Foreign Investment

India’s Legal and Regulatory Environment for Foreign Companies in the Indian Market

Legal and regulatory environment

India offers various opportunities to foreign investors especially foreign companies to enter the Indian market however, the Indian market is large and complex. India is not a single market but a series of inter-connected regional markets with slight variations in the legal and regulatory environment from one state to another. Therefore, consideration of India’s Legal and Regulatory Environment is needed to be carefully analyzed to achieve success. Due to these regional variations, the intricacies of the Indian market have to be thoroughly understood. Let’s discuss the legal and regulatory environment of the Indian market, which would be relevant for foreign companies to make an India entry.

Foreign Direct Investment (FDI) Policy

Foreign Investments in India are governed by the FDI Policy issued by the Department of Industrial Policy and Promotion (DIPP)[1] every year. It is further supplemented by press notes. The Indian government is committed to liberalizing India’s FDI Policy. To some extent it has liberalized the FDI Policy permitting most investments under the automatic route leaving only a few sectors under the government approval route. The government has also added a few countries under the government approval route. Earlier only Pakistan and Bangladesh were under the approval route however, now neighbouring countries such as Pakistan, Afghanistan, China, Bhutan, Nepal, Myanmar and Bangladesh also come under the approval route. Any company from these countries who is willing to invest in India has to obtain government approval.

Rules and Regulations Relating to Company

Foreign companies from neighbouring countries need to make a declaration of whether or not it has obtained approval from the Indian government. If yes, then the incorporation form SPICe+ should be attached. In addition to this foreign companies from neighbouring countries have to obtain a security clearance from the Ministry of Home Affairs. Foreign companies should conform to the standards set by the Companies Act, of 2013. There are various rules framed under the Company’s Act, 2013 prescribing the appointment of a foreign director and also the process for obtaining the DIN. Rules regarding exhibiting Company Identification Number (CIN), applying for PAN and TAN, etc. The foreign company willing to enter India has to be up-to-date with these rules as they affect the legal operation of the foreign company in India.

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Employment Laws

A foreign company willing to operate in India has to familiarize itself with the labor and employment laws in India. There are several state-specific laws as well as laws formulated by the Centre. The State-specific laws vary depending on the state in which the foreign company commences its operations. The foreign company has to ensure that all appropriate registrations have been obtained and proper documents have been filed. Further, there are several records and correspondences required to be maintained under the Labour laws. Therefore, it is advisable to procure professional advice in areas relating to complying with the policies and practices, structuring employment contracts and reducing employment issues.

Taxation

The Income Tax Act of 1961 governs the direct tax regime in India. The corporate tax rate currently applicable to foreign companies is 30% excluding surcharge and cess. The corporate tax rate might be reduced in the coming years. The transfer pricing rules are also available under the direct tax regime which applies to related party transactions. Taxes such as Goods and Services Tax, customs and excise duty come under the indirect tax regime in India. India introduced the Goods and Services Tax Act in 2017 which reduces the complexities and eliminates double taxation. Various tax benefits and exemptions are provided to foreign companies operating in Special Economic Zones.

Environmental Laws

With the spread of environmental awareness in India, there is certain responsibility imposed upon companies to act in accordance with environmental laws and regulations. The Environment Laws include the Indian Forest Act, 1927, Environment (Protection) Act of 1986, Water (Prevention and Control of Pollution Act of 1974, Hazardous Wastes (Management, Handling and Trans-boundary Movement) Rules of 2008, Manufacture, Storage and Import of Hazardous Chemical Rules of 2000, etc. These laws promote sustainability and ensure the conservation of nature. All these laws apply to all companies functioning in India. In addition to these, the companies operating in India and having certain profitability are obliged to follow Corporate Social Responsibility (CSR) also. CSR includes activities that adhere to sustainability and community welfare.

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Anti-Trust Regulation in India

In India, the Anti-Trust issues are dealt with under the Competition Act of 2002. The Act prohibits anti-competitive agreements and abuse of dominant position. Anti-competitive agreements are agreements that have an adverse effect on the competition in India. Such agreements include tie-in agreements, bid-rigging, etc. Further abuse of a dominant position is prohibited by preventing an enterprise or a group from abusing its dominant position. It means that every enterprise irrespective of its position in the market should function independently of the competitive forces. The Competition Act also prohibits combinations that exceed a specified threshold and requires approval from the Competition Commission of India to ensure that such combinations will not affect the competition in the relevant market.

Intellectual Property Rights (IPR)

Foreign Companies planning to enter the Indian market must know how to safeguard their company name, logo, design as well as their inventions. In addition to being a signatory to the General Agreement on Trade and Tariff (GATT) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, India has also enacted laws governing trademarks, copyrights, patents, Geographical indications and Industrial designs. Further, India has also signed WIPO Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT) cumulatively known as the WIPO Internet Treaties. So foreign companies have to adhere to laws relating to IPR and can also seek protection in case of IPR infringement.

Dispute Settlement In India

Entering a new market is a major commitment and failure to fulfil the commitment may drag the foreign company to legal disputes. The Indian legal system follows the common law concept. It has the Apex Court at the Centre level, the High Courts at the State level and the District Courts at the District level. However, Court proceedings are lengthy processes and due to the backlog of pending cases in India, Court proceedings have become a less preferred medium for dispute settlement. Commercial disputes preferably resolved by way of alternate modes of dispute resolution such as arbitration, mediation and conciliation.

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Conclusion

All in all the above laws govern the legal and regulatory environment in India. It can be said that the Indian Legal and Regulatory Environment is comprehensive and complex however, a recent trend of simplification can be observed. Due to the ever-changing nature of the Legal and Regulatory environment in India, it is wise to always consult an expert before making an entry into the Indian market. The experts have in-depth knowledge of the legal and regulatory environment so they are in a better position to advice. 

Read our Article: Foreign Investments from Neighbouring Countries in India

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