Investing in India: Characteristics, Opportunities and Risks (Financial Year 2022-2023)

Summary

India is a huge market, both in terms of personnel and material. Investing in India, holdings in Asian companies or vice versa is becoming increasingly important for medium-sized companies.

Great opportunities beckon, big risks loom all over Asia, including in India. The most underestimated challenges are the time factor and the intercultural characteristics of Indian customers, suppliers and employees.

This contribution aims to help us better understand the Indian market and its participants.

1 India: Still a boom country

India has still experienced a real boom in recent years, despite some setbacks: consumer spending has risen and risen enormously, owing to a steadily rising per capita income. Rapidly growing disposable income, increased availability, and the use of customer loans and credit cards support the average Indian’s propensity to follow global (usually Western-oriented) trends. This has led to a rapidly growing number of consumers, making India one of the largest markets for industrial goods and services.

2 M&A Markets in India

The M&A market in India can currently be described as “cautiously optimistic”. Although the number of transactions as such has declined to a small extent, the value of individual transactions has increased, reaching a six-year high in 2017.

Modi’s government is trying to simplify the economy and has pushed through some of the facilitations that have a positive impact on the M&A market, such as tax breaks, patent protection, and the ability to do much of what had to be done online. Previous restrictions on Foreign Direct Investment (FDI) such as defence, pharmaceuticals and civil aviation have also been eased – but this should not be confused with “easy”.

There are significant M&A activities in the following sectors: manufacturing, financial services, IT and IT-based services, oil and gas, pharmaceuticals, life sciences and healthcare.

2.1 Options for foreign investors in India

In contrast to Europe, India is indeed a state that has also enacted laws for the whole of India. But Dr. India is also a federation of many federal states, all of which have their own rules again.

A distinction is made between Indian and foreign investors only in exceptional cases. In many industries, foreign companies can participate 100%, so they don’t need an Indian partner (more). In certain sectors, however, foreign investments are not possible or only up to a ceiling, e.g. in media and lotteries or pure financial investment.

A company from abroad that plans to operate in India has the following options:

  • Registering as a company (Companies Act, 1956) by:
  1. Joint venture or
  2. Establishment of a wholly owned subsidiary
  3. Establishment of your own company

The company capital from abroad can amount to up to 100% for such Indian companies, depending on the requirements of the investor and the “caps” in the respective sector/area under the FDI guidelines.

  • Entry as a foreign company is possible through:
  1. Liaison Office
  2. Project branch
  3. Branch

These offices can conduct business as required by the Foreign Exchange Management Regulations.

The investment climate has also been improved by the amendment of the insolvency rules.

As early as 2015, the Indian government implemented a fast-track procedure for German companies in order to be able to handle business faster and without red tape. Start-ups are also to be made safer by an electronic variant of the “INC-29” approval process. “eBIZ” will in future be an electronic procedure, which originally combines 14 individual authorisations of public authorities into a single form. However, data have not yet officially confirmed whether these measures are actually successful.

Economic support measures in India include increased depreciation, tax exemptions and direct and indirect tax benefits.

2.2 Special Economic Zones in India

Special Economic Zones (SEZ) exist not only for public investors, but also for medium-sized enterprises, including those from abroad. Since India has states, the exact conditions in the special economic zones depend on the location. The central government only set out general guidelines, such as tax exemption and the possibility of relaxing the extremely rigid protection against dismissal for Indian employees.

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