India’s Business, Legal System & Labour Laws Raj Chakrabarti Partner Kochhar & Co., Mumbai.

India’s Business, Legal System & Labour Laws

Raj Chakrabarti

PartnerKochhar & Co.,

Mumbai

© Kochhar & Co., Mumbai (2006)

Kochhar & Co.• Full Service Commercial Law Firm.

• One of the Largest Law Firms in India.

• Firm with a True National Presence.

• Representing Major International Corporations.

• Unique Client Satisfaction Policy.

• Proactive, Modern and Responsive Culture.

• Preferred Law Firm for most of the Fortune 500 companies doing business in India.


Practice Areas• Foreign Investment • Regulatory Approvals

• Commercial Contracts • Labour & Employment

• Taxation • Real Estate

• Exchange Control • Litigation & Arbitration

• Joint Ventures & Technical Collaborations

• Establishment of Indian subsidiaries

• Corporate Governance • Infrastructure Projects

• Project and Corporate Finance • Banking & Finance

• Privatization & Divestments • Consumer Protection

• Competition/Anti-Trust • Securities Law

• Mergers & Acquisition • Intellectual Property

• Outsourcing Arrangements • Anti-Dumping


Dinsmore & Shohl LLP• National and Regional Law Firm

• Offices: Ohio, Kentucky, Pennsylvania, and West Virginia

• Over 280 Lawyers

• Clients: 60 Foreign (including Indian) clients with offices in the USA

• Clients: 60 Non-U.S. (including Indian) clients who do business in the USA without official offices

• Large Automotive and Manufacturing Practice


Harvey Jay Cohen, [email protected]

Telephone: 1-513-977-8144

Facsimile: 1-513-977-8423

At Dinsmore & Shohl for more than 19 years

Georgetown University, A.B. Cum Laude 1982

Columbia University, Master International Affairs,

Magna Cum Laude 1984

University of Cincinnati, Juris Doctor, Order of the Coif 1987

Please do not hesitate to ask questions during our presentation and afterward

by e-mail or telephone.

mailto:[email protected]


Accolades…

• India is the 2nd fastest growing economy in the world. - Standard & Poor’s Ratings Services

• Most attractive investment destination. - AT Kearney FDI Confidence Index 2005

• Indian economy expected to grow at 5% per annum till 2050. - Goldman Sachs


Go India Go!!!• Foreign investment encouraged in almost all sectors.• Vibrant & diverse country with an economy increasingly integrating with

the world economy.• Expanding markets with improved infrastructure and rapid urbanization

fuelled by the explosion of electronic media.• Increasing domestic and foreign travel coupled with the changing nature

and composition of expenditure.• Cost-competitive workforce.• Well established and modern legal system together with a transparent

regulatory environment.• Legal protection for IPR.• English is the preferred business language.

Supreme Court of India

High Courts

CIVIL CRIMINAL

District Court

Civil Judge Senior Division

Civil Judge Junior Division Judicial Magistrate

Chief Judicial Magistrate

Sessions Court


Indian Judiciary…

• Rule of Law prevails.

• No local litigant advantage.

• It is possible to obtain urgent interim relief from Courts.

• Enforcement of foreign court judgments is possible.


…Indian Judiciary

• Parties are free to choose foreign law as the governing law.

• Subject to public policy, Courts recognise and enforce foreign laws.

• Courts are conversant with international legal norms and precedents and rely on them as well.

• Punitive damages generally not allowed, courts require evidence/ proof of actual damage suffered.


Arbitration – The Preferred Mode

• Indian arbitration laws modeled after the UNCITRAL Rules.

• Parties free to choose the governing law and venue of arbitration.

• Clear provisions for enforcement of foreign awards.

• Courts can grant interim relief notwithstanding arbitration clause


Relevant Business Laws & Policies

• Indian Contract Act, 1872• The Companies Act, 1956• The Securities Exchange Board of India (“SEBI”) Act, 1992 and allied

regulations• The Foreign Exchange Management Act (“FEMA”), 1999 and allied

regulations• The Competition Act, 2002• The Special Economic Zones Act, 2005• Intellectual Property Laws• Administrative Guidelines/ Regulations – Foreign Direct Investment (FDI)

Policy, EXIM (Export – Import) Policy


Regulatory Authorities…• Foreign Investment Promotion Board (“FIPB”) is a body set up to promote

and regulate FDI into India.• The Reserve Bank of India (“RBI”) is the Central Bank of the country

which inter alia monitors and implements policies relating to foreign exchange transactions.

• Registrar of Companies (“RoC”) is the regulatory authority for companies incorporated under the (Indian) Companies Act.

• Directorate General of Foreign Trade (“DGFT”) is the authority to regulate all export and import transactions.

• SEBI is a statutory and autonomous regulator of the financial & securities markets in India.


Passage to India…

Foreign Direct Investment into India: Automatic Route - No prior government or regulatory approval required

for FDI within specified sectoral caps. Approval Route – FDI upon permission from the FIPB. Previous joint venture/ technology transfer/ technical collaboration in

India – Provisions of Press Note 1 of 2005 applicable.

Entry Strategies:

Joint venture/ Wholly owned subsidiary.

Project/ Liaison/ Branch/ Representative office.

Acquisition of shares/ business assets of an existing Indian company.


About Private Companies…

• Setting up a ‘Private Limited Company’ the most preferred option.

• Private companies subject to fewer regulatory compliances.

• Charter documents of a private company can be fine-tuned to ensure

maximum operational flexibility.

• Incorporation process fairly simple, e-filing system introduced.


Income Tax

Corporate Tax Capital Gains Tax Withholding Tax

Domestic33.66%

Foreign41.82%

Royalties10.45%

Short Term*10.45%

Long Term20.91%

The aforesaid rates include Surcharge and Education Cess.

Dividends are tax-free in the hands of shareholders.

Dividend distribution tax @ 14.025% payable by the company.

* Short term capital gains tax applicable only on the capital gains made out of the transfer of equity shares.

Taxation


Other Taxes & Duties…

• Central Excise: Duty payable on manufacture/ production of goods in India. General rate of duty is about 16% of the Value of Goods as per the Central Excise Tariff Act, 1985.

• Central Sales Tax (“CST”): Tax paid on the inter state (between two states in India) sale of goods. Rate of tax is about 4%.

• Value Added Tax (“VAT”)/ Local Sales Tax: Tax paid on intra state (within a state in India) sale of goods. VAT @ 4% of the taxable turnover of the dealer is charged on industrial inputs, capital goods and items of mass consumption.


Are you a Service Provider ?

Service Tax @12.24%

Transfer/ Permitting the use of any IPR

except Copyrightclassified as “Service”.

Export of Services - No Service Tax.

Service Tax

Service tax is leviedon certain identified

services listedin the Finance Act.


Other Taxation Issues

• India has incorporated elaborate transfer pricing regulations in its tax laws.

• India is a signatory to various Double Taxation Avoidance Agreements including countries like USA, UK and other tax haven countries.

• Avoidance of Permanent Establishment (PE) status is critical.


Special Economic Zones…• Special Economic Zones Act, 2005 – SEZs are designated duty free

enclave to be treated as foreign territory only for trade operations and

duties and tariffs.

• 100% FDI under the Automatic Route allowed subject to the sectoral policy.

• 7 SEZs operational, several more on the anvil.• The units would have to be physically located in the SEZ in order to

avail the incentives.• Single Window Clearance system for granting all approvals.


…Special Economic Zones• Income Tax Incentives:

- 100% income tax exemption for a block of five years;

- 50% tax exemptions for two years; &

- 50% of ploughed back export profits for 5 years thereafter for SEZ units.

• Exemption from capital gains on transfer of an undertaking from an urban area to SEZs.

• Exemption from Customs duty & Central Excise.• Reimbursement of Central Sales Tax (“CST”).


Software Technology Parks of India

• 100% FDI under the Automatic Route allowed for carrying on IT/ ITES activities.

• Single window clearance mechanism for approvals.• STP units may be set up anywhere in India.• STP units would have to maintain a positive NFE (Net Foreign

Exchange Earnings).• 100% Income Tax exemption – ONLY UPTO 2010.• Incentives in terms of Customs duty, Excise duty and CST.


Repatriation of Investment and Profits

• All foreign investments are freely repatriable subject to sectoral policies.• Dividends declared can be remitted freely through an authorised dealer.• Repatriation of payments for foreign technology transfer/ technical

collaboration made by Indian Companies are allowed under the automatic route subject to following limits: Lump sum payment not exceeding US$ 2 million. Royalty upto 5% on domestic sales and 8% on exports allowed,

without restriction on the duration of the royalty payments.• Use of Trade marks and Brand name without any technology transfer:

Payment of royalty upto 2% for exports and 1% for domestic sales allowed without government approval.


If Yes…

Don’t forget these golden rules while handing out the pink slip to your workmen…

• Only the workman in continuous service of more than 1 year protected

• Workman to be given due notice/remuneration in lieu thereof• Principle of Last Come, First Go to be followed• Workman to be paid retrenchment compensation = 15 days’ average

pay for every completed year of service• Government approval required in certain cases


Employment Contracts…Is Your IPR

Safe?• Copyright law in India – All IPR developed under a contract of employment to belong to the employer

• Strict IPR/Confidentiality obligations/Non-disclosure obligations that would survive termination of employment

• Scope of obligations/assignment of IPR – should extend worldwide

• In case of a Consultancy Agreement, insist upon a contractual assignment of the IPR for perpetuity, worldwide

• It is advisable to stipulate in the employment contract the importance of the proprietary information that may be shared


Smell a rat in your ranks??


…Employment Contracts

• Non – compete Clauses:– Absolute restriction possible during employment. – Reasonable non-solicitation obligations can be imposed beyond

the term of employment.– Reasonable restrictions beyond term of employment on engaging

in a similar or competing business – Not generally viewed

favourably by the Indian courts.


COMMITMENT TO SAFEGUARDING IPR


IP Protection in India – An Overview

• Adequate protection under various Indian laws for infringement of registered/ unregistered IPR. India is TRIPS compliant.

• IPR implemented by statutory compliance, common law and by written agreement.

• Indian IP laws, notably the Patents Act, have been amended to bring them in sync with international IPR regime.

• Measures to strengthen, streamline and modernize the IPR administration & enforcement system.


What’s India Got to Offer???

The Industrial DesignsAct, 2000

The Patents Act, 1970

The Trade Marks Act, 1999

The Geographical Indicationsof Goods Act, 1999

The Copyright Act, 1957

RegulatoryFramework

India is a member of the WTO and has ratified GATT and TRIPS.


Basic Principles …

Copyrights:

• Copyrightable matter: Original literary, dramatic, musical, artistic work; cinemtographic films; sound recording.

• First Owner of Copyright: Author of original work.• Term of protection: 60 years from date of publication or Life + 60

years.• Registration of Copyrights not necessary.• Performer’s Rights included.

Statutory Remedies

Copyrights

Civil Criminal

Suit for Damages

In junctionTemporary

Permanent

Suit for Account of Profits

Delivery of the infringing copies upto the owner

Imprisonment 6 months – 3 yearsFine Rs. 50,000 (approx USD 1087) – 200,000 (approx USD 4348)

Search and Seizure


…Basic Principles…Trade Marks:

• Registrable Marks: Trade Marks, Service Marks, Well-known Trade Marks, Collective Marks.

• Trademark protection extends to the shape of goods, packaging and combination of colors.

• Term of protection: 10 years from the date of registration of the trademark.

• Registration advisable to claim proprietary rights. However, action for passing off available for unregistered trademarks.


Statutory RemediesTrademark

Registered Unregistered

Suit for Damages

In junction Temporary

Permanent


Imprisonment 6 months – 3 yearsFine Rs. 50,000 (approx USD 1087) – 200,000 (approx USD 4348)Search and Seizure

Forfeiture and/or destruction of infringing goods

Infringement Passing off

Criminal Civil


…Basic PrinciplesPatent Law:

• What is patentable: Any invention / innovation having novelty, utility and an inventive step.

• Recognition of ‘Product patents’ – A boon for all foreign pharma and chemical companies.

• Term of protection: 20 years from the date of filing the patent application.

• Mail box system devised for filing applications.


Statutory Remedies

Patents

Civil

Suit for Damages

In junction Temporary

Permanent


Delivery of the infringing copies upto the owner


India Calling!!!


The Global Back Office• India emerging as the No.1 outsourcing destination. • IT and ITES is one of the top 5 priority industries in India - policies

framed to obtain maximum benefit out of IT outsourcing to India. • Over the past 5 years, India's share of global sourcing grew from 62 per

cent to 65 per cent for the IT sector and 39 per cent to 46 per cent for ITES-BPO sector

• NASSCOM along with the government is playing a notable role in protecting the interests of the IT sector.

• By 2007, total global offshore spending on IT services in India is expected to reach $50 billion.


What’ve We Got That They Ain’t Got

• Human resources: Abundance of highly qualified, English speaking and technically skilled IT professionals.

• Cost efficiency: Wide gap between personnel costs in India and those in developed countries – Significant cost savings.

• Superior quality of work: Compliance with international standards and certification requirements.

• Reliable communication facilities: Excellent telecom, ISP, and cellular networks available in most cities & towns in the country.

• Other factors facilitating the IT growth: Favourable government IT/ ITES policies, rapid economic growth, tax incentives, good infrastructure, industrial parks & special economic zones have all been helpful in the BPO Boom.


Closing Comments…• Choice of business vehicle:- Analyze your short to mid-term

requirements and decide on entry strategies. • Choice of Location :- Identify the region/state most suited for your

business needs.• Choice of partner : - Assess the strength (or the lack thereof) of local

partner.• Planning:- Knowledge of Indian business environment helps in

planning for growth.


Thank You

Raj Chakrabarti, PartnerKochhar & Co., Mumbai

Harvey Jay Cohen, Esq.Dinsmore & Shohl LLP

India’s Business, Legal System & Labour Laws Raj Chakrabarti Partner Kochhar & Co., Mumbai.

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