net asset value. These will be covered in future columns.
Certain foreign jurisdictions allow zero corporate and/or capital gains taxation and/or major import duty benefits. Setting up of business in such countries by Indian companies would be useful to maximize growth and give Indian business houses the competitive advantage that Western companies have enjoyed over many decades.
International finance, technology and high purchasing power markets could be the backbone of Indian companies’ global ambitions.
Gautam Khurana is the managing partner at India Law Offices in New Delhi.
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