Destination India-tips for the potential investor




This article provides insights about legal issues related to Foreign Direct Investment ( FDI) including Joint Ventures, Technology Transfers, Outsourcing and other kinds of agreements. The content is based on 24 years of personal professional experience of advising North American and European companies and includes information not generally available on the internet or books.

Destination India : Tips for the potential investor

Part I

The story of India emerging as a preferred investment destination in the last two decades is well known. It is also well known that businesses all over the world assume and anticipate certain difficulties related to the legal and infra structures of the destination country. However, a prior knowledge of the generally unknown aspects of the ‘lay of the land’ helps reduce the disturbance caused by mini volcanoes disguised as hot springs. The following series of articles bring forth  some lesser known legal aspects (related to India) that may be of interest to potential investors.

According to the classical explanation, there are four ‘means of production’, land, labour, capital and entrepreneurship. In that context the legal position in India regarding these means of production is as follows:

1.                  Land

1.1.Position in a Federal constitution

India has a federal constitution which distributes the legislative power between the Union and the States. The States through their respective Assemblies, have the exclusive power to legislate on the following subject matters :-

·         The maintenance of land records, records of rights.

·         Taxes on lands and buildings.

·         Taxes on mineral rights subject to any legal limitations.

·          The relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; etc.

The Union through Parliament has the exclusive power to legislate on the following subject matters:-

·         Taxes on the capital value of the assets, exclusive of agricultural land, of individuals and companies; taxes on the capital of companies.

·         Regulation and development of oil fields and mineral resource ; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable.

·         Regulation of mines and mineral development to the extent to which such regulation and development under the control of the Union is declared by Parliament by law to be expedient in the public interest.

 

Both the Union and the States have the power to legislate on transfer of property other than agricultural land; registration of deeds and documents.

1.2 .Buying land Vs Leasing land

Foreign companies who have been permitted to open a Branch or Project Office in India are also allowed to acquire any immovable property in India, which is necessary for or incidental to carrying on such activity. However, the land records are in the vernacular of the concerned State, such records are not always fully computerized and agricultural land can be used for industrial purpose only after obtaining the conversion certificate. Land being purchased may have family and mortgage claims against it and these claims have to be satisfied prior to the purchase to perfect the title to it. A detailed title search and public notice is therefore a must. There are law firms and individual lawyers that handle such assignments but the time taken for the process is not standard and varies with the complexity of the given case.

On the other hand, in accordance with the constitutional position stated above, all the major States have incorporated their own special purpose vehicles, known as Industrial Development Corporations. These corporations buy the land from farmers or private land holders and develop the infrastructure needed to set up business. Such developed plots of land are leased by these corporations to companies. Leasing land from such corporations obviates all the downsides associated with purchase of land mentioned above. Also since it is a lease, exiting from such a lease is far easier than trying to find a buyer when owned land needs to be sold.

IT Parks for Information Technology companies

Keeping in mind the performance of the Indian IT industry and its potential, all the major States have developed IT Parks which provide excellent connectivity and other infrastructural support for this industry. In particular, Maharashtra, Karnataka, Gujarat, Andhra Pradesh, Tamilnadu and West Bengal have many such IT Parks attracting companies like Microsoft, Accenture etc.

1.3 Eminent Domain or Nationalization

In theory, any land in India can be acquired by the Central Government under the Land Acquisition Act 1894, which is jurisprudentially based on the principle of Eminent Domain. Equally, a private company can be nationalized by passing an appropriate law. However, in practice, since 1991, lands owned by foreign companies have never been acquired nor are such companies nationalized.
 


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