Overview (April 2000)

New Policy
Lending Rules
Government Incentives

New Policy

In July 1991 the government announced The New Industrial Policy for India. This new policy has introduced wide-ranging measures aimed at opening up the economy for investment in new infrastructure projects. Such measures include the following, among others:

• Private companies can invest and operate in sectors that had been the domain of the government and state owned companies such as mining, oil exploration, refining, and certain railway transportation.
  
  
• The Finance Ministry has liberalized investment norms for non-resident Indians (NRIs) by allowing them to invest in nearly all infrastructure sectors. (The investment ceiling has been removed and NRIs are now allowed to hold 100% of the equity in infrastructure ventures.)
  
  
• For foreign investment, the normal investment ceiling is fixed at 51% of the total capital. However, if the venture is largely export oriented, a higher foreign contribution towards equity is permitted (up to 100% for priority industries).
  
  
• Foreign investment in infrastructure projects will usually receive automatic approval from the Reserve Bank of India.
  
  
• The Secretariat for Industrial Assistance and the Foreign Investment Promotion Board have been created to speed up the approval process when investment proposals must be individually assessed on their merits (ie, not subject to automatic approval).

Lending Rules

Overseas banks are allowed to finance projects in India with the prior approval of the Ministry of Finance (MOF). The MOF sends a letter which specifies the terms and conditions under which its approval is granted.

Foreign lenders to projects in India must open special companies through which investments are channeled. The relevant state government and/or Indian banks generally guarantee these projects.

The prior approval of the Reserve Bank of India is required before Indian corporate entities can provide guarantees to foreign lenders.

Government Incentives

The government has significantly liberalized the rules on foreign investment in projects in India. The following are some of the incentives the government has implemented in order to encourage investment in projects.

Urban development
The following are some of the initiatives for improving urban infrastructure:

• The sourcing, treatment and bulk supply of water may be privatized;

• Solid waste disposal may be privatized;
  
  
• Low-cost sanitation may be privatized;
  
  
• The maintenance of roads is to be entrusted to the private sector subject to quality controls; and
  
  
• The cost of building/improving roads may be recovered by granting advertisement rights, licence rights, and long-term leases.

Power
The following are some of the initiatives to encourage investment in power:

• price reform by way of a pre-determined benchmark price per unit of energy;
  
  
• restructuring of state electricity boards; and
  
  
• replacement of 'plant load factor' by 'plant availability'.

Telecommunications
Investment in telecommunications is being encouraged with the following initiatives:

• long-distance services to be privatized by 2001;
  
  
• India Telecom to become a holding company with subsidiary companies or a long-distance service provider;
  
  
• the Department of Telecommunications to enter into joint venture projects with foreign companies to provide telecommunications services in international markets;
  
  
• steps to encourage the development of major telecommunications equipment manufacturing capabilities both for the domestic and international markets;
  
  
• replacement of the Indian Telegraph Act 1885 with modernized legislation that reflects the current needs of the telecommunications industry;
  
  
• more staff for the Telecommunications Regulatory Authority to deal with the complex issues that are likely to arise (eg, interconnection of different operators' networks);
  
  
• transfer of all telecommunications licence fees to an infrastructure fund, which will provide debt and equity to infrastructure projects; and
  
  
• the creation of an inter-ministerial committee to consider an integrated national policy on telecommunications, broadcasting and information technology.

Industrial parks
The government has decided that industrial parks should be treated as infrastructure projects. Also, the same incentives that apply to the power and telecommunications industries, as well as urban development projects, should apply to industrial parks.

Ports
Although the commercial operation of ports is to remain under the control of existing port authorities, a separate regulatory authority is to be set up to consider issues relating to pricing and other issues of importance to private investors. Ports with private participation will continue to be exempt from corporate taxes.

For further information on this topic please contact Shardul Thacker at Mulla & Mulla & Craigie Blunt & Caroe by telephone (+91 22 204 4960) or by fax (+91 22 204 0246) or by e-mail ([email protected]).