GAIL (India) Limited (India) Limited 16 ... slots thereafter are booked by off-takers/importers...

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GAIL (India) Limited

16, Bhikaiji Cama Place, R.K.Puram,

New Delhi – 110066

Phone Nos. (+91)11-26172580; 26182955

PART 3:

PROJECT INFORMATION MEMORANDUM

TIME CHARTER HIRING OF LNG VESSELS

(TENDER NO.: GAIL/ND/BD/C&P/S123/8000008476)

(E-TENDER NO. 8000008476)

ATTENTION

THIS IS AN ELECTRONIC TENDER (E-TENDER)

LNG SHIPPING PROJECT

MATERIAL FOR INFORMATION PACKET

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Contents

1.0 Energy consumption profile and growth forecast, with specific focus on the Northern Indian market 4

1.1 India’s energy snapshot ...................................................................................................................... 4

1.2 Estimated Gas demand in India .......................................................................................................... 4

1.3 Estimated Total Gas availability in India during 12th & 13th five year plan Period & Regasification

Capacity ..................................................................................................................................................... 5

1.4 North India energy snapshot .............................................................................................................. 7

2.0 LNG import projects information .......................................................................................................... 12

3.0 GAIL's current operations in terms of gas distribution and sales as well as balance sheets. Who are

the major customers? ................................................................................................................................. 12

3.1 Operational Highlights ...................................................................................................................... 12

3.2 Financial Highlights ........................................................................................................................... 14

4.0 GAIL's plan for Northern India interconnection with the nationwide gas network. Who are expected

to be major customers? .............................................................................................................................. 15

4.1 Existing Gas Pipeline Network in India .............................................................................................. 15

4.2 Existing gas pipeline network in Northern India ............................................................................... 16

4.3 Proposed gas pipeline network in Northern India ............................................................................ 16

4.4 GAIL’s plan for North India gas pipeline interconnection ................................................................. 17

5.0 Revenue collection mechanism rates and enforcement ...................................................................... 17

6.0 How does import of LNG from USA to India fits in with medium and long term strategies ................ 18

7.0 List of international companies already working in oil and gas sector ................................................. 18

8.0 Briefing on current investment and legal framework of India ............................................................. 28

8.1 Appraisal by foreign entities before starting business in India ......................................................... 29

8.2 Foreign Investment in India under different routes ......................................................................... 30

8.3 Foreign Institutional Investors .......................................................................................................... 35

8.4 Legal regime in India regulating the Oil and Natural Gas Sector ...................................................... 36

8.5 Judicial System in India ..................................................................................................................... 37

9.0 Investment incentives currently offered by the Government of India ................................................. 37

9.1 Measures to attract Foreign Capital & augment Exchange Earnings ............................................... 38

9.1.1 Measures Inducing Better Export Performance ........................................................................ 38

9.1.2 Measures Inducing Inflow of Foreign Investment ..................................................................... 39

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9.2 Other measures to induce Investment growth ................................................................................. 40

9.2.1Tax Holiday .................................................................................................................................. 40

9.2.2 Tax Holiday for New Industrial Undertakings in Under-developed Areas ................................. 40

9.2.3 Tax Holiday for the Power Generating Sector ........................................................................... 41

9.2.4 Tax Holiday for Infrastructure Building ...................................................................................... 41

9.2.5 Deduction of Expenditures for Scientific Research .................................................................... 42

9.2.6 Exemption of Venture Capital Income ....................................................................................... 42

9.2.7 Adjustment for Business Losses ................................................................................................. 43

Annexure I ................................................................................................................................................... 44

Annexure II .................................................................................................................................................. 48

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1.0 Energy consumption profile and growth forecast, with specific focus

on the Northern Indian market

1.1 India’s energy snapshot 1. India is the 4

th largest energy consumer in the world with annual primary energy

consumption of around 559 MTOE1 against 4803 MTOE (of Asia Pacific) and 12274

MTOE (of entire world)2.

2. India’s average primary energy consumption growth rate3 is around 6.53% compared to

5.97% (for Asia Pacific) and 2.66% (for entire world)

3. Around 39% of India’s primary energy consumption is constituted of Oil (29%) and Gas

(10%)4.

4. India’s natural gas consumption growth rate during 2001 to 2011 was 8.75% against

6.72% (of Asia Pacific) and 2.75% (of entire world).

5. The above underscores India’s primary energy consumption as well as natural gas

consumption is on a higher growth trajectory in comparison to Asia Pacific region and

the World.

6. The growing Indian economy needs to maintain and increase its energy consumption and

accordingly the growth forecasts of energy requirements are quite promising.

1.2 Estimated Gas demand in India

Sectors 12th

Five year Plan

(Figures in MMSCMD)

13th Five year Plan

(Figures in MMSCMD)

Year Starting from

2012

12-

13

13-

14

14-

15

15-

16

16-

17 17-18

18-

19

19-

20

20-

21

21-

22

Power* 135 153 171 189 207 225 243 261 289 307

Fertilizer** 62 110 113 113 113 113 113 113 113 113

Demand(Price

Elastic) - Sub Total 197 263 284 302 320 338 356 374 402 420

City Gas*** 15 19 24 39 46 47 50 53 55 57

Industrial*** 20 20 22 25 27 28 32 35 37 37

1Million tones oil equivalent (MTOE) 2BP Energy Statistics 2012 3Compounded Annual Growth Rate for last 10 years, i.e., from year 2001 to year 2011 4BP Energy Statistics 2012

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Petrochemicals /

Refineries / Internal

Consumption*** 54 61 67 72 72 72 76 80 82 82

Sponge Iron /

Steel*** 7 8 8 8 8 9 9 10 10 10

Demand(Relatively

price Inelastic) - Sub

Total 96 108 121 144 153 156 167 178 184 186

Grand Total

Demand 293 371 405 446 473 494 523 552 586 606

Source: Ministry of Power (*), Ministry of Fertilizer (**), (***) Report of the Sub Group on Demand Estimates for petroleum products-12th&

13th Plan

1.3 Estimated Total Gas availability in India during 12th & 13th five year plan

Period and Regasification Capacity

12th Five year Plan (Figures in MMSCMD)

2012-13 2013-14 2014-15 2015-16 2016-17

Domestic Availability 112 105 129 139 175

Imports-LNG 40 41 87 129 150

Expected Total Availability 152 146 216 268 325

13th Five year Plan (Figures in MMSCMD)

2017-18 2018-19 2019-20 2020-21 2021-22

Domestic Availability 216 222 229 236 243

Imports (LNG) 172 193 215 236 258

Imports (Trans Border Pipelines) 0 30 30 30 30

Expected Total Availability 418 445 474 502 531

Note: The above projections excludes gas sources like Shale Gas, Gas Hydrates etc

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There is a clear gap in demand supply projections of natural gas for the next few years in India

indicating huge scope of imports both through LNG imports as well as transnational pipelines

gas imports.

Regasification

India currently has 4 LNG terminals, along the west coast, with 23 MMTPA of

regasification capacity. There are plans for significant capacity expansion along existing

terminals and with new terminals planned at Ennore, Mundra, Gangavaram and an

FSRU at Kakinada. Plans for adding additional capacity to existing terminals, if fully

met, will mean increase in total regasification capacity at the four terminals to 40

MMTPA.

The details of Existing and Planned LNG terminals are as shown in below:

There are no open access provisions as on today. Currently 7.5 MMTPA is booked for

long-term supplies at Dahej (out 10 MMTPA) and 1.44 MMTPA is booked for long-term

supplies at Kochi (out of 5 MMTPA). At Dabhol GAIL has 4 MMTPA capacity (out of 5

MMTPA). Hazira terminal currently do not have long-term contracts and is currently

utilized by HLPL, GSPC & RIL. Normally, any long-term/medium-term LNG contracts

are given priority during finalization of Annual Scheduling Programme. Any remaining

slots thereafter are booked by off-takers/importers through one-to-one discussions with

terminal operator.

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In addition to capacity expansion at existing terminals there are a number of new

terminals being planned. With upwards of 12 projects currently being planned, 4 are in

an advanced stage in the development process and expected to be completed by 2016

and include Ennore in Tamil Nadu, Mundra in Gujarat, Gangavaram and Kakinada

FSRU in Tamil Nadu. Collectively, these new LNG facilities will add in 20 MMTPA of

regasification facilities in India over the next four to five years. Other terminals outside

the above that are under consideration have the potential to add in another 31 MMTPA

of regasification capacity.

1.4 North India energy snapshot

1. North Indian market, primary target consumer for LNG, are situated mainly in the states

of Uttar Pradesh, Bihar, Punjab, Haryana, Rajasthan, & Delhi. As per the 2011 census,

North Indian states have around 45-50% of India’s population residing in them.

2. Power sector is the major consumer of natural gas in India. Accordingly an important

indicator of likely gas demand in north Indian states can be ascertained from the Peak

deficit of Power in these states:

Factor Punjab Rajasthan Delhi Bihar Uttar

Pradesh

Peak Power

Availability

9075 MW 8135 MW 6043 MW 1954 MW 11606 MW

Peak Demand

in 2012-13

12200 MW 9300 MW 6100 MW 2750 MW 14400 MW

Present

Shortfall

3125 MW 1165 MW 57 MW 796 MW 2794 MW

Peak Deficit 25.6% 12.5% 0.9% 29% 19.4%

Source: Load Balancing Report: 2013-14 by Central Electricity Authority

The following is the demand emanating from different customer groups in North India (GAIL

Estimates and Secondary Information):

Sector Demand ( in MMSCMD)

Power (Including Captive Power) 76.0

Fertilizers 15.0

Industrial 12.0

Refinery 3.0

City Gas 6.0

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Total 112

Besides the potential of the above mentioned states, a mega project viz: Delhi Mumbai

Industrial Corridor (DMIC), focused on north-western corridor of India, is expected to add to

the demand of north Indian region. The highlights of DMIC project are as follows:

1. Delhi-Mumbai Industrial Corridor is a mega infra-structure project of USD 90 billion

with the financial & technical aids from Japan.

2. Passing through the six Northern States - U.P, NCR of Delhi, Haryana, Rajasthan,

Gujarat and Maharashtra.

3. 52% of DMIC will be in Northern Region alone.

4. This project incorporates Nine Mega Industrial zones of about 200-250 sq. km., high

speed freight line, three ports, and six air ports; a six-lane intersection-free

expressway and a 4000 MW power plant.

5. Several industrial estates and clusters, industrial hubs, with top-of-the-line

infrastructure would be developed along this corridor to attract more foreign

investment. Approximately 180 million people, 14 per cent of the population, will be

affected by the corridor’s development.

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City Gas and CNG Infrastructure – Present & Future (as per PNGRB)

City Gas distribution is also emerging as a very promising potential consumer of gas. Following

is a snapshot of the present establishment:

• 24 entities • 51+ Cities • Over 12 lakhs domestic,

12000 commercial and 2400 industrial connections

• 600+ CNG stns ; Over 12 lacs vehicles

• 12 MMSCMD throughput

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CGD is expected to be a high growth sector and is likely to witness exponential growth over the

years. Following estimates by the PNGRB support this belief.

Present

Scenario

Next

three

year

Next five

years

Next ten years

Total Number of

Geographical Areas

(GAs)

25 86 125 >250

Besides, following is a roadmap of the states in the Northern region with their potential gas

demand for CGD applications:

States Number of

Cities

Potential Gas Demand

(MMSCMD)

Bihar 27 2.84

Punjab & Himachal 25 4.50

Haryana 22 3.11

Jharkhand 10 0.66

Rajasthan 24 3.82

Uttar Pradesh & Uttarakhand 58 10.13

Total 166 25.06

Source: GAIL Gas & Secondary Information

CNG CORRIDORS - “FUTURE HIGHWAYS TO GREENWAYS”

Further to the development of local distribution network in various cities, even national and state

highways between them are envisaged to be connected along the trunk pipeline network. This

would create ‘Greenways’ between important commercial centres and help in conversion of

Commercial diesel vehicles plying between them to CNG ones. Till now, such conversions could

not take place in bulk for lack of CNG re-fuelling stations outside major cities. As the map below

exhibits GAIL has extensive plans to create such greenways along its trunk lines and CGD

networks, across the length and breadth of the country.

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2.0 LNG import projects information 2.1 In December 2011, GAIL signed an LNG Sales & Purchase Agreement (‘LNG SPA’) with

Cheniere Energy Partners, LP (‘Cheniere’) to procure 3.5 MMMTPA of LNG from the

latter's Sabine Pass Terminal in Louisiana, USA on FOB basis for a period of 20 years. All

the Conditions Precedent (‘CPs’) of the LNG SPA have been met and the contract is

effective with deliveries scheduled to start within the window period of August 2017 –

March 2018.

2.2 Further in April 2013, GAIL Global (USA) LNG LLC (‘GGULL’) which is GAIL’s step-

down US subsidiary had executed a Terminal Service Agreement (‘TSA’) with Dominion

Cove Point LNG, LP (‘Dominion’) for booking 2.3 MMMTPA of liquefaction capacity in

the Cove Point LNG liquefaction terminal project located at Lusby in the state of Maryland

for a period of 20 years. The deliveries from the terminal are scheduled to commence within

a 9 month window, the start of which shall fall within 36 to 42 months from the date of grant

of the Federal Energy Regulatory Commission (‘FERC’) approval which is figuring as a

Conditions Precedent (‘CP’) in the TSA and is to be met by December 2014. There is

another CP in the TSA pertaining to furnishing of a non-appealable judgment or an order of

settlement by 08.02.2015 affirming that Dominion is permitted to construct and operate the

project and can export of LNG from the Terminal. However, Dominion expects the CPs to

be fulfilled before their due dates and is gearing up to start exports from February 2018.

2.3 Since, both the contract are FOB, GAIL will be required to make its own arrangement for

shipping of contracted LNG volumes from USA to India.

3.0 GAIL's current operations in terms of gas distribution and sales as well as balance sheets. Who are the major customers?

3.1 Operational Highlights

1. GAIL’s is that largest gas pipeline operator in India and owns and operates pipelines

infrastructure of approximately 10,877 KM. These pipelines carry about 74% of total natural

gas transmitted through pipelines in India. The Gas Transmission during FY 2012-13 was

104.9 MMSCMD.

2. GAIL sells around 50% of total natural gas marketed in India. Gas Sales clocked 81.44

MMSCMD during FY 2012-13.

3. GAIL supplies gas for about half of the country’s fertilizer produced. The major fertilizer

customers of GAIL are as follows:

Aditya Birla Nuvo Ltd. (Unit : Indo

Gulf Fertilisers)- Northern India

Chambal Ferts. & Chemicals Ltd.)-

Northern India

D.C.M. Shriram Consolidated Ltd.)-

KrishakBharati Cooperative Ltd.)- Western

India

Indian Farmers FertiliserCoop.Ltd.

(IFFCO)-Northern India

Rashtriya Chemicals & Fertilizers Ltd.-

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Northern India

Deepak Ferts.& Petrochemicals

Corpn.Ltd.)- Western India

Gujarat Narmada Valley Fertilizers

Co.Ltd.)- Western India

Gujarat State Fertiliser& Chemicals

Ltd.)- Western India

Western India

Nagarjuna Fertilizers & Chemicals Ltd.-

Southern India

National Fertilizers Ltd.)- Central India

Tata Chemicals Ltd.)- Northern India

KribhcoShyam Fertilizers Ltd. - Northern

India

4. GAIL supply gas for more than 1/2 of country’s gas based power generation. The major

power customers of GAIL are as follows:

NTPC plants in North and Western

India.

IPGCL, New Delhi

PPCL,, New Delhi

RRVUNL, Rajasthan

GIPCL, Gujarat

GSECL, Gujarat

GPEC, Gujarat

Konaseema Power Corp Ltd. A.P.

GVK Industries-A.P.

Vemagiri Power Generation Ltd.-A.P.

Mahagenco-Mumbai

Torrent-Ahmedabad

TPC, Trombay-Mumbai

RGPPL-DHABHOL-ratnagiri-

Maharashtra

Andhra Pradesh Gas Power Corp. Ltd. –

A.P.

LancoKondapalli Power Ltd.-A.P.

Spectrum Power Generation Ltd.-A.P.

Gautami Power Ltd-A.P.

Coromandel Electric co.-Tamilnadu

Arkay Energy (Rameshwaram) Ltd. –

Tamilnadu

Sai Regency Power Corporation-

Tamilnadu

5. GAIL is operating more than 2/3rd of country’s CNG infrastructure through its City Gas JVs.

GAIL is supplying more than half of country’s piped natural gas (PNG) supply through its

City Gas JVs.GAIL has the following city gas joint ventures in India:

Indraprastha Gas Limited (IGL),

Delhi & NCR

Mahanagar Gas Limited (MGL),

Mumbai

Bhagyanagar Gas Limited,

Andhra Pradesh

Avantika Gas Limited in Madhya

Pradesh

Central U P Gas Limited, Uttar

Pradesh

Green Gas Limited, Uttar

Pradesh;

Maharashtra Natural Gas

Limited, Pune (Maharashtra)

Tripura Natural Gas Company

Limited, Tripura

6. Besides, GAIL Gas Limited (a wholly owned subsidiary of GAIL (India) Limited) is

implementing / operating City Gas Distribution Projects in Dewas (Madhya Pradesh), Kota

(Rajasthan), Sonepat (Haryana), Meerut (Uttar Pradesh).

7. GAIL is the only Company in India which owns and operates exclusive two LPG

transmission pipelines (2038 km approx. with 3.8MMTPA LPG transportation capacity) for

third party usage.

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o Jamnagar-Loni Pipeline (1415 km- Western to Northern India) and Vizag-

Secunderabad Pipeline (623 km- Southern India)

o In the year 2012-13 the LPG transmission throughput achieved was about 3.136

million MT.

8. GAIL produces LPG for every 10th

domestic LPG cylinder in India. GAIL has 7 LPG plants

in the country.

LPG Plants Capacity (MT/Annum)

Vijaipur (M.P.) – 2 Plants 406,000

Auraiya Pata (U.P.) 258,250

Gandhar (Gujarat) 207,000

Vaghodia (Gujarat) 73,000

Usar (Maharashtra) 8,1500

Lakwa (Assam) 85000

Total ~ 1.10 MMTPA

In the year 2012-13, around 1.078 million MT of LPG was produced by GAIL.

9. GAIL produces almost 1/5th

of Polyethylene produced in India. GAIL owns and operates gas

based integrated petrochemical plant at Pata, Uttar Pradesh with a capacity of 4.1MTPA of

Polymers i.e., HDPE and LLDPE. Further, GAIL is doubling its capacity of Petrochemical

plant at Pata by installing 4.5 MTPA of Gas Cracker Unit and 4MTPA of Downstream

Polymer Unit. Further, GAIL is currently in the process of setting up 2.8MTPA

Petrochemical Complex in Assam through its subsidiary Brahmaputra Cracker and Polymer

Limited (BCPL). During FY 2012-13, GAIL has produced 437TMT of polymer and sold 427

TMT of polymers.

3.2 Financial Highlights

GAIL has recorded sustained growth in all key financial parameters. The important financial

highlights for last 3 years are as under:-

(all figures in USD million)

Particulars 2012-13 2011-12 2010-11

Turnover (Net of ED) 7634.35 6496.94 5235.33

Other Income 153.87 130.32 83.71

Cost of Sales (excluding Interest and

Depreciation and including extraordinary

items)

6621.61 5619.68 4355.65

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Gross Margin 1166.61 1007.58 963.39

Interest 31.45 18.71 13.39

Depreciation 158.23 127.58 104.84

Profit Before Tax 977.10 861.29 845.16

Provision for Tax 328.39 271.94 270.80

Profit after Tax 648.71 589.35 574.35

Appropriations

Interim Dividend 81.77 61.45 40.97

Proposed Final Dividend 114.52 116.61 112.58

Corporate Dividend Tax 32.74 28.87 25.00

Net Transfer to / (From) Bond Redemption

Reserve

-0.07 -3.87 1.29

Transfer to General Reserve 64.84 58.87 57.42

Balance carried forward to Balance

Sheet

352.74 327.42 337.10

*Exchange Rate: 1USD = Rs.62

4.0 GAIL's plan for Northern India interconnection with the nationwide

gas network. Who are expected to be major customers?

4.1 Existing Gas Pipeline Network in India Three major pipeline entities in gas transportation in India are GAIL (India) Limited, Reliance

Gas Transportation Infrastructure Limited (RGTIL), Gujarat State Petroleum Corporation

Limited (GSPCL).

GAIL is operating a gas pipeline network of around 10000 km covering all the major cities of

India. GAIL’s major pipelines are as follows:

HVJ-GREP-DVPL Trunk Pipeline (connecting the LNG terminal at Dahej and gas

resources of western offshore with the markets in Northern India)

DVPL-GREP Capacity augmentation Trunk Pipeline (connecting the LNG terminal at

Dahej and gas resources of western offshore with the markets in Northern India)

Dahej-Uran-Panvel-Dhabol Trunk Pipeline (connecting the LNG terminal at Dahej and

gas resources of western offshore with the markets in the state of Maharashtra)

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Dabhol-Bangalore Trunk Pipeline (pipeline extending above network south of

Maharashtra to other major demand centres in Southern India)

Dadri-Bawana-Nangal Trunk Pipeline (Extending HVJ-DVPL Network to Punjab)

Chhainsa-Jhajjar-Hissar Pipeline (through Chhainsa-Jhajjar-Hissar) (Extending HVJ-

DVPL Network to Haryana & Punjab)

Kochi-Koottanad-Bangalore-Mangalore Trunk Pipeline (connecting the LNG terminal at

Kochi with the markets in Southern India)

Mumbai Regional Network (Regional Network)Agartala Regional Pipeline Network

(Regional Network)

K.G.Basin Pipeline Network (Regional Network)

Gujarat Regional Pipeline Network (Regional Network)

Cauvery Basin Pipeline Network (Regional Network)

Assam Regional Pipeline Network (Regional Network)

RGTIL is operating one trunk line of 1469 km East West pipeline (EWPL) to evacuate gas from

KG-D6 gas in Andhra Pradesh. This pipeline passes through Andhra Pradesh, Maharashtra and

Gujarat and integrated with GAIL & GSPL network to reach Northern and Western India

market.

GSPL is presently a regional player mainly focused in the state of Gujarat consisting about 1874

km gas pipeline network.

4.2 Existing gas pipeline network in Northern India

GAIL’s following pipelines are presently covering northern India:

(i) HVJ-GREP-DVPL Trunk Pipeline (passing through the states of Gujarat, Madhya

Pradesh, Uttar Pradesh, Delhi)

(ii) DVPL-GREP Capacity augmentation Trunk Pipeline (passing through the states

of Gujarat, Madhya Pradesh, Uttar Pradesh, Delhi)

(iii) Dadri-Bawana-Nangal Trunk Pipeline (passing through the states of Uttar

Pradesh, Delhi, Haryana, Punjab, Uttarakhand)

(iv) Chhainsa-Jhajjar-Hissar Trunk Pipeline (passing through the states of Rajasthan,

Haryana)

4.3 Proposed gas pipeline network in Northern India

(i) Jagdishpur-HaldiaTrunk Pipeline (by GAIL)

Jagdishpur Haldia Pipeline will connect energy starved markets of Bihar, Jharkhand

& West Bengal with North-West corridor (HVJ –DVPL Network).

(ii) Mallavaram-Bhopal-Bhilwara-Vijaipur Trunk Pipeline (by GSPL)

(iii) Mehsana-Bhatinda Trunk Pipeline (by GSPL)

(iv) Bhatinda-Jammu-Srinagar Trunk Pipeline (by GSPL)

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Pipelines mentioned at point no. (ii) to (iv) have been awarded under the competitive bidding

route to the GSPL led consortium. Mallavaram-Vijaipur Pipeline will connect east coast of India

with the markets in central and northern India. While Mehsana-Bhatida-Srinagar Pipelines will

connect western India with northern India.

4.4 GAIL’s plan for North India gas pipeline interconnection

(i) GAIL is in the process of developing customer connectivities through its Dadri-

Bawana-Nangal and Chhainsa-Jhajjar-HissarTrunk Pipeline.

(ii) GAIL’s upcoming Jagdishpur-Haldia pipeline will connect the northern states with

eastern India.

(iii) GAIL’s above pipelines are interconnected with its pipeline network in western India.

5.0 Revenue collection mechanism rates and enforcement 1. Robust regulatory framework through Independent sector regulator i.e. PNGRB

i. The Petroleum and Natural Gas Regulatory Board (PNGRB) was constituted under

The Petroleum and Natural Gas Regulatory Board Act, 2006. The Act enables

PNGRB to protect the interests of consumers and entities engaged in specified

activities relating to petroleum, petroleum products and natural gas and to promote

competitive markets.

ii. The transmission tariffs of natural gas pipelines are being regulated by PNGRB.

2. Creditworthy customers

GAIL has a large portfolio of creditworthy customers covering power, fertilizer, city gas and

steel sectors. In India, the anchor load gas customers are large power and fertilizers plants in

private and public sector. These customers are consistent users of natural gas and have high

credit worthiness in Indian market. The gas supplies to these customers are made under well-

established gas supply terms which are structured along the lines of international contracts in gas

industry. These contracts provide for adequate payment security mechanisms such as letter of

credit / bank guarantee through appropriate financial securities for supply of gas. Besides, the

contracts have safeguards in the form of Take-or-Pay and / or Ship-or-Pay clauses to ensure

consistent off take of gas.

3. Dispute Resolution

The dispute resolution mechanism in gas contracts is largely through Arbitration which helps in

avoiding unpleasant consequences of court cases. In addition to this GAIL also operates an

established in-house dispute resolution system through SAC.

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6.0 How does import of LNG from USA to India fits in with medium and

long term strategies Natural gas is the fuel of choice since it is an efficient fuel for power generation, a cheaper

feedstock for industries, a cleaner alternative fuel for vehicles and leads to an improvement in the

quality of life. Accordingly import of LNG from USA to India will completely integrates with

India’s energy management goals in following respects:

1. Indian gas grid – linking all the major consumption centers with supply sources across the

country. This will facilitate equitable distribution of natural gas to wide cross section of

customers. Once such a National level grid is in place, gas from TAPI can also be supplied

to not just in Northern region but also to any other demand centre across the country

physically or through swapping mechanism.

2. Matured gas market – a well developed market characterized by the presence of multiple

suppliers, multiple gases, multiple transporters and multiple buyers. This will ensure

competitive utilization of natural gas.

3. Energy security – an alternative supply source with dependable reserves will mitigate the

risk of source failure leading to enhanced energy security. It will further diversify the fuel

basket to the benefit of Indian economy.

4. Development of Regas terminals in India – With the increase in energy demand of India,

there is a need of development of more and more regas terminal so as to import more LNG

to India. GAIL is one of the promoter of Petronet LNG Limited (PLL) and has its capacity

booked in almost all regas terminals. Also GAIL has recently commissioned Dabhol LNG

regas terminal which will further add to the regas capacity of GAIL. Apart from the

existing terminals GAIL along with its subsidiaries is planning to develop two more regas

terminal in east coast of India i.e. in the state of Orissa and Andhra Pradesh.

5. The share of Natural Gas in India’s primary energy consumption is projected to increase

from the current level of about 10% to 20% by the year 2020. As such import of gas from

Turkmenistan is an important element of India’s overall gas sourcing strategy.

6. As per the 12th

& 13th

Five Year Plans i.e. by year 2022 , an integrated pipeline grid is

expected to be in place in the country with pipelines of around 30,000-35,000 Kms and

capacity of around 800 MMSCMD(280 BCM).

7.0 List of international companies already working in oil and gas sector 1. BHP Billiton Petroleum International Pty. Ltd.

BHP Billiton is an Anglo-Australian multinational mining, oil and gas company

headquartered in Melbourne, Australia and with a major management office in London,

United Kingdom. The Revenue of the Company is US$ 71.7 billion (2011).

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The Company Operates in India through BHP Billiton Petroleum International Pty.Ltd.

The Company was been awarded 10 blocks in India.

2. BP International Ltd.,

BP International Ltd., incorporated in United Kingdom, operates in around 30 countries

in across the Oil and Gas Value Chain. The revenue of the Company is US$ 386.46

billion (2011).

India Operations:

1) Deepwater E&P Blocks: In 2008, BP in a consortium with Reliance Industries

Limited signed a production sharing contract for a deep water block KG-DWN-

2005/2, offered under NELP VII (New Exploration Licensing Policy).

2) Lubricants: Castrol India Limited (CIL), the flagship company of BP in India, has

been in the country for over 80 years, with operations going back to 1919 as a trading

unit for lubricants. Through its 71 percent holding in CIL, BP is amongst the largest

lubricant companies in India and the market leader in the retail automotive lubricant

market. Following the takeover of Burmah Castrol by BP, CIL took over the

operations of Tata BP Lubricants India and now operates with two brands - Castrol

and BP. With headquarters in Mumbai, the company has four regional offices and a

large manufacturing and distribution infrastructure across the country. CIL is the

market leader in the retail automotive lubricant business, including four-wheeler

engine oils, premium 4-stroke two-wheeler oils and multi-grade diesel engine oils.

3) Coal Bed Methane (CBM): In 2006, BP was awarded a CBM block in Birbhum

district in West Bengal. BP aims to leverage over 30 years of experience from

operations in the US where it is a leader in CBM exploration and production. Drilling

of core holes is in progress.

4) Trading: BP has well developed crude, product trading and risk management

services. BP maintains a strong focus on the exciting Indian oil market. Led by the

London and Singapore-based trading teams, the company trade crude oil, bulk

chemicals and petroleum products with Indian counterparties and help customers

manage their energy price risk exposures.

5) Interests in Solar Power: BP's other major business in India is solar power. Tata BP

Solar is a joint venture (JV) of Tata Power Company and BP Solar. The company was

incorporated in 1989 with the objective of developing and propagating renewable

energy in the form of solar power and solar thermal heating. The company has a

manufacturing facility in Bangalore for solar photovoltaic and solar thermal products

and systems, and combines market leadership in India with substantial export sales.

6) RIL-BP JV: In Feb.’2011, BP and Reliance Industries Limited (RIL) have signed a

deal wherein BP has bought 30 percent stake in 23 oil and gas blocks that RIL is

operating. The deal is a multi-billion dollar transaction giving the partnership of RIL

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and BP the largest private sector acreage in India. The partnership also includes

formation of a 50:50 JV between the two companies for the sourcing and marketing

of gas in India. The 23 oil and gas blocks together cover approximately 270,000 sq

km (square kilometre). The JV will also endeavour to accelerate the creation of

infrastructure for receiving, transporting and marketing of natural gas in India. The

partnership will combine BP’s world-class deepwater exploration and development

capabilities with RIL’s project management and operations expertise.

3. British Gas plc.

British Gas plc, incorporated in United Kingdom, has operations in 25 countries across

Africa, Asia, Australasia, Europe, North America and South America. The Revenue of

the Company is US$21.15 billion (2011)

India Operations:

Upstream

1. BG Exploration & Production India Ltd. (BGEPIL)

BGEPIL has interest in the Panna-Mukta and Tapti fields. In the 2006 NELP VI licensing

round, BG Group acquired a 45 percent interest in exploration block KG-OSN-2004/1 in

the Krishna-Godavari Basin. In February 2008, two farm-in agreements were signed

between BG India and ONGC for gaining participation interests in two deepwater blocks

off the Indian east coast.

Downstream

2. Gujarat Gas Company Limited (GGCL)

BG Group has a 65.12 percent controlling stake in GGCL, with the remaining 34.88

percent publicly owned. As at end June 2010, GGCL served more than 296 000

residential, commercial and industrial customers through a pipeline network of over 3500

kms. GGCL also fuelled compressed natural gas (CNG) to more than 1,19,000 natural

gas vehicles (NGVs) as on June 30, 2010. The government of India has notified the

downstream regulator (PNGRB) under the PNGRB Act 2006 to grant authorisation

effective July 2010, which will enable formal authorisation of GGCL’s application for

gas distribution business in the districts of Surat and Bharuch and for its 73 kilometre

high-pressure Hazira-Ankleshwar transmission pipeline (HAPi).

4. Mahanagar Gas Limited (MGL)

BG and GAIL have 49.75% stake each in MGL, Mumbai which is a city gas distribution

company. It is India's largest city gas distribution company in terms of size of customer

base. MGL owns and controls almost 2,700 km of pipeline and is extending its network

beyond Mumbai into the neighbouring cities of Thane, Mira-Bhayander and Navi-

Mumbai. As in June 2009, the number of connected domestic customers of MGL is

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374,500. Following the introduction of regulation into the city gas distribution (CGD),

MGL has received authorization from the Regulator for the operation of its business in

the Greater Mumbai City area and the surrounding areas to the east – Navi Mumbai plus

the conurbation of Ambernath-Kalyan, an area identified for growth in future. To support

this volume growth, MGL has signed long-term gas supply agreements for additional gas

from the RIL D6 and ONGC C Series fields and framework agreements to source spot

LNG.

5. Cairn Energy India Pty. Ltd.

Cairn EnergyPlc., incorporated in Edinburgh, United Kingdom, has E&P Operations in

India (9 blocks), Bangladesh, Nepal, Greenland and Tunisia. The Company operates in

India through Cairn Energy India Pty. Ltd. The revenue of Cairn Energy India Pvt. Ltd.,

is US $2,480 million (FY 2011-12).

Cairn India has also laid 670 km pipeline from Barmer to Bhogat to transport crude oil.

The 590 km long Barmer to Salaya section of the Barmer to Bhogat pipeline (670 km) is

now operational with oil supplies having commenced to the private refineries from the

delivery point at Salaya.

6. Canoro Resources Ltd.

Canoro Resources Ltd, a publicly listed independent international oil and gas exploration

and production (E&P) company based in Calgary, Canada and New Delhi, India has

operations in the prolific Assam/Arakan basin of northeast India. Having established a

core operation and infrastructure in India, the company is well positioned for growth,

both organic and through additional projects in the region. As one of the largest

independent operators in northeast India, Canoro is successfully operating the Amguri

development block and the AA-ON/7 exploration block in the prolific Assam-Arakan

basin of northeast India. Canoro is also present in AA-ONN-2003/2.

7. ENI India Ltd.

Eni S.p.A, incorporated in Italy, has main discoveries in Angola, Brazil, Congo, Egypt,

Indonesia, Nigeria, Norway, Pakistan, Scotland, the Gulf of Mexico and Alaska. The

revenue of the Company is €99.48 billion (2010).

India Operations:

The Company operates in India through its subsidiary ENI India Ltd. ENI India Ltd. was

awarded 2 blocks in India. The Company is also present in engineering and construction

services in India through its subsidiaries Saipem and Snamprogetti which have merged

since October 2008. Saipem and Snamprogetti have carried out several turnkey contracts

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including Madras refinery, the Trombay Lubricants and a number of pipelines, offshore

platforms and related facilities. Snamprogetti has also provided engineering services and

technical assistance for the construction of several ammonia and urea plants as well as

engineering services for an MTBE (Methytertitary-butyl ether) plant and an isobutene

plant. In 2005, Saipem completed the design and construction of the Hazira Natural gas

Re-gasification terminal, including storage tanks and a wharf for the docking of LNG

tankers. The Company also acquired a contract for the license and basic engineering of a

urea plant at Hazira. Saipem also carries out offshore drillings, on behalf of the Gujarat

State Petroleum Corporation (GSPC).

8. ExxonMobil

ExxonMobil is the world's largest publicly traded international oil and Gas Company, and

also the world's largest refiner and marketer of petroleum products. Formed in 1999, by

the merger of Exxon and Mobil, currently it has a presence in about 200 countries.

ExxonMobil conducts its business activities in India via three wholly owned subsidiaries,

which are companies incorporated in India.

1) ExxonMobil Company India Private Limited (EMCIPL) provides high quality

aviation products and markets specialty petrochemical products. It has actively

developed the market for ExxonMobil specialty chemicals and polymers since May

1996.

2) ExxonMobil Lubricants Private Limited (EMLPL) (previously named “Indo Mobil

Limited”) was established in March 1994 to handle the manufacture and sale of

lubricants. It is responsible for marketing a wide range of lubricants for the

automotive (both passenger as well as commercial), industrial and marine sectors.

EMLPL is also responsible for marketing activities in Sri Lanka and Nepal. Its

operations include lubricant oil blending, packaging, distribution, and marketing.

3) ExxonMobil Gas India Private Limited (EMGIPL) was established in India in May

2003. It supports RasGas’ (a 70:30 joint venture company between Qatar Petroleum

and ExxonMobil respectively) in its ongoing business with Petronet LNG. It also

supports the marketing initiatives from the Australian supply project Gorgon LNG

and Papua New Guinea-based LNG (liquefied natural gas) with Petronet LNG.

9. GdF Suez

GdF Suez is a major European energy utility, which produces, purchases, transports,

distributes and sells natural gas, electricity and related services for its residential,

corporate and local government customers. The company is present in more than 30

countries such as countries of the European Union (EU) and outside Europe in Africa,

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North America and India; GDF is also present in exploration and production (E&P). The

company has been merged with Suez, now known as GDF SUEZ. The Revenue of the

company is €90.7 billion (2011).

Presence in India:

GDF is present in India though its subsidiary GDF International. GDF has 10 percent

stake in Petronet LNG and GDF is the strategic partner of Petronet and provides support

in operation and maintenance of the PLL’s Dahej Terminal. GDF has recently shown

interest in Indian market especially in the transmission of natural gas and city gas

distribution (CGD) business. GDF is also showing keen interest in E&P & LNG

business.

10. OAO Gazprom

OAO Gazprom, incorporated in Russia, is the world's largest gas company having focus

on geological exploration, production, transmission, storage, processing and marketing of

gas and other hydrocarbons. The state owns a 50 percent controlling stake in Gazprom.

Gazprom is a major supplier of gas to Europe with the commissioning of Sakhalin-II in

2009. The revenue of the Company is US$158.1 billion (2011).

Indian Operations:

OAO Gazprom has been awarded the NEC-OSN-97/1 block under New Exploration and

Licensing Policy (NELP)-I. Gazprom is also in discussions with major Indian public and

private companies in the exploration, production and refining of hydrocarbon raw

materials, such as ONGC (Oil and Gas Corporation Ltd.) in terms of joint activities under

the Sakhalin-1 project and Reliance Industries for joint ventures in the gas market in

India.

11. Hardy Exploration & Production (India) Inc.

Hardy Oil and Gas plc, incorporated in London, UK is into oil and gas exploration and

Production Company which has operations in India and Nigeria. The Revenue of the

Company is $ 11,829.6 million (2007).

The Company operates in India through its subsidiary, Hardy Exploration & Production

(India) Inc (HEPI). The Company has rights to explore and produce as an operator in PY-

3, CY/OS-2 and interest in other 4 New Exploration Licensing Policy (NELP) Blocks.

HEPI also has 8.5 percent strategic stake in Hindustan Oil Exploration Company

(HOEC).

12. NAFTOGAZ

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National Joint Stock Company (NJSC) Naftogaz, a leading enterprise in Ukraine's fuel

and energy complex, is in the business of prospecting for exploration drilling, extraction

and production of mineral oils, natural gas, and petroleum products. The NJSC Naftogaz

of Ukraine is one of the biggest Ukrainian companies.

Naftogazoperatesin India through its subsidiary Naftogaz India Pvt. Ltd. The Indian

subsidiary is having three 3 blocks in India.

The revenue of the Company is UAH 65.5 billion (2010).

13. Niko Resource Ltd.

Niko Resources Ltd, Canadian company with a focus on the Indian subcontinent with

minor interests in Canada, has 36 active exploration blocks in 7 countries - India,

Bangladesh, Pakistan, Madagascar, Kurdistan, Indonesia and Trinidad - where it operated

15 blocks out of 26 (operated) blocks in total. The revenue of the Company is

US$194.464 million (June 2011)

Indian Operations:

The Company has interest in producing Oil and Gas blocks in India. Niko along with

various other companies also participated in bidding rounds under the New Exploration

Licensing Policy (NELP) of India. Niko won exploration rights in NEC-25 and D-6 along

with Reliance Industries Ltd. (RIL) in NELP-I. Both the blocks have turned out to be gas

rich and are supplying gas to Indian market. The gas strike in D-6 is in fact one of the

biggest gas discoveries in recent period. The company also struck gas in Surat and is

producing gas from Bheema and NSA shallow natural gas fields from the block. Niko is

able to freely market the natural gas it produces from the fields and is supplying to

various customers in Gujarat.

14. PETROGAS E&P LLC

Petrogas E&P LLC, a limited liability company registered and incorporated in the

Sultanate of Oman, actively engaged in acquisition, operation and management of oil and

gas properties.

The Company operates in India through its wholly owned subsidiary Petrogas E&P

(India) Limited incorporated in British Virgin Islands.Petrogas E&P (India) Limited has

an interest of 20% in a E&P block along with GSPC (20%), IOCL (20%), GAIL

(20%)and HPCL (20%).

15. Premier Oil

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Premier Oil is an international exploration and production company with operations

focused on UK oil and Asia gas. Premier Oil started life as the Carribean Oil Company,

which was registered in the UK in 1934 to pursue oil and gas exploration and production

activities in Trinidad. Two years later, it was publicly floated as Premier (Trinidad)

Oilfields. For the next two decades, the company concentrated its attention on oil

production in Trinidad.

India Operations:

Ratna and R- series fields

Premier Oil is the operator of the 1000 sq. km field with 10 percent interest in the

fields. The other consortium partners are Essar (50 percent) and ONGC (40 percent).

AAP-ON-94/1

The block is jointly held by Premier Oil (38 percent), HOEC (25 percent), IOC (27

percent) and Oil India Ltd (10 percent). Operated by Premier Oil, the block covers

870 square km.

CR-ON-90/1

The block measures 2,541-sq km and was awarded in the eighth bidding round. This

onshore block is now held between Premier Oil (84 percent and operator) and Essar

Oil (16 percent).

16. Royal Dutch Shell plc

Shell is a multinational energy company operating in more than 130 countries. The

Revenue of the Company is US$ 470.171 billion (2011). It is the largest and most

diversified international investor in India's energy sector among all global integrated oil

companies with nearly $1 billion invested already. Shell’s presence in India goes back

about 80 years, when it operated in the country as the pioneering oil distribution

company, Burmah Shell. Set up in 1928, the Burmah-Shell Oil Storage and Distribution

Company of India Limited began operations with import and marketing of kerosene. It

re-entered India in 1993 with the incorporation of Bharat Shell, a 51:49 JV (joint venture)

between Shell and BPCL (Bharat Petroleum Corporation Limited). By 1997, Shell India

Pvt. Ltd., a 100 percent Shell owned company was formed to develop the company's

energy business in the country.

India Operations:

In India, Shell has interests in the areas of LNG (liquefied natural gas), LPG (liquefied

petroleum gas), lubricants, solar energy, and retail fuels. The key Shell companies

operating in India are:

Shell Lubricants: Since 1997, Shell India has been manufacturing its lubricants at its

state-of-the-art lubricant oil blending plant at Taloja, near Mumbai. The company

sells its products through a distribution network of 250 distributors

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Shell Hazira Gas: Along with Total, Shell has set up a 3.67 MMTPA (million metric

tons per annum) LNG re-gasification terminal at Hazira, Gujarat. The re-gasification

capacity is expected to be expanded to 10 MMTPA. The LNG is sourced on spot

basis from Shell operated LNG terminals worldwide. The Hazira LNG terminal is

now interconnected with the Hazira-Vijaypur-Jagdishpur pipeline (HVJ), Dahej-Uran

pipeline (DUPL), Gurjarat State Petronet Limited (GSPL) and East West (EW)

pipelines at Mora, enabling the terminal to supply gas to north, west, central and even

south India.

Shell Solar: The subsidiary installs, operates, and maintains solar panels, mainly in

the rural areas of the country.

Shell Business Service Centre: This service centre was set up in Chennai in 2007 to

provide a wide range of finance, accounting, and business services to Shell operating

companies across several business sectors globally.

Shell India Marketing Private Limited: This subsidiary is planning to set up a

network of 2,000 fuel stations across India.

Shell Gas (LPG) India Private Limited: Shell Gas (LPG) India has a dedicated

LPG import and storage facility with a handling capacity of 90,000 MTPA (metric

tons per annum) at Pipavav, Gujarat. It has a network of distributors located in all

industrial/commercial belts of Gujarat and Maharashtra.

Shell Bitumen India Private Limited: The first Shell bitumen plant in India was

launched in December 2006 at Uluberia, near Kolkata. The plant has a total installed

capacity of 50,000 MTPA, which can be expanded as per the market demand in

future. Shell Bitumen also supplies ready to use road repair mix under brand name

Shellmac PR. Shell Bitumen has also commissioned a similar modified bitumen and

emulsion plant at Savli, near Vadodara in Gujarat.

Shell Technology India: Located in Bangalore, Shell Technology undertakes

advanced technical studies, projects and services for Shell around the world as well as

supporting Shell activities in India. The services span across upstream exploration

and production activities as well as downstream chemical, gas, and refinery

operations.

Shell Marine Products: It serves customers in coastal shipping, dredging, shipyard

and offshore sector like Mercator Lines, Orient Express Ship management, Pratibha

Shipping, Van Oord, ABG Shipyard, Cochin Shipyard, Samson Maritime, Ensco

Maritime, Hercules Offshore among the few.

17. SANTOS

SANTOS,incorporated in Australia, is into on-shore and off-shore oil and gas E&P

ventures throughout Australia, in the Timor Gap, Indonesia, Papua New Guinea, India (2

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blocks), Bangladesh, Egypt, Vietnam, and Kyrgyzstan. The revenue of the Company is

A$2.762 billion (2008)

Santos operates in India through its subsidiary Santos International Operations Pty. Ltd

and has 100 percent working interest and operatorship of blocks NEC-DWN-2004/1 and

NEC-DWN-2004/2, covering approximately 16,500 sq. km in the NortheastCoastBasin,

in the Northern Bay of Bengal.

18. Total S. A.

Total S.A. is the world's fifth largest oil and gas company with operations in more than

130 countries. The Revenue of the Company is €166.55 billion (2011).

India Operations:

Total Oil India Limited is a wholly owned subsidiary of Total SA. Total has been

present in India since 1970, when it started a long-term technical co-operation program

with ONGC (Oil and Natural Gas Corporation). The group is now active in LNG, LPG

(liquefied petroleum gas) marketing, lubricants, and specialty chemicals.

LPG:South Asia LPG Company, a joint venture between Total and Hindustan

Petroleum Corporation Limited (HPCL) has built an LPG underground cavern in

Vizag at a cost of INR 333 crore. It has a storage capacity of 60,000 metric tons. The

project was completed in January 2008.

Totalgaz commenced LPG marketing from 1999 and its activities are spread across

states of southern India. It has bottling plants strategically located at Bangalore,

Madurantakam, Namakkal, Hyderabad, Palakkad and Kolhapur.

LNG: The company has partnered with Shell Gas, in the Hazira LNG terminal and

port. Total holds a 26 percent interest in each of the three companies that comprise

the Hazira LNG terminal port company, the LNG terminal company, and the

marketing company.

Lubricants: The company has lubricants for every segment from trucks to tractors

to cars to 2-wheelers to industries, thereby providing complete solutions to

lubrication needs along with a product range in industrial greases. The company also

markets lubricants for construction and industrial usage.

19. Tullow India Opn.Ltd.

Tullow Oil plc, a UK registered company, quoted on the London and Irish stock

exchanges, is one of the largest Independent Exploration and Production companies in

Europe. Tullow Oil is a dynamic player in the international oil and gas industry. It has

interests in 54 exploration and production licences spread over three main areas – South

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Asia, Africa, and Europe - and has regional offices in each area. Its primary offices are in

London (UK & Corporate) and Dublin (International Business). The principal countries

of operation are United Kingdom, Pakistan, Bangladesh, India, Côte d'Ivoire, Gabon,

Cameroon and Romania.The revenue of the Company is GBP 2,304.2 million (2011)

India Operations:

Tullow has been active in India since 1997 and holds interests in seven blocks, one of

which contains an existing gas discovery. In February 2001, Tullow farmed out interests

of between 40% and 50% in five blocks, along with operatorship to Reliance Industries

Limited.

8.0 Briefing on current investment and legal framework of India Since the time of discovery of a commercially significant amount of oil in the north eastern part

of India in Assam, the petroleum and natural gas sector in the country has come a long way

forward. With the passage of time, there has been a considerable change in the approach of the

Government in regulating this sector. From owning and establishing petroleum and gas

companies and retaining majority stakes in them to regulating prices, the Government has

conspicuously acknowledged that foreign investment is necessary for further development of this

industry.

The oil & gas sector in India was highly regulated until 1997, when the Government announced

a policy of deregulation of the sector. With such announcement the oil & gas sector became an

interesting prospect for several private sector and foreign players. The oil & gas industry now

does not require compulsory industrial licensing under the Industrial Policy of India. The sector

is regulated by the Ministry of Petroleum & Natural Gas (MoP&NG/Petroleum Ministry) of the

Government of India which is entrusted with the responsibility of grant of licenses/leases to

private and public sector companies alike exploration and production of oil and natural gas, their

refining, distribution and marketing, import, export, and conservation of petroleum products and

liquefied natural gas and monitoring of various projects to ensure that they conform to the

applicable laws. As per the revised Foreign Direct Investment (“FDI”) policy for the Petroleum

and Natural Gas sector effective from 1st April, 2011 as circulated by Dept. of Industrial Policy

& Promotion (“DIPP”) vide Circular 1 of 2011 dated 31.03.2011, it provides that FDI up to

100% is permitted under the ‘automatic route’ in exploration activities in petroleum and natural

gas fields, infrastructure related to marketing of petroleum products, petroleum product

pipelines, natural gas/pipelines, Liquefied Natural Gas (LNG) regassification infrastructure,

market study and formulation and petroleum refining in the private sector, subject to the existing

sectoral policy and regulatory framework in the oil marketing sector and the policy of the

Government on private participation in exploration of oil and the discovered fields of national oil

companies.

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The Government has further liberalized the policy for this sector as a result of which the

condition of compulsory disinvestment has been done away with, which earlier provided that

FDI was allowed up to 100% under the ‘automatic route’ with the condition that 26% foreign

equity would be disinvested in favour of the Indian partner/public in a period of five years in

case of actual trading and marketing of petroleum products. The FDI norms for the petroleum

and natural gas sector, which were governed by Press Note 1 of 2004 and Press Note 4 of 2006,

are relaxed through Press Note 5 of 2008 and now the ceiling on foreign investment in public

sector petroleum refining has been raised from 26% to 49%.

8.1 Appraisal by foreign entities before starting business in India

International companies, consortiums or investors seeking to set up operations or make

investments in India need to appraise themselves and structure their activities on the following

three pillars:

1. Strategic:

I. The economic and political situation and landscape of the country has to be

strategically observed from the perspective of investment, with special emphasis

on the concerned sector.

II. The foreign company needs to have the ability and the vision to carry out

operations in India, the location of its customers, the quality and location of its

workforce.

2. Law:

I. Exchange Control Laws : Primarily the Foreign Exchange Management Act,

1999 (“FEMA”) and numerous circulars, notifications and press notes issued

under the same;

II. Corporate Laws: Primarily the Companies Act, 1956 and the regulations laid

down by the Reserve Bank of India (“RBI”) and the Securities and Exchanges

Board of India (“SEBI”);

III. Environmental Laws: The main pollution control statutes in India are the Water

(Prevention and Control of Pollution) Act, 1974 the Air (Prevention and Control

of Pollution) Act, 1981, and the Environment (Protection) Act, 1986, which are

designed to act as an umbrella legislation for the environment, with the

responsibility for administering the new legislation falling on the Central

Pollution Control Board (CPCB) at the national level and the State Pollution

Control Board (SPCB) at the State level. Other than few specified industries, all

industries have to obtain prior clearance from the CPCB and/or SPCB for their

establishment.

IV. Intellectual Property Laws: India does not have a single legislation for the

purposes of Intellectual Property, but a whole set of statutes are available which

together constitute a self contained comprehensive code. Intellectual property in

its various forms is protected by several different legislations in India which

primarily include Patent Act, 1970, the Copyright Act, 1957, the Trademarks

Act, 1999, the Semiconductors and Integrated Circuit Layout Design Act 2000,

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etc. Many of these acts have been amended several times to meet India’s

commitments at World Trade Organization, such as increasing the term of a

patent to 20 years.

V. Labour Laws: There is a plethora of labour laws like Minimum Wages Act,

1948, Industrial Disputes Act, 1947 Provident Fund and Gratuity contribution

laws and General Medical Insurance etc., which govern the working and wage

conditions for employees. The financial implications of the regulations are not

huge as the limits provided therein are very low and do not create any drastic

burden on the employer/industry.

VI. Sector Specific Laws: Specific Laws relating to various sectors, viz. Oil and Gas

Sector (refining, processing, storage, transportation, distribution, marketing)

Financial Services (banking, non-banking financial services), Infrastructure

(highways, airports) and other sectors.

3. Tax:

I. Law dealing with taxation: The levy of taxes in India is a constitutional power

granted to the Union Government and the State Governments. Each tax levied or

collected has to be backed by an accompanying law, passed either by the

Parliament or the State Legislature. India, in terms of direct taxes (income tax)

follows a system of progressive taxation wherein the rate of taxation increases as

the income bracket increases. The important tax laws would be primarily be the

Income Tax Act, 1961; indirect tax laws including laws relating to value added

tax, service tax, customs, excise, etc;

II. International Tax Treaties: Treaties with favourable jurisdictions such as

Mauritius, Cyprus, Cayman Islands, Singapore and the Netherlands.

8.2 Foreign Investment in India under different routes

While foreign investment is freely permitted in most sectors, an investor for certain sectors and

depending on the quantum of investment, may be required to obtain prior approval from the

Foreign Investment Promotion Board (“FIPB”) or the RBI. Foreign direct investment can be

made either through the “automatic route” or the “approval route”.

Automatic Route: Under the “automatic route” neither the foreign investor nor the Indian

company requires any approval from the FIPB or the RBI. The recipient (Indian company)

simply must notify the RBI of the investment and submit specified documents to the RBI

through an authorized dealer. Where there are sector-specific caps for investment, proposals for

stakes up to those caps are automatically approved, with a few exceptions. Foreign direct

investment (including the establishment of wholly owned subsidiaries) is allowed under the

automatic route in all sectors, except those specifically listed as requiring government approval.

The government has established norms for indirect foreign investment in Indian companies,

according to which an investment by a foreign company through a company in India that is

owned and/or controlled by a non-resident entity would be considered as foreign investment.

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Approval Route: Proposed investments that do not qualify for automatic approval must be

submitted to the Foreign Investment Promotion Board; areas where FIPB approval is required

include asset reconstruction, commodity exchange, courier service, defence, print media, etc.

A foreign enterprise can consider the following routes for doing business in India:

1. Corporate entity

I. Joint Venture with an Indian partner (JV)

II. Wholly Owned Subsidiary (WOS)

III. Limited Liability Partnership (LLP)

IV. Private & Public Companies

2. Non-corporate entity/ Other Entry Options

I. Project Office (PO)

II. Liaison Office (LO)

III. Branch Office (BO)

3. Foreign Institutional Investors (FII)

1. CORPORATE ENTITY

1.1. Joint Venture with an Indian partner

There are no separate laws for regulating the conduct of Joint Ventures (“JV”) in India and laws

governing domestic companies equally apply to JVs. Typically, as in any other country, a JV is

where two parties (individual or companies) incorporate a company in India. The management

and running of a Joint Venture is as per the terms decided by the JV partners in the shareholders

agreement.

1.2. Wholly Owned Subsidiary (WOS)

A foreign corporate can invest and start its operations in India by incorporating a Wholly Owned

Subsidiary (“WOS”) company under the provisions of the Indian Companies Act, 1956. It is

treated at par with a domestic company and all regulations applicable to an Indian company

equally apply to the WOS.

The set-up can be under the automatic route, wherein no prior approval of the government is

required. One needs to take into consideration the business activities proposed for India as well

as the sector of operation. In case restrictions apply, prior approval is required from the FIPB

under the Ministry of Finance.

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1.3. Limited Liability Partnership (LLP)

The recent concept of a Limited Liability Partnership (“LLP”) is a form of business entity which

permits individual partners to be shielded from the liabilities created by another partner’s

business decision or misconduct. In India, LLPs are governed by The Limited Liability

Partnership Act, 2008. The LLP is a body corporate and exists as a legal person separate from its

partners. After 2 years of notification of the Limited Liability Partnership Act 2008, and after 5

months of issuing a discussion paper on allowing Foreign Direct Investment (FDI) in the Limited

Liability Partnership (LLP), the Government of India, approved policy on FDI in Limited

Liability Partnership. FDI in LLP is allowed in sectors activities where 100% FDI is allowed

under the automatic route and there are no FDI-linked performance related conditions, subject to

approval of government.

1.4. Private & Public Companies

Companies in India can either be public or private. Further, a private company can be limited by

shares or by guarantee. In the former, the personal liability of members is limited to the amount

unpaid on the share subscription, while in the latter the personal liability is limited by a pre-

decided nominated amount.

Public or Private Companies are first formed by first obtaining name availability approval,

followed by registering the memorandum and the articles of association and prescribed forms

with the Registrar of Companies (ROC) in the state in which the registered office is to be

located. If the documents are in order, the ROC will issue a certificate of incorporation. The

filing for company formation is made in electronic form. A private company can commence its

business immediately upon incorporation. A public company is required to obtain a Certificate of

Commencement of business from the ROC before starting its business operations.

All Directors or proposed Directors must obtain a Director Identification Number (DIN). At least

one Director must obtain a Digital Signature Certificate (DSC) from the certifying authority for

electronic filings.

The below table further brings out the differences in the process of incorporation of a private and

public company in India:

S

NO.

DETAIL PRIVATE LIMITED COMPANY PUBLIC LIMITED COMPANY

1. Commencement of

business

Immediately on obtaining the

certificate of incorporation

Only after obtaining

certificate of commencement

of business.

2. Number of

Members

Minimum 2 and maximum 50 Minimum 7 with no

Maximum cap

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3. Number of

Directors

Minimum 2 Minimum 3

4. Authorized Capital Minimum INR 100,000 (US$

1818*approx)

Minimum INR 500,000(US$

9090*approx)

5. Share subscription Cannot invite public to

subscribe its shares or

debentures

Can invite general public

subscribe to its shares.

6. Transferability of

shares

Right to transfer is restricted by

its Articles of Association

Freely transferable

7. Quorum Minimum 2 members be

personally present. In case of

corporate shareholders, their

nominated representatives

Minimum 5 members to be

personally present. In case of

corporate shareholders, their

nominated representatives.

8. Statutory Meeting

& Statutory Report

No requirement to hold

statutory meeting or to circulate

statutory report.

Mandatory

9. Index of Members Not required Mandatory

10. Rights Shares No requirement to offer right

shares to existing equity

shareholders

Must offer first to the

existing shareholders

*Exchange Rate: 1USD = Rs.55

2. NON CORPORATE ENTITY/ OTHER ENTRY OPTIONS5

A foreign company may also enter the Indian markets by establishing a non-corporate entity

which operates as an extension of the foreign company. These are:

2.1. LIAISON OFFICE

Liaison Office (“LO”) is in the nature of a representative office set-up primarily to understand

the business and investment climate. It acts as a channel of communication for the head office.

However, it cannot directly undertake any commercial activity. All running expenses are to be

met only through inward remittances by the head office.

Scope of Activities:

a) Representing the parent company in India

b) Promoting trade with India, including the act of sourcing

5Please see Annexure I- RBI Foreign Exchange Management (Establishment in India of branch or office or other place of

business) Regulations, 2000, Notification No. FEMA 22 /2000-RB dated 3rd May 2000 available at

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/13272.pdf (last assessed on 26.06.2012)

See also Annexure II, page 6- ‘Branch/Project/ Liaison office of a foreign company in India’ RBI FAQs on ‘Foreign Investments

in India’ updated upto October 13, 2010 available at http://www.rbi.org.in/scripts/FAQView.aspx?Id=26 (last assessed on

26.06.2012)

http://rbidocs.rbi.org.in/rdocs/notification/PDFs/13272.pdf

http://www.rbi.org.in/scripts/FAQView.aspx?Id=26

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c) Exploring technical or financial collaborations between parent and Indian partners

Set-up Process

Setting up a LO requires prior approval from RBI, the apex foreign exchange management

authority in India. Approval is usually granted for a period of three years and can be renewed

thereafter.

Compliance

As the LO does not undertake any commercial activity, it is not taxable in India. However, the

LO is required to meet compliance requirements viz. tax withholding, audit, etc.

Closure

To close the LO, an application is to be submitted with the Authorised Dealer Bank along with a

tax clearance certificate from the Income tax authorities and an Auditor’s certificate computing

the amount repatriable. Besides, intimation is to be made to the ROC.

2.2. PROJECT OFFICE

Foreign companies planning to execute a project in India can set-up temporary project / site

offices which are generally referred to as project Offices (“PO”). Generally, Project Offices are

set-up for turnkey or installation projects.

Scope of Activities

a) Activities restricted to those incidental to the project

b) Permitted to operate a bank account in India

c) The project can be funded by bilateral / multilateral / international financing

agencies

Set-up Process

In specified cases, a PO is allowed to be set-up under the automatic route, otherwise a prior

approval is required from the RBI. Subsequently, one is required to obtain a certificate of

establishing a place of business in India from the ROC.

Compliance

PO may remit the surplus revenue from the project subject to payment of applicable taxes in

India. PO is considered an extension of the foreign company and taxed at 40 per cent (plus

surcharge and cess). Besides, it is required to meet compliance requirements viz. income tax, tax

withholding, audit, etc.

Closure

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On completion of the project and to repatriate balance funds, an application is to be submitted

with the Authorised Dealer Bank. The application is to be accompanied with a tax clearance

certificate from the Income tax authority which is issued only once the entire verification

process, namely assessments, is completed.

2.3 BRANCH OFFICE

A foreign company may consider establishing a branch to carry out trading, business dealing,

etc. on behalf of the head office and this is generally referred to as the Branch Office (“BO”)

Scope of Activities

a) Export / import of goods;

b) Rendering professional or consultancy services;

c) Research work linked to activities of the parent;

d) Promoting technical or financial collaborations between Indians and parent;

e) Rendering services in information technology including software development;

f) Technical support in respect of products supplied by the parent; and

g) Foreign airline / shipping company

Set-up Process

Set-up of a BO requires a prior permission from the RBI which will closely examine the

proposed activities to be carried out in India. Subsequently, one is required to obtain a certificate

of establishing a place of business in India from the ROC.

Compliance

BO may remit the surplus revenue from the project subject to payment of applicable taxes in

India. BO is considered an extension of the foreign company and taxed at 40 per cent (plus

surcharge and cess). Besides, it is required to meet compliance requirements viz. Income tax, tax

withholding, audit, etc.

Closure

To close a BO and to repatriate balance funds, an application is to be submitted with the

Authorized Dealer Bank. The application is to be accompanied with a tax clearance certificate

from the Income tax authorities which are issued only once the entire verification process,

namely assessments, is completed.

8.3 Foreign Institutional Investors

Foreign Institutional Investors (“FIIs”) is a term commonly used in India to refer to outside

companies investing in the financial markets of India. FIIs include institutions such as pension

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funds, mutual funds, investment trusts, asset management companies or their power of attorney

holders (providing discretionary and non-discretionary portfolio management services). The FIIs

are invited to invest in all the securities traded in the primary and secondary markets, including

the equity and other instruments of companies which are listed or are to be listed on the stock

exchanges in India.

The FIIs are required to register with SEBI, which shall, while granting registration to the FII,

take into account the track record of the FII, its professional competence, financial soundness,

experience, etc. FIIs seeking registration with the SEBI should hold a registration from the

securities commission or the regulatory organization for the stock market in its own country of

domicile. SEBI’s registration and RBI’s general permission to an FII will be for five years,

renewable for further five year periods later on.

8.4 Legal regime in India regulating the Oil and Natural Gas Sector

The legal regulatory regime specific to the oil & gas industry in India constitutes primarily the

Petroleum Act, 1934, the Petroleum Rules, 1974, the Petroleum & Natural Gas Rules, 1959, the

Oilfields (Regulation and Development) Act, 1948, Petroleum and Minerals Pipelines

(Acquisition of Right of User in Land) (“PMP”) Act, 1962 and the Petroleum and Natural Gas

Regulatory Board Act, 2006. These statutes and rules lay down the substantive and procedural

requirements to be complied with in order for a party to engage in E&P, refining, import and

distribution activities relating to petroleum products. The PMP Act provides for the acquisition

of right of user in land for laying pipelines for the transport of petroleum and minerals and for

matters connected therewith. PMP Act was conceived because of the resistance that invariably

attracted acquisition under the Land Acquisition Act, 1894. The statement of objects and reasons

that accompanied the Bill stated that ‘Although land can be acquired outright for laying down

pipelines under the Land Acquisition Act, 1894, the procedure for such acquisition is long drawn

and costly. Since the petroleum pipelines will be laid underground, outright acquisition of the

land is not necessary. Therefore, in the case of these pipelines it is considered sufficient to

acquire the mere right of user in the land.’

This partial acquisition vests the right to use the land in the government; the owner or occupier

of the land is, however, entitled to continued use of the land. The damage, loss or injury that may

result is compensated under the law under the PMP Act.

Dismantling of the APM (administered price mechanism) system effective 1 April 2002 led to

the formation of the Petroleum and Natural Gas Regulatory Board (“PNGRB”) on 1 October

2007 under the Petroleum and Natural Gas Regulatory Board Act, 2006. The Board was formed

to regulate the refining, processing, storage, transportation, distribution, marketing and sale of

petroleum, petroleum products and natural gas excluding production of crude oil and natural gas

so as to protect the interests of consumers and entities engaged in specified activities relating to

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petroleum, petroleum products and natural gas and to ensure uninterrupted and adequate supply

of petroleum, petroleum products and natural gas in all parts of the country and to promote

competitive markets and for matters connected therewith or incidental thereto.

The PNGRB Act, inter alia, provides for the legal framework for downstream oil and gas sector

regulation, development (including fixation of tariff) of petroleum and natural gas pipelines, and

city or local gas distribution networks. However, it does not envisage fixing or controlling the

selling price—neither at the producer level nor at the retail consumer level. The PNGRB, in its

initial two years of existence, has notified several regulations for natural gas pipelines covering

authorization, regulation of tariff for common carrier or contract carrier, access code and

technical and HSE (health, safety, and environment) standards in design, construction, and

maintenance of natural gas pipelines.

The PMP Act, along-with the PNGRB Act, are the two important acts dealing with and affecting

the right of user in land for laying pipelines and for the transportation and distribution of

petroleum and natural gas, respectively. In addition to the abovementioned, the Companies Act,

1956 would regulate the laws relating to the companies in India and the Indian Constitution

would be the supreme guiding factor affecting all the relevant statutes.

8.5 Judicial System in India

India has a well-established and robust independent judicial system which is based on the

English Common Law and derives its powers from the Constitution, statutes enacted by central

and state legislatures, customary laws and case laws. The legal system consists of the Supreme

Court, India’s apex court, High courts in each state that are the apex court at the state level, and

lower courts at the district level. Foreign companies operating in India can approach other

specialized foras (Competition Commission of India- CCI, National Green Tribunal- NGT, etc.)

also for the redressal of their grievances in addition to these courts.

9.0 Investment incentives currently offered by the Government of India

There are a variety of tax concessions. The most important are the partial tax holiday for newly

established small scale industrial undertakings, full five year tax holiday for entrepreneurs

building infrastructure facilities and the full tax holiday for industrial units established in Free

Trade Zones (FTZs) and for 100% Export Oriented Units. Also, all profits derived from export

of computer software are deductible in computing taxable income. Exporters of goods or

merchandise are also allowed 100 per cent deduction in respect of profits derived from export

trade in computing the taxable income. These benefits can be passed on to the manufacturers

whose goods are exported through the trading or export houses.

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Special tax treatment has been provided to foreign institutional investor in respect of income

from securities and capital gains. Dividends and interest on investments made by foreign

institutional investors are taxed at a concessional rate of 20 per cent and long-term gains at a rate

of 10 per cent. Short term capital gains on sale of securities are subject to tax at the rate of 30 per

cent. Indian companies are required to pay 30 per cent tax on long-term capital gains. However,

foreign companies and non-resident non-corporate tax payers are charged a concessional rate of

20 per cent on long-term capital gains.

The existing tax incentives can be divided into two groups:

1. Measures specifically aimed at attracting foreign capital and augmenting exchange

earnings;

2. Other measures including investment growth.

9.1 Measures to attract Foreign Capital & augment Exchange Earnings

9.1.1 Measures Inducing Better Export Performance

1. Exemption for New Industrial Undertakings in Free Trade Zones(FTZs)

A complete Tax Holiday is available to industrial undertakings established in specified Free

Trade Zones (FTZs), Electronic Hardware Technology Park or Software Technology Park.

There are in all six Free Trade Zones in the country. The benefit is an exemption of the

profits of an undertaking for five consecutive assessment years beginning with the initial

assessment year. For this purpose the undertaking should have been set up in an FTZ and

commenced manufacturing during the previous year relevant to the assessment year 1981-

82 and thereafter. However, the law provides a choice to the taxpayer. The concession

offered is in lieu of other benefits like Tax Holiday Scheme contained in Section 801A.

2. Deduction of Profits From Projects Outside India

To stimulate the export of projects, a tax benefit is available to Indian companies or non-

corporate entities resident in India at 50 per cent of the profits earned on a foreign project

provided the said 50 per cent of profits are remitted to India in foreign exchange within six

months of the end of the relevant previous year and a reserve account is also created for the

same. The amount in the reserve account can be utilized only for business purposes for a

period of five years. The expression `foreign project' connotes work carried on outside India

relating to construction of roads, buildings etc. assembly or installation of plant or

machinery; and such other work as may be prescribed.

3. Deduction of Profits Earned from Export Business

An exporter of goods or merchandise is allowed 100 per cent deduction of profits derived

from export trade in computing the taxable income. This benefit can be passed on to the

manufacturers when goods are exported through the trading or export house.

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4. Deduction of Royalties and Other Payments from Foreign Enterprises

A 50 per cent deduction on the income arising to an Indian Company and other non-

corporate taxpayer from royalty, commission, fees or similar payment received or receivable

in convertible foreign exchange and brought into India as per the Foreign Exchange

Regulations, is provided for. The income earned, is against the provision by the taxpayer to

a foreign Government or enterprise for use outside India of any patent, invention, model

design, secret formula or process, or similar proprietary right or information concerning

industrial, commercial or scientific knowledge, experience or skill. The income earned from

professional services rendered from India is also deductible under this provision.

5. Exemption for Foreign Technicians

Foreign technicians including Non-Resident Indians, required to serve in India under an

approved contract of service are generally paid remuneration net of tax. The tax liability is

borne by the Indian enterprise employing the technician, and the technician will owe no

further tax.

6. Deduction of Profits Derived from the Export of Computer Software

Section 80HHE of the Income-tax Act, 1961 provides for the deduction of all profits derived

from the export of computer software from the total income of the taxpayer. This concession

is available to the Indian companies as well as resident non-corporate tax payers. The broad

features of the deduction are as follows:

i. The tax concession is available with regard to profits from the export of software not

only through magnetic media or on paper but also through satellite data links and

consultancy services delivered to the foreign client outside India;

ii. The tax concession is available only when the export profits are received in or

brought into India in convertible foreign exchange within six months of the end of

the relevant financial year or within such further period as the Commissioner of

Income Tax may allow;

iii. To claim the tax concession, the taxpayer must furnish along with its return of

income, a report of a chartered accountant certifying the correctness of the claim for

deduction.

9.1.2 Measures Inducing Inflow of Foreign Investment

1. Concessional Tax Rates for Foreign Institutional Investors

For promoting investment by foreign institutional investors in the Indian capital market,

such investors are subject to tax at a concessional rate of 20 per cent on investment income

i.e., (dividends and interest), and 10 per cent on long-term capital gains. Income received

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from securities listed on a recognized stock exchange in India in accordance with the

Securities Contracts (Regulations) Act, 1956 are taxed at the rate of 20 per cent. Long-term

capital gains arising from the transfer of said securities are also taxed at the rate of 10 per

cent and short-term capital gains at the rate of 30 per cent. The period of holding for long-

term capital gains in case of securities is 12 months.

Section 196D provides for withholding tax (at 20 per cent) from income derived by foreign

institutional investors from securities. The deduction must be made either when the income

is credited to the payee's account, when payment is made in cash, or when a cheque or draft

is issued, whichever is earlier.

2. Exemption of Investment Income of EEC Investors

Under the EC International Investment Partners Scheme, the European Economic

Community (EEC) provides grants, interest-free loans, and equity participation of dividend

income accruing in India from investments made under the scheme, to be used for further

investment in India. To facilitate investment by the ECC in India such income from

investment has been made exempt from income tax. Clause (23 BBB) in Section 10

provides a complete income tax exemption for Indian-source income in the form of

dividends, interest or capital gains derived by EEC investors from investments made out of

funds under the scheme.

9.2 Other measures to induce Investment growth

9.2.1Tax Holiday

Section 801A of the Income Tax Act, 1961 allows a certain percentage of taxable income

derived from the small-scale new industrial unit, as deduction. The deduction rate is 30 per cent

of profits derived from the new industrial undertaking, etc. in the case of companies for a period

of 10 years and 25 per cent of such profits for a like period in the case of other business entities.

For cooperative societies, the benefit period is 12 years. In addition to this general, partial tax

holiday, enterprises engaged in specific investment projects are entitled to other full tax holidays

as well. These are described below.

9.2.2 Tax Holiday for New Industrial Undertakings in Under-developed Areas

With a view to encouraging new investment in industrially underdeveloped states and Union

Territories, the government offers a full five-year tax holiday commencing in the year of

production begins for new industrial undertakings located in the North-Eastern States of Jammu

& Kashmir, Himachal Pradesh, Sikkim, Goa and the Union Territories of the Andaman and

Nicobar islands and Dadra and Nagar Haveli, Daman & Diu, Lakshdweep and Pondicherry. A

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similar deduction is offered to new industrial undertakings in certain backward areas of other

states.

After the fifth year, the industrial undertaking is entitled, for the balance of the applicable period

(i.e., seven additional years for co-operative societies and five for other entities), to the profits

deduction provided under sections 801A (a 30 per cent deduction of the profits of such

undertakings in the case of companies and a 25 per cent deduction in the case of other entities).

9.2.3 Tax Holiday for the Power Generating Sector

A full five-year tax holiday is allowed in respect of profits and gains of new industrial

undertakings set up anywhere in India for power-generating projects. The five-year tax holiday is

available to undertakings that have begun or will begin to generate power on or after 1 April,

1994. When the tax holiday expires, the undertaking will be allowed to deduct 30 per cent of its

profits if it is organised as a company, and 25 per cent if it is a non-corporate entity. Again, these

deductions will be available for seven assessment years to co-operative societies and five years

to other taxpayers.

9.2.4 Tax Holiday for Infrastructure Building

To promote the expansion of equality infrastructure, a full five-year tax holiday is allowed to any

enterprise that builds, maintains, and operates any infrastructure facility, such as roads, highways

or expressways, new bridges, airports, ports, or rapid rail transport systems on a BOT (build,

operate, transfer), BOOT (build, own, operate, transfer), or similar basis. The enterprise must

have entered into an agreement with the central or state government, local authority, or any other

statutory authority for this purpose. The period within which the infrastructure facility has to be

transferred needs to be stipulated in the agreement between the undertaking and the government

concerned.

The tax holiday is allowed in respect of income derived from the use of the infrastructure

facilities developed by the taxpayer. The five year tax holiday is available to an entrepreneur that

has begun or will begin to operate infrastructure facilities on or after 1 April, 1995. When the tax

holiday expires, the entrepreneur will be allowed to deduct 30 per cent of its profits, if it is a

company and 25 per cent if it is a non-corporate entity. The incentive is available to cooperative

societies for the first 12 years and to other for the first 10 years of operation.

An entrepreneur is allowed to choose the initial year from which he wants to avail of the five

year tax holiday. The tax holiday has to be availed of within the means that an entrepreneur (in

case of cooperative societies) who chooses the fourth year of operation as the initial year gets a

full tax holiday for five years from the fourth to the eighth year and the 30 per cent deduction

from its remaining four years, that is from the ninth year to the twelfth year.

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As an incentive for financial institutions to provide long-term financing for the development of

infrastructure facilities, the budget also proposes to allow a deduction of 40 per cent which is

allowed to such institutions of the taxable income derived from financing investments in

infrastructure facilities, provided this amount is credited to a special reserve.

9.2.5 Deduction of Expenditures for Scientific Research

Section 35 of the Income Tax Act allows a deduction for contributions to approved scientific

research associations, universities, colleges, or other institutions that are to be used for scientific

research. To encourage industry to make use of facilities offered by national laboratories and

research institutes, this section also allows a weighted deduction of 125 per cent of contributions

to approved national laboratories and institutions carrying out research and development in

natural and applied sciences.

A "National Laboratory" is defined as a scientific laboratory functioning at the national level

under the aegis of the Indian Council of Agricultural Research, the Indian Council of Medical

Research and the Council of Scientific and Industrial Research, Department of Electronics, the

Defence Research and Development Organisation, the Department of Biotechnology and the

Department of Atomic Energy and which is approved by the prescribed authority for this

purpose.

9.2.6 Exemption of Venture Capital Income

To encourage venture capital financing, clause (23F) to section 10 of the Income Tax Act

provides an income tax exemption for all dividends and long-term capital gains of a venture

capital fund or a venture capital company from investments made by way of equity shares in

venture capital undertakings. To obtain this exemption, the venture capital fund or company

must obtain approval from the prescribed authority and satisfy the prescribed conditions. The

approval by the prescribed authority will have effect for the immediate assessment year of up to

three assessment years, as may be specified in the order of approval.

If the equity shares are transferred by the venture capital fund or company at any time within

three years from the date of their acquisition (other than in the event of shares are listed on a

recognised stock exchange of India), the aggregate amount of dividend income on such equity

shares that has not been included in income in years preceding that in which the transfer has

taken place shall be deemed to be income of the venture capital fund or company for the years in

which the transfer took place. The exemption also will not be allowed in respect of long-term

capital gains, if any, arising on the transfer of shares.

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9.2.7 Adjustment for Business Losses

In India, there are five broad heads of income under which a taxpayer's different sources of

income may be grouped. Except for speculation losses, long-term capital losses, losses from

some specified sources like horse-races, gambling, etc., loss from any other source is eligible for

set off against the profits from any other source under the same head of income. The net loss

under any head is further eligible for set-off against the income from other heads but is allowed

to be carried forward to be set off against capital gains in the subsequent years.

If a loss cannot be set-off against profits under the same head or under different heads on account

of inadequacy of profits in the same year, it may be carried-forward and set-off against the

income of the subsequent years. However, only business losses (including those arising on

account of speculative activities), losses arising out of transfer of capital assets, and losses

arising on account of maintaining racehorses are permitted to be carried-forward. Business losses

can be forward for eight years while unabsorbed depreciation allowance can be carried forward

indefinitely.

Another welcome provision aimed at salvaging sick units permits carry-forward and set-off of

accumulated business losses and unabsorbed depreciation allowances of the amalgamated sick

unit in certain cases of amalgamations.

Income Tax Act is still far from the tax statutes of some of the advanced nations wherein

business losses of the current year may be carried back and set off against assessed profit of

previous year. India has made a good start, and the path ahead should not remain un traversed for

long, however.

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Annexure I

Foreign Exchange Management (Establishment in India of branch or office or other place

of business) Regulations, 2000

Notification No.FEMA 22 /2000-RB dated 3rd May 2000

RESERVE BANK OF INDIA

(EXCHANGE CONTROL DEPARTMENT)

CENTRAL OFFICE

MUMBAI 400 001

In exercise of the powers conferred by sub-section (6) of Section 6 of the Foreign Exchange

Management Act, 1999 (42 of 1999), the Reserve Bank makes the following regulations to

prohibit, restrict and regulate establishment in India of a branch or office or other place of

business by a person resident outside India, namely:

1. Short title and commencement:-

i. These Regulations may be called the Foreign Exchange Management (Establishment in

India of Branch or Office or other Place of Business) Regulations, 2000.

ii. They shall come into force on 1st day of June, 2000.

2. Definitions:-

In these regulations, unless the context otherwise requires -

a. 'Act' means the Foreign Exchange Management Act, 1999 ( 42 of 1999);

b. 'Foreign company' means a body corporate incorporated outside India, and includes a

firm or other association of individuals;

c. 'Branch' shall have the meaning assigned to it in sub-section (9) of Section 2 of the

Companies

d. Act, 1956 ( 1 of 1956),

e. 'form' means a form annexed to these Regulations;

f. 'Liaison Office' means a place of business to act as a channel of communication between

the Principal place of business or Head Office by whatever name called and entities in

India but which does not undertake any commercial /trading/ industrial activity, directly

or indirectly, and maintains itself out of inward remittances received from abroad through

normal banking channel;

g. 'Project Office' means a place of business to represent the interests of the foreign

company executing a project in India but excludes a Liaison Office;

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h. 'Site Office' means a sub-office of the Project Office established at the site of a project

but does not include a Liaison Office;

i. the words and expressions used but not defined in these Regulations, shall have the same

meanings respectively assigned to them in the Act.

3. Prohibition against establishing branch or office in India:-

No person resident outside India shall, without prior approval of the Reserve Bank, establish in

India a branch or a liaison office or a project office or any other place of business by whatever

namecalled:

Provided that no approval shall be necessary for a banking company, if such company has

obtained necessary approval under the provisions of the Banking Regulation Act, 1949.

4. Prohibition against establishing a branch or office in India by citizens of certain

countries:-

No person, being a citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China,

without prior permission of the Reserve Bank, shall establish in India, a branch or a liaison office

or a project office or any other place of business by whatever name called.

5. Application to Reserve Bank for opening branch or liaison or project office etc.:-

i. A person resident outside India desiring to establish a branch or liaison office in India

shall apply to the Reserve Bank, in form FNC 1.

ii. Where a person resident outside India has secured from an Indian company a contract to

execute a project in India, and

a) the project is funded directly by inward remittance from abroad;

or

b) the project is funded by a bilateral or multilateral International Financing

Agency,

or

c) the project has been cleared by an appropriate authority;

or

d) a company or entity in India awarding the contract has been granted Term

Loan by a Public Financial Institution or a bank in India for the Project, such

person shall apply to the Reserve Bank in form FNC 1 for permission to

establish a Project or Site Office in India.

iii. The Reserve Bank may grant permission subject to such terms and conditions as may be

considered necessary.

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Explanation:

For the purpose of this Regulation,

(i) 'a bilateral or multilateral International Financing Agency' means the World Bank or the

International Monetary Fund or similar other body;

(ii) “Public Financial Institution” is a public financial institution as defined in Section 4A of

the Companies Act, 1956.

6. Activities which may be undertaken by the branch or office in India

(i) A person resident outside India permitted by the Reserve Bank under Regulation 5, to

establish a branch or a liaison office in India may undertake or carry on any activity

specified in Schedule I or, as the case may be, in Schedule II, but shall not undertake or

carry on other activity unless otherwise specifically permitted by the Reserve Bank.

(ii) A person resident outside India permitted by the Reserve Bank under Regulation 5, to

establish a Project or Site Office in India shall not undertake or carry on any activity

other than the activity relating and incidental to execution of the project.

7. Remittance of profit or surplus

A person resident outside India permitted by the Reserve Bank under Regulation 5, to establish a

branch or Project Office in India may remit outside India the profit of the branch or surplus of

the Project on its completion, net of applicable Indian taxes, on production of the following

documents, and establishing the net profit or surplus, as the case may be, to the satisfaction of the

authorized dealer through whom the remittance is effected.

I. For remittance of profit of a branch, -

a) certified copy of the audited balance-sheet and profit and loss account for the relevant

year;

b) a Chartered Accountant's certificate certifying, -

(i) the manner of arriving at the remittable profit,

(ii) that the entire remittable profit has been earned by undertaking the permitted

activities, and

(iii) that the profit does not include any profit on revaluation of the assets of the

branch.

II. For remittance of surplus on completion of the Project, -

a) certified copy of the final audited Project accounts;

b) a Chartered Accountant's certificate showing the manner of arriving at the remittable

surplus;

c) income tax assessment order or either documentary evidence showing payment of

income tax and other applicable taxes, or a Chartered Accountant's certificate stating

that sufficient funds have been set aside for meeting all Indian tax liabilities; and

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d) auditor's certificate stating that no statutory liabilities in respect of the Project are

outstanding.

(P.R. GOPALA RAO)

Executive Director

Schedule I

[See Regulation 6(i)]

Permitted activities for a branch in India of a person resident outside India

(i) Export/Import of goods

(ii) Rendering professional or consultancy services.

(iii) Carrying out research work, in which the parent company is engaged.

(iv) Promoting technical or financial collaborations between Indian companies and parent

or overseas

(v) group company.

(vi) Representing the parent company in India and acting as buying/selling agent in India.

(vii) Rendering services in Information Technology and development of software in India.

(viii) Rendering technical support to the products supplied by parent/group companies.

(ix) Foreign airline/shipping company.

Schedule II

[See Regulation 6(i)]

Permitted activities for a Liaison office in India of a person resident outside India

(i) Representing in India the parent company/group companies.

(ii) Promoting export import from/to India.

(iii) Promoting technical/financial collaborations between parent/group companies and

companies in

(iv) India.

(v) Acting as a communication channel between the parent company and Indian

companies.

Published in the Official Gazette of Government of India - Extraordinary -

Part-II, Section 3, Sub-Section (i) dated 08.05.2000 - G.S.R.No.408(E)

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Annexure II

Reserve Bank of India (RBI) FAQs

Foreign Investment in India

(Updated up to October 13, 2010)

I. Foreign Direct Investment (FDI)

Q. 1. What are the forms in which business can be conducted by a foreign company in

India?

Ans. A foreign company planning to set up business operations in India may:

Incorporate a company under the Companies Act, 1956, as a Joint Venture or a Wholly

Owned Subsidiary.

Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of

the foreign company which can undertake activities permitted under the Foreign

Exchange Management (Establishment in India of Branch Office or Other Place of

Business) Regulations, 2000.

Q.2. What is the procedure for receiving Foreign Direct Investment in an Indian

company?

Ans. An Indian company may receive Foreign Direct Investment under the two routes as given

under :

i. Automatic Route

FDI up to 100 per cent is allowed under the automatic route in all activities/sectors except where

the provisions of the consolidated FDI Policy, paragraph on 'Entry Routes for

Investment' issued by the Government of India from time to time, are attracted.

FDI in sectors /activities to the extent permitted under the automatic route does not require any

prior approval either of the Government or the Reserve Bank of India.

ii. Government Route

FDI in activities not covered under the automatic route requires prior approval of the

Government which are considered by the Foreign Investment Promotion Board (FIPB),

Department of Economic Affairs, Ministry of Finance. Application can be made in Form FC-IL,

which can be downloaded from http://www.dipp.gov.in. Plain paper applications carrying all

relevant details are also accepted. No fee is payable.

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Indian companies having foreign investment approval through FIPB route do not require any

further clearance from the Reserve Bank of India for receiving inward remittance and for the

issue of shares to the non-resident investors.

The Indian company having received FDI either under the Automatic route or the Government

route is required to report in the Advance Reporting Form, the details of the receipt of the

amount of consideration for issue of equity instrument viz. shares / fully and mandatorily

convertible debentures / fully and mandatorily convertible preference shares through an AD

Category –I Bank, together with copy/ies of the FIRC evidencing the receipt of inward

remittances along with the Know Your Customer (KYC) report on the non-resident investors

from the overseas bank remitting the amount, to the Regional Office concerned of the Reserve

Bank of India within 30 days from the date of receipt of inward remittances.

Further, the Indian company is required to issue the equity instrument within 180 days, from the

date of receipt of inward remittance or debit to NRE/FCNR (B) account in case of NRI/ PIO.

After issue of shares / fully and mandatorily convertible debentures / fully and mandatorily

convertible preference shares, the Indian company has to file the required documents along with

Form FC-GPR with the Regional Office concerned of the Reserve Bank of India within 30 days

of issue of shares to the non-resident investors.

The form can also be downloaded from the Reserve Bank's website at the following address :

http://www.rbi.org.in/Scripts/BSViewFemaForms.aspx

Q.3. Which are the sectors where FDI is not allowed in India, both under the Automatic

Route as well as under the Government Route?

Ans. FDI is prohibited under the Government Route as well as the Automatic Route in the

following sectors:

i) Retail Trading (except single brand product retailing)

ii) Atomic Energy

iii) Lottery Business

iv) Gambling and Betting

v) Business of Chit Fund

vi) Nidhi Company

vii) Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal

Husbandry, Pisci-culture and cultivation of vegetables, mushrooms, etc. under controlled

conditions and services related to agro and allied sectors) and Plantations activities (other than

Tea Plantations) (cf. Notification No. FEMA 94/2003-RB dated June 18, 2003).

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viii) Housing and Real Estate business (except development of townships, construction of

residential/commercial premises, roads or bridges to the extent specified in Notification No.

FEMA 136/2005-RB dated July 19, 2005).

ix) Trading in Transferable Development Rights (TDRs).

x ) Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco

substitutes.

Q.4. What is the procedure to be followed after investment is made under the Automatic

Route or with Government approval?

Ans. A two-stage reporting procedure has to be followed :.

• On receipt of share application money :

Within 30 days of receipt of share application money/amount of consideration from the non-

resident investor, the Indian company is required to report to the Regional Office concerned of

the Reserve Bank of India, under whose jurisdiction its Registered Office is located, the Advance

Reporting Form, containing the following details :

Name and address of the foreign investor/s;

Date of receipt of funds and the Rupee equivalent;

Name and address of the authorised dealer through whom the funds have been received;

Details of the Government approval, if any; and

KYC report on the non-resident investor from the overseas bank remitting the amount of

consideration.

• Upon issue of shares to non-resident investors :

Within 30 days from the date of issue of shares, a report in Form FC-GPR- PART A together

with the following documents should be filed with the Regional Office concerned of the Reserve

Bank of India.

Certificate from the Company Secretary of the company accepting investment from

persons resident outside India certifying that:

The company has complied with the procedure for issue of shares as laid down under the

FDI scheme as indicated in the Notification No. FEMA 20/2000-RB dated 3rd May 2000,

as amended from time to time.

The investment is within the sectoral cap / statutory ceiling permissible under the

Automatic Route of the Reserve Bank and it fulfils all the conditions laid down for

investments under the Automatic Route, namely-

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a) Non-resident entity/ies - (other than individuals), to whom it has issued shares have existing

joint venture or technology transfer or trade mark agreement in India in the same field and

Conditions stipulated at Paragraph 4.2 of the Consolidated FDI policy Circular of Government of

India have been complied with.

OR

Non-resident entity/ies - (other than individuals), to whom it has issued shares do not have any

existing joint venture or technology transfer or trade mark agreement in India in the same field.

Note – For the purpose of the 'same' field, 4 digit NIC 1987 code would be relevant.

b) The company is not an Industrial Undertaking manufacturing items reserved for small sector.

OR

The company is an Industrial Undertaking manufacturing items reserved for the small sector and

the investment limit of 24 per cent of paid-up capital has been observed/ requisite approvals have

been obtained.

c) Shares issued on rights basis to non-residents are in conformity with Regulation 6 of the RBI

Notification No FEMA 20/2000-RB dated 3rd May 2000, as amended from time to time.

OR

Shares issued are bonus shares.

OR

Shares have been issued under a scheme of merger and amalgamation of two or more Indian

companies or reconstruction by way of de-merger or otherwise of an Indian company, duly

approved by a court in India.

OR

Shares are issued under ESOP and the conditions regarding this issue have been satisfied.

• Shares have been issued in terms of SIA/FIPB approval No. --------------------- dated -------------

-------

• Certificate from Statutory Auditors/ SEBI registered Category - I Merchant Banker / Chartered

Accountant indicating the manner of arriving at the price of the shares issued to the persons

resident outside India.

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II. Foreign Technology Collaboration Agreement

Whether the payment in terms of foreign technology collaboration agreement' can be made

by an Authorised Dealer (AD) bank?

Ans. Yes, RBI has delegated the powers, to make payments for royalty, lumpsum fee for

transfer of technology and payment for use of trademark/brand name in terms of the foreign

technology collaboration agreement entered by the Indian company with its foreign partners, to

the AD banks subject to compliance with the provisions of Foreign Exchange Management

(Current Account Transactions) Rules, 2000. Further, the requirement of registration of the

agreement with the Regional Office of Reserve Bank of India has also been done away with.

III. Foreign Portfolio Investment

Q.1. What are the regulations regarding Portfolio Investments by SEBI registered Foreign

Institutional Investors (FIIs)?

Ans.

Investment by SEBI registered FIIs is regulated under SEBI (FII) Regulations, 1995 and

Regulation 5(2) of FEMA Notification No.20 dated May 3, 2000, as amended from time

to time. FIIs include Asset Management Companies, Pension Funds, Mutual Funds,

Investment Trusts as Nominee Companies, Incorporated / Institutional Portfolio

Managers or their Power of Attorney holders, University Funds, Endowment

Foundations, Charitable Trusts and Charitable Societies.

SEBI acts as the nodal point in the registration of FIIs. The Reserve Bank of India has

granted general permission to SEBI Registered FIIs to invest in India under the Portfolio

Investment Scheme (PIS).

Investment by SEBI registered FIIs and its sub accounts cannot exceed 10per cent of the

paid up capital of the Indian company. However, in case of foreign corporates or High

Networth Individuals (HNIs) registered as sub accounts of an FII, their investment shall

be restricted to 5 per cent of the paid up capital of the Indian company. All FIIs and their

sub-accounts taken together cannot acquire more than 24 per cent of the paid up capital

of an Indian Company. An Indian company can raise the 24 per cent ceiling to the

sectoral cap / statutory ceiling, as applicable, by passing a resolution by its Board of

Directors followed by passing a Special Resolution to that effect by their General Body.

The Indian company has to intimate the raising of the FII limit to the Reserve Bank to

enable the Bank to notify the same on its website for larger public dissemination.

VI. Branch/ Project/ Liaison Office of a foreign company in India

Q.1. How can foreign companies open Liaison /Branch office in India?

Ans.

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A. With effect from February 1, 2010, foreign companies/entities desirous of setting up of

Liaison Office / Branch Office (LO/BO) are required to submit their application in Form FNC

along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange

Department, Reserve Bank of India, Central Office, Mumbai through an Authorised Dealer bank.

This form is available at www.rbi.org.in

B. The applications from such entities in Form FNC will be considered by the Reserve Bank

under two routes:

Reserve Bank Route - Where principal business of the foreign entity falls under sectors

where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic

route.

Government Route - Where principal business of the foreign entity falls under the

sectors where 100 per cent FDI is not permissible under the automatic route. Applications

from entities falling under this category and those from Non - Government Organisations

/ Non - Profit Organisations / Government Bodies / Departments are considered by the

Reserve Bank in consultation with the Ministry of Finance, Government of India.

C. The following additional criteria are also considered by the Reserve Bank while sanctioning

Liaison/Branch Offices of foreign entities :

• Track Record

For Branch Office — a profit making track record during the immediately preceding five

financial years in the home country.

For Liaison Office — a profit making track record during the immediately preceding

three financial years in the home country.

• Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest

Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any

Registered Accounts Practitioner by whatever name].

For Branch Office — not less than USD 100,000 or its equivalent.

For Liaison Office — not less than USD 50,000 or its equivalent.

D. Permission to set up such offices is initially granted for a period of 3 years and this may be

extended from time to time by the Authorised Dealer in whose jurisdiction the office is set up.

The Branch / Liaison offices established with the Reserve Bank's approval will be allotted

a Unique Identification Number (UIN) (www.rbi.org.in/scripts/Fema.aspx). The BOs / LOs

shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting

up the offices in India.

E. Liaison/Branch offices have to file an Annual Activity Certificate (AACs) from the Auditors,

as at end of March 31, along with the audited Balance Sheet on or before September 30 of that

year, stating that the Liaison Office has undertaken only those activities permitted by Reserve

Bank of India. In case the annual accounts of the LO/ BO are finalized with reference to a date

http://www.rbi.org.in/

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other than March 31, the AAC along with the audited Balance Sheet may be submitted within six

months from the due date of the Balance Sheet.

Q.2. What are the permitted activities of Liaison Office/ Representative Office?

Ans. A Liaison Office (also known as Representative Office) can undertake only liaison

activities, i.e. it can act as a channel of communication between Head Office abroad and parties

in India. It is not allowed to undertake any business activity in India and cannot earn any income

in India. Expenses of such offices are to be met entirely through inward remittances of foreign

exchange from the Head Office outside India. The role of such offices is, therefore, limited to

collecting information about possible market opportunities and providing information about the

company and its products to the prospective Indian customers. A Liaison Office can undertake

the following activities in India :

i. Representing in India the parent company / group companies.

ii. Promoting export / import from / to India.

iii. Promoting technical/financial collaborations between parent/group companies and companies

in India.

iv. Acting as a communication channel between the parent company and Indian companies.

Q.3. Can Foreign Insurance Companies / Banks set up Liaison Office in India?

Ans. Foreign Insurance companies can establish Liaison Offices in India only after obtaining

approval from the Insurance Regulatory and Development Authority (IRDA). Similarly, foreign

banks can establish Liaison Offices in India only after obtaining approval from the Department

of Banking Operations and Development (DBOD), Reserve Bank of India.

Q. 4. What is the procedure for setting up Branch office?

Ans. Permission for setting up branch offices is granted by the Foreign Exchange Department,

Reserve Bank of India, Central Office, Mumbai. Reserve Bank of India considers the track

record of the applicant company, existing trade relations with India, the activity of the company

proposing to set up office in India as well as the financial position of the company while

scrutinising the application. The application in Form FNC should be submitted to the Reserve

Bank through the Authorised Dealer bank.

Q.5. What are the permitted activities of Branch Office?

Ans. Companies incorporated outside India and engaged in manufacturing or trading activities

are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such

Branch Offices are permitted to represent the parent / group companies and undertake the

following activities in India :

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i. Export / Import of goods2.

ii. Rendering professional or consultancy services.

iii. Carrying out research work, in areas in which the parent company is engaged.

iv. Promoting technical or financial collaborations between Indian companies and parent or

overseas group company.

v. Representing the parent company in India and acting as buying / selling agent in India.

vi. Rendering services in information technology and development of software in India.

vii. Rendering technical support to the products supplied by parent/group companies.

viii. Foreign airline / shipping company.

Normally, the Branch Office should be engaged in the activity in which the parent company is

engaged.

Note :

a. Retail trading activities of any nature is not allowed for a Branch Office in India.

b. A Branch Office is not allowed to carry out manufacturing or processing activities in

India, directly or indirectly.

c. Profits earned by the Branch Offices are freely remittable from India, subject to payment

of applicable taxes.

Q.6. Whether Branch Offices are permitted to remit profit outside India?

Ans. Branch Offices are permitted to remit outside India profit of the branch net of applicable

Indian taxes, on production of the following documents to the satisfaction of the Authorised

Dealer through whom the remittance is effected :

a. A Certified copy of the audited Balance Sheet and Profit and Loss account for the relevant

year;

b. A Chartered Accountant’s certificate certifying -

i .the manner of arriving at the remittable profit

ii. that the entire remittable profit has been earned by undertaking the permitted activities

iii. that the profit does not include any profit on revaluation of the assets of the branch.

Q.7 What are the documents to be submitted to the AD bank at the time of closure of the

Liaison/ Branch Office?

Ans. At the time of winding up of Branch/Liaison offices, the company has to approach the

designated AD Category - I bank with the following documents:

a) Copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for

establishing the BO / LO.

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b) Auditor’s certificate - i) indicating the manner in which the remittable amount has been

arrived at and supported by a statement of assets and liabilities of the applicant, and indicating

the manner of disposal of assets;

ii) confirming that all liabilities in India including arrears of gratuity and other benefits to

employees, etc., of the Office have been either fully met or adequately provided for; and

iii) confirming that no income accruing from sources outside India (including proceeds of

exports) has remained un-repatriated to India.

c) No-objection / Tax Clearance Certificate from Income-Tax authority for the remittance/s.

d) Confirmation from the applicant/parent company that no legal proceedings in any Court in

India are pending and there is no legal impediment to the remittance.

e) A report from the Registrar of Companies regarding compliance with the provisions of the

Companies Act, 1956, in case of winding up of the Office in India.

f) Any other document/s, specified by the Reserve Bank while granting approval.

Q.8. What is the procedure for setting up Project Office?

Ans. The Reserve Bank has granted general permission to foreign companies to establish Project

Offices in India, provided they have secured a contract from an Indian company to execute a

project in India, and

i. the project is funded directly by inward remittance from abroad; or

ii. the project is funded by a bilateral or multilateral International Financing Agency; or

iii. the project has been cleared by an appropriate authority; or

iv. a company or entity in India awarding the contract has been granted Term Loan by a

Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met or if the parent entity is established in Pakistan,

Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to the

Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai for approval.

Q.9. What are the bank accounts permitted to a Project Office?

Ans. AD Category – I banks can open non-interest bearing Foreign Currency Account for

Project Offices in India subject to the following:

i. The Project Office has been established in India, with the general / specific permission of

Reserve Bank, having the requisite approval from the concerned Project Sanctioning

Authority concerned.

ii. The contract, under which the project has been sanctioned, specifically provides for

payment in foreign currency.

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iii. Each Project Office can open two Foreign Currency Accounts, usually one

denominated in USD and other in home currency, provided both are maintained with the

same AD category–I bank.

iv. The permissible debits to the account shall be payment of project related expenditure and

credits shall be foreign currency receipts from the Project Sanctioning Authority, and

remittances from parent/ group company abroad or bilateral / multilateral international

financing agency.

v. The responsibility of ensuring that only the approved debits and credits are allowed in the

Foreign Currency Account shall rest solely with the branch concerned of the AD. Further,

the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the

respective AD banks.

vi. The Foreign Currency accounts have to be closed at the completion of the Project.

Q.10. What are the general conditions applicable to Liaison / Branch / Project Office of

foreign entities in India?

Ans. The general conditions applicable to Liaison/Branch/Project Office of foreign entities in

India are as under;

(i) Without prior permission of the Reserve Bank, no person being a citizen of Pakistan,

Bangladesh, Sri Lanka, Afghanistan, Iran or China can establish in India, a Branch or a Liaison

Office or a Project Office or any other place of business.

(ii) Partnership / Proprietary concerns set up abroad are not allowed to establish Branch

/Liaison/Project Offices in India.

(iii) Entities from Nepal are allowed to establish only Liaison Offices in India.

(iv) Branch/Project Offices of a foreign entity, excluding a Liaison Office are permitted to

acquire property for their own use and to carry out permitted/incidental activities but not for

leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka,

Afghanistan, Iran, Bhutan or China are not allowed to acquire immovable property in India even

for a Branch Office. These entities are allowed to lease such property for a period not exceeding

five years.

(v) Branch / Liaison / Project Offices are allowed to open non-interest bearing INR current

accounts in India. Such Offices are required to approach their Authorised Dealers for opening the

accounts.

(vi) Transfer of assets of Liaison / Branch Office to subsidiaries or other Liaison/Branch Offices

is allowed with specific approval of the Central Office of the Reserve Bank.

(viii) Authorised Dealers can allow term deposit account for a period not exceeding 6 months in

favor of a branch/office of a person resident outside India provided the bank is satisfied that the

term deposit is out of temporary surplus funds and the branch / office furnishes an undertaking

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that the maturity proceeds of the term deposit will be utilised for their business in India within 3

months of maturity. However, such facility may not be extended to shipping/airline companies.

1 financial services sector means service rendered by banking and non-banking finance

companies regulated by the Reserve Bank of India, insurance companies regulated by the

Insurance Regulatory and Development Authority (IRDA) and other companies regulated by any

other financial regulator, as the case may be.

2Procurement of goods for export and sale of goods after import are allowed only on wholesale

basis

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