To understand the limits set by the Indian regulations on Foreign direct investment (Fdi) it is necessary to delve into the folds of the tripartite division already outlined in the first article of this series: the one in which it was explained that in India there are sectors closed to foreigners, sectors subject upon approval and open sectors. As Jacopo Gasperi, of counsel Macchi di Cellere Gangemi and of counsel Titus&Co (New Delhi) explains, there are also exceptions reserved for industrial realities not dissimilar from the Italian ones (think of those small scale industries that in Italy we would call small and medium enterprises) and which in India have obtained recognition of their status also under the profile of the protectionist policies so in vogue until 1991 and still not completely dismantled today. “Regarding small scale industries – explains Gasperi, referring to one of the sectors sheltered from possible competition from a foreign player who decides to come and produce and sell in India – it must be said that over the last few years we have gone from a list of thousands of types of protected products to one now made up of a few hundred items and that the maximum limit on foreign investment in this sector has been set at 24%" . The list is varied to say the least and ranges from leather shoes to playing cards, but the trend towards progressively reducing the number of protected sectors not only signals India's growing openness to foreign investment, but also a change of perspective.
“The era – continues Gasperi – in which Indian industry simply aimed to attract foreign capital can now be said to be over. It is certainly not liquidity that is lacking these days. The new focus of Indian entrepreneurs is technology. By signing a joint venture with a foreign partner today they want to import into their own country first of all machinery and know-how superior to those they possess today. Sometimes the operation turns out to be easier than expected for foreign players because transferring to India a line that by European standards can be considered outdated often means making available to one's Indian partner a technology that is in any case more advanced than that currently used in the Subcontinent". This need to import "production quality" is also reflected in the recent decision to relax the rules governing the payment of royalties, a way like any other to incentivize technology transfers to the country.
In terms of formal compliance, the role played by the reference banks is more often than not crucial. "One of the mechanisms most used to 'open in India' - continues Gasperi - consists in having a trusted local contact person create a shell company and then requesting the transfer of part or all of the shares". In these cases it is good that the aspiring investor is aware of the fact that the creation of the corporate shell can take from three to four weeks and that the transfer of shares can prove to be a more complicated affair than expected. “It can happen that it takes up to six months to complete the operation. Sometimes large amounts of time are lost translating documentation. Not only that, strict observance of the rules on transfers of funds is essential to avoid getting bogged down”.
The money with which you acquire the shares of your future Indian company must in fact pass through predefined channels and in exact quantities to the rupee. Pouring something extra, even when it comes to tiny figures and trivial rounding off, can end up making the proverbial grain of sand slip into the gears of the titanic Indian bureaucratic machine and cost you dearly in terms of time. “The other thing you need to make sure of – explains Gasperi – has to do with your bank of reference in Italy. The KYC (know your customer) regulations currently in force in India are very precise and Indian credit institutions do not allow exceptions in their application. Sometimes it happens that the Italian counterparts dismiss these obligations as trivial formalisms on which it is not worth wasting one's time. Serious mistake: the risk is to raise a wall of distrust and misunderstanding between oneself and one's Indian counterpart.
When applying to the Foreign Investment Promotion Board to start a business that does not enjoy automatic approval, it is best to consult a local law firm. Not only for a matter of formal correctness of one's question. But also to be able to know the orientations of the board with respect to the expansion of the offer in certain sectors. Opening a chain of single-brand stores in India is technically possible as long as you don't hold more than 51% of the company, but complying with this limit alone does not ensure approval of your request. There are also more discretionary parameters such as the degree of internationalization of one's brand. In other words, an Italian clothing company that wanted to start its internationalization process starting from India would commit a false step because it would be difficult to obtain the go-ahead from the Foreign Investment Promotion Board.
The government's orientation is in fact to encourage the entry of brands recognized worldwide rather than those with a mere relevance in their countries of origin. A way to internationalize the provincial Indian retail market and at the same time limit foreign competition in those sectors where there are potentially Indian players in a position to suffer it. In other words, the entry of brands such as Chanel or Dior (which not surprisingly are already present in the country) is particularly welcome, as they give prestige to Indian malls, but cannot in any way damage the nascent Indian luxury industry. The latter is in fact characterized by a completely different offer, both in jewels and in clothing, and is of an exquisitely local taste, which makes it little or nothing susceptible to competition from the products of the big European houses. (end of part two)
