India follows a common law system and has adopted a quasi-federal structure. The basis of all laws and institutions in the country is the Indian Constitution, which provides for three pillars – ie, the legislature, the executive and the judiciary. All three pillars work in tandem through a system of checks and balances.
The Constitution provides for the union, state and concurrent lists which specify the divisions of power between the union and the states. While both central and state governments can legislate on subjects mentioned under the concurrent list, in case of any conflict, the law specified by the central government would prevail.
Additionally, sector-specific regulatory bodies (such as the Reserve Bank of India (RBI) or Securities Exchange Board of India (SEBI)) are also empowered to formulate rules and regulations in respect of the sector/domain that they govern.
Judicial decisions (or judge made law) also play a significant role in the Indian legal system. Subordinate courts are bound by the decisions of the higher courts, if a similar dispute has been resolved in the past using a certain reasoning. India’s judicial structure is spearheaded by the Supreme Court which is followed by High Courts at the state/union territory level, and the District Courts at the district level. Furthermore, there are bodies such as the Gram Panchayat and Lok Adalats at the local level for resolution of disputes.
Specialised tribunals/forums have also been established under various statutes to deal with matters pertaining to certain specific subject matters, such as the National Company Law Tribunal, consumer courts, family courts, etc.
Foreign Investment in India
Policy regarding foreign investment in India is formulated by the Department for Promotion of Industry and Internal Trade (DPIIT). The DPIIT issued a consolidated foreign direct investment policy dated 15 October 2020 (FDI Policy). The FDI Policy is a compilation of all applicable rules/regulations governing foreign direct investments (FDI) into India under the Foreign Exchange Management Act, 1999 (FEMA) summarised below:
Nature of Categorisation
Investments can be made under two broad routes: (i) the automatic route (that does not require prior approval from the government), and (ii) the government approval route (where prior approval of the Indian government is required). Foreign investment in certain sectors such as defence is allowed only up to a certain threshold, subject to prescribed conditions. Beyond this threshold, foreign investment in such sectors requires approval from the government. An approval is also necessary if the prescribed conditions under the automatic route are not complied with.
Broadly, various industry sectors fall within the following categories.
In some sectors, different treatment has been provided for greenfield investments and brownfield investments. It appears that the government intends to promote greenfield investment more than brownfield investments in such sectors.
Other FDI Regulations
The Indian government has introduced several changes to the FDI regime in the last year. For instance, each foreign investor is required to obtain prior government approval for investments from countries sharing land borders with India.
In 2019, FDI in the entities engaged in uploading and streaming news/current affairs through the digital media sector was permitted up to 26%. Given the wide ambit of this sector and the possible implications, recently the government has clarified that this limit will apply to the following categories of Indian entities registered/located in India:
In terms of procedure, foreign investors are required to invest in an Indian company at a price that is no less than the valuation of such company. Furthermore, post-investment reporting (event-based and periodical) formalities have also been prescribed.
Procedure for Obtaining Approval
Each applicant that intends to obtain approval for foreign investment is required to submit the proposal for such investment as per the requirements under the FDI Policy read with the standard operating procedure (SOP) issued by the Foreign Investment Facilitation Portal (FIFP). Briefly, the process set out in the SOP is as follows.
Penalties for Investing without Approval
Not obtaining prior approval when prescribed for the relevant sector will amount to non-compliance under FEMA. The same can attract a penalty of up to three times the sum involved in the contravention (where that amount is quantifiable), or up to INR2 million (approximately USD2,650) where the amount is not quantifiable. If the contravention is a continuing one, an additional penalty of INR5,000 (approximately USD65) is levied for every day that the contravention continues. Additionally, the concerned authority has the discretionary power to allow for confiscation of any currency, security, any other money or property in relation to the contravention.
Approval may be granted by the Competent Authority subject to certain conditions and requirements. These conditions, inter alia, include the conditionalities set out in the NDI Rules. For instance, prior approval is required for FDI in the brownfield pharmaceutical sector beyond 74%, which may be based on the conditionalities set out in the NDI Rules along with other case-based requirements (such as the location of the industrial project and compliance with the applicable law regarding import of capital requirements). Non-compete clauses may be subject to certain restrictions in some sectors.
If the foreign investor’s application is rejected, that entity may reapply to the Competent Authority with the necessary revisions. However, the NDI Rules/FDI Policy do not provide for a formal process of appeal if an FDI proposal is rejected.
A company may be incorporated either as a private company or a public company under the Companies Act, 2013 (CA 2013).
A private company is defined under the CA 2013 to mean a company which by its charter documents, inter alia, (i) restricts the right to transfer its shares, and (ii) prohibits any invitation to the public to subscribe for any securities of the company.
A public company is defined under CA 2013 to mean a company which is not a private company.
Key distinctions between a private company and a public company are as follows:
Companies may have unlimited liability of members, or limit the liability of members to either the uncalled share capital amount or a guaranteed amount. Further, there are no minimum share capital requirements for companies in India.
Limited Liability Partnership (LLP)
An LLP is hybrid corporate business structure featuring the benefits of a limited liability company and the flexibility of a partnership. LLPs in India are regulated by the Limited Liability Partnership Act, 2008 which accords them the status of a legal entity separate from its partners. An LLP can enter into contracts under its own name and has perpetual succession, so its existence is unaffected by any change in its partners. An LLP is required to have at least two partners while there is no limit on the maximum number of partners. The contractual agreement entered into between the partners or between the LLP and the partners determines the internal governance structure of the LLP and governs the mutual rights and duties of the partners within the LLP. Typically, LLPs are preferred in the consultancy or services industry.
Difference between a company and an LLP
A company has significantly more compliance and disclosure requirements as compared to an LLP which is more flexible.
Companies are considered more transparent than LLPs in light of the greater compliance and disclosure requirements.
Companies have an option, after complying with applicable law, to list their shares on stock exchanges, which cannot be done by LLPs.
Unlike LLPs, companies can also issue incentives like employee stock options, etc.
Repatriation of funds to foreign investors/promoters may be easier in the case of LLPs as compared to companies.
Other Options - Branch Office, Liaison Office or a Project Office
A non-resident that does not intend to set up a company/LLP may choose to open a branch office, liaison office or a project office having limited operations in India.
To establish such offices, the applicant may approach an Authorised Category I Dealer Bank with whom they intend to pursue banking relations. After processing such application, the bank may issue an approval letter to the applicant. A prior approval may be required for, inter alia, businesses where the office will be engaged in defence, telecoms, private security and/or information and broadcasting.
Unlike companies or LLPs, branch, liaison and project offices have limitations on the nature of activities that can be undertaken.
Broadly, the following steps will be involved for incorporation of an Indian company.
Identification of shareholders and preparation of shareholding pattern. At this stage, necessary declarations and documents of these shareholders are procured. In the case of foreign shareholders, the relevant documents (such as certificate of incorporation/proof of identity/utility bill, as the case may be) will be required to be apostilled in terms of the Hague Convention Abolishing the Requirement of Legalisation for Foreign Public Documents (1961) (Hague Convention) and subsequently stamped with an “apostille”. For all documents that are obtained from nations that are not party to the Hague Convention, they will have to be notarised by a public notary and may require consularisation of the document from the Indian embassy.
Simultaneously, articles of association and the memorandum of association (Charter Documents) can be prepared and, in parallel, name availability can be confirmed. At this stage, relevant documents such as the lease deed of the registered office, utility bills, and the signatures of the proposed directors/ shareholders on the necessary affidavits and declarations can also be procured.
Once all the documents have been collated, the Charter Documents along with affidavits and declarations can be filed with the jurisdictional Registrar of Companies (ROC). Upon processing such documents, the ROC will issue the certificate of incorporation. Simultaneously, the permanent account number (PAN) and tax deduction number will also be issued. The approximate time taken to receive a certificate of incorporation is one to two weeks after successful filing of the documents.
Prior to incorporation of the company, the director(s) of the company will be required to obtain digital signatures (DSC) and director identification number (DIN).
After incorporation of the company, the following steps are required to be undertaken for commencing business in India:
It takes about four to five weeks to incorporate a company provided that all necessary documentation and information is ready and available before commencement of the process. Based on our experience, it typically takes the foreign shareholder 10–14 days to collate the relevant documents to be provided to the ROC. There are also added costs and timing issues associated with apostilling/consularisation/notarisation of documents. The process could take longer for reasons beyond the control of the parties since it is subject to fulfilment of requirements, and satisfaction of any questions raised by the relevant authorities.
Companies incorporated in India are required to complete their filing/reporting requirements with the ROC. Additionally, they are required to comply with requirements set out by the appropriate authority that regulates such a company.
For instance, if the entity is a non-banking financial company, it will be guided by the RBI’s regulations in addition to the CA 2013. These filings may, inter alia, include filing forms regarding the change in the registered office/Charter Documents of the company, appointment of director, resolutions passed by the company and annual accounts.
Listed companies are required to also comply with requirements set out by the Securities and Exchange Board of India (SEBI), on a quarterly, biannual and annual basis. They are also required to make event-based disclosures based on the materiality of such event which may be categorised as follows:
LLPs are required to file annual returns, statements of accounts and solvency, details of the number of partners and any change in such details. As compared to companies, LLPs have fewer compliance requirements.
Liaison/branch/project offices are subject to periodical compliances like filing of annual activity certificates, financial statements, etc.
Indian companies are governed by a board of directors (BOD) who undertake operations of the company. A public company requires a minimum of three directors while a private company requires a minimum of two directors, of whom, at least one director should have resided in India for a minimum of 182 days in the previous calendar year. Broadly, the following are the categories of directorships:
While the BOD undertakes the operation of the company, certain matters require approval from the shareholders of the company.
LLPs are guided as per the terms of the LLP agreement. Every LLP must have at least two designated partners (who are akin to directors in the case of a company).
CA 2013 provides for a concept of “officer who is in default" for the purposes of affixing liability (and corresponding penalty and punishment) on such a person or persons in relation to any contravention of provisions under CA 2013. The definition of “officer who is in default” is very wide and, inter alia, includes a person who is responsible for the management of the affairs of the company.
However, it is likely that a non-executive may also be considered as “officer who is in default”, if such a director were aware (or were deemed to be aware) of any contraventions of the provisions of the CA 2013. The liability of non-executive directors is limited to the extent of acts of omission or commission by a company which had occurred with their knowledge, attributable through board processes, and with their consent or connivance, or where they had not acted diligently. The quantum of penalty and/or punishment under the respective provisions of CA 2013 varies depending on the nature of the contravention.
Please also note that the general principle followed in other applicable Indian laws in the context of offences committed by a company is that when a company commits an offence, persons who are in charge of and/or responsible for conducting the business of the company are considered to be guilty of the offence along with the company. Some laws/regulations may have broad language pursuant to which all directors may be considered to be guilty of the offence committed by the company.
A person considered guilty of an offence committed by the company, can defend themselves if they can prove that the offence was committed without their knowledge, or that they had exercised all due diligence to prevent the commission of such offence.
Independent directors do not have a material or pecuniary relationship with the company. Their role is limited to attending the board meetings. However, they are subject to certain duties under CA 2013 such as ensuring that the company has adequate vigil mechanisms in place, reporting any unethical behaviour or suspected frauds or violation of code of conduct, etc. They must act within their authority, bearing in mind legitimate interest of the company’s shareholders and employees. Finally, such directors are subject to confidentiality requirements and shall not disclose any confidential information about the company unless such disclosure is expressly approved by the BOD or required by law.
Piercing the Corporate Veil
A company and an LLP have separate legal status from their shareholders/partners/officers, respectively and the "Salomon principle" has been recognised in corporate law jurisprudence in India. Notwithstanding this, there have been various instances where Indian courts have taken exception to this principle and "lifted the corporate veil" in circumstances, including fraud or improper conduct committed by responsible individuals.
Employment relationships between employers and employees in India can either be express or implied, and are governed by the terms of employment agreements, applicable statutes, and collective bargaining agreements/wage settlement agreements (if any).
Though not statutorily required across India and across all industries, it is standard practice in India for an employer to execute an employment agreement with each employee at the time of their recruitment/onboarding. Most establishments also formulate and adopt an employees' handbook/manual containing standard terms governing their employment, including but not limited to code of conduct, leave entitlements, and other service conditions and benefits.
Implied Terms of Employment as per Applicable Statutes
As per the federal structure of the Indian Constitution, labour and employment, as a subject, falls within the concurrent list, which means that the central government as well the respective state governments are empowered to enact labour and employment legislation. However, certain law-making powers are reserved with the central government.
Various labour laws have been enacted at the central and state level bearing in mind the location of the establishment, type of industry (manufacturing or other enterprises), nature of service rendered by an employee (skilled, unskilled, managerial, or non-managerial), number of employees engaged at the establishment, remuneration of the employees, etc. For instance, the Industrial Disputes Act 1947 governs industrial relations, the Factories Act 1948 and the state-specific Shops and Establishments Acts govern the service conditions and leave benefits of workers and employees in the manufacturing sector and commercials establishments, respectively, and the Employees’ Provident Funds and Miscellaneous Provisions Act 1952 governs social security contributions.
Terms and conditions of service which are regulated by statute (such as timing of payment of wages, statutory bonus, gratuity payments and social security contributions) will constitute implied terms of an employment contract and are not required to be recorded in writing as they stem from applicable statutes and are not entirely the result of free consent of the parties privy to a contract.
Collective Bargaining Agreement (CBA)
Employment relationship may also be governed by applicable CBAs. Indian industrial relations laws provide for formation of trade/labour unions to facilitate negotiations and foster healthy industrial relations. Unionisation of employees (typically blue-collar employees) in India is a predominant feature of the manufacturing sector and is not commonly observed in the services sector. CBAs can only establish better or more favourable/beneficial employment conditions (such as remuneration, cash and non-cash benefits, and leave entitlements) than those prescribed under applicable laws.
An employment relationship can be written or oral. Other than in a few states (such as Karnataka and Delhi) and in respect of a certain category of employees (such as sales promotion employees), there is no statutory requirement to execute written employment contracts with employees. However, to mitigate disputes arising out of a lack of clarity regarding terms of employment, it is standard practice across all sectors to require employees to execute employment contracts.
Typically included provisions in an employment contract are job title and description, work location, remuneration and benefits, probationary period, notice period and termination provisions, confidentiality obligations, post-employment restrictive covenants, etc.
There is no statutorily prescribed minimum or maximum duration of an employment contract, and the employer and employee may mutually agree regarding the same. Unless otherwise specified (such as in case of a fixed term employment), the employment relationship may continue unless terminated by either party, or on account of death or retirement.
Working hour requirements and overtime entitlements for employees engaged in factories/manufacturing units are prescribed under the Factories Act 1948, while employees engaged in non-manufacturing establishments (ie, shops or commercial establishments (Commercial Establishments)) are governed by the state-specific Shops and Establishments Acts (S&E Act).
For employees engaged in factories, the maximum number of working hours shall not exceed 48 hours in a week and nine hours in a day, with one compulsory day of rest. Any employee working for more than the maximum prescribed time is entitled to overtime wages at twice the ordinary rate of pay. Employees should not work more than 60 hours a week and overtime should not exceed 50 hours in each quarter.
For employees engaged in Commercial Establishments, the maximum number of working hours shall not exceed 48 hours in a week and eight to nine hours in a day (the daily working hour threshold varies from state to state), with one compulsory day of rest. Any employee working for more than the maximum prescribed time is entitled to overtime wages at twice the ordinary rate of pay.
Employers are required to maintain records of the daily and weekly hours of work rendered by employees as per the prescribed format.
Paid Time Off
Employees working in factories are entitled to paid annual leave at the rate of one day for every 20 days of work performed in the previous calendar year, provided the employee worked for 240 days or more in the previous calendar year.
Leave entitlement for employees in Commercial Establishments varies from state to state in India (and ranges between 15 to 30 days). Such leave is normally classified as privilege/earned leave, sick leave and/or casual leave. While earned leave is granted to employees under all S&E Acts, certain S&E Acts prescribe limits on the days of sick or casual leave.
Employees are also entitled to receive holidays on various festivals and other national or local holidays (generally eight to ten public holidays depending on their work location).
The concept of "at-will" employment or hire-and-fire policies are not statutorily recognised in India. Termination of employment by an employer may be effectuated in the manner set out below.
Termination of Employment for Cause
Dismissals on account of misconduct may only be effectuated subject to conclusion of an internal disciplinary inquiry in this regard, at which the employee shall be provided a fair hearing by following the principles of natural justice.
Termination without Cause
Termination of employment for reasons other than misconduct (ie, termination simpliciter) may be carried out only after complying with the notice period requirements (or payment of salary in lieu of notice period) as mentioned in the:
Industrial relations laws in India such as the ID Act provide protection to "workmen" in cases of termination of their employment by the employer for any reason other than misconduct, retirement, non-renewal of a fixed term contract or on account of continued ill-health (referred to as "retrenchment" under the ID Act). In the context of an industrial establishment, "workmen" are typically those employees who are not engaged in an administrative or a managerial capacity or, if they are employed in a supervisory capacity, earning a monthly wage of less than INR10,000. As per the ID Act, in a case of retrenchment of a workman, the employer is required to, inter alia, provide at least one month’s prior notice (or pay salary in lieu of such notice) and pay retrenchment compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months (retrenchment compensation).
Non-workmen would be predominantly governed by the terms and conditions of their contract of employment/service rules of the employer (if any). They do not have a statutory right to retrenchment compensation in the event of termination of their employment.
In the case of redundancies necessitating termination of employees’ services, an employer is required to comply with the procedure as set out above in respect of workmen and non-workmen. Additionally, employers would also need adhere to the principle of "last in, first out" in respect of workmen – ie, if a workman in a particular category is proposed to be retrenched, the employer is required to retrench the workman who was the last person to be employed in that category.
Employers would also be required to check the terms of the settlement agreement that may have been executed with the concerned trade union (if any), for any consultation/procedural requirements, before effectuating such a termination of employment.
The ID Act provides for the constitution of a "works committee" in an establishment with 100 or more workmen, comprising of equal representation of workmen and employers’ representatives, to settle workmen-related disputes and any other issues related to conditions of their service. The ID Act also provides for the constitution of a "Grievance Redressal Committee" in every industrial establishment employing 20 or more workmen, for resolution of disputes arising out of individual grievances.
Save as mentioned above, there are no other compulsory employee representation requirements prescribed under Indian industrial relations law. Furthermore, there is no statutory requirement to have employees’ representative(s) on the board of an Indian company.
While unionisation of employees (as commonly observed in the manufacturing sector) may facilitate collective bargaining and promote a larger say of the workforce in matters concerning service conditions, unionisation of employees (in the manufacturing or services sector) is not mandatory. Employees may, individually or collectively approach or negotiate with the employer/management regarding any grievance or disputes that may relate to conditions of their service and either resolve the same by arriving at a settlement with the employer or seek its resolution or adjudication through quasi-judicial or judicial intervention.
Taxability of income under the Indian Income-tax Act, 1961 (IT Act) is either residence-based or source-based. Any income arising to an employee who is a tax resident of India will be taxable in India. A non-resident employee’s salary income will be taxable in India only if the employment-related services have been provided in India and will be subject to beneficial tax treatment as provided under the applicable tax treaty signed between India and the country of which the employee is a tax resident (Tax Treaty).
Income in the nature of salary is taxable in the hands of the employee under the head of "salaries". The employee will be required to pay tax on a progressive slab rate basis which ranges between 0% and 30%. These rates are further subject to surcharge (depending upon the income) as well as 4% education cess.
Withholding Tax Obligation
An employer is required to withhold applicable taxes from the payment being made to an employee. The taxes withheld have to be deposited with the Indian government Treasury within a certain period of time and thereafter undertake related payroll related compliances (eg, issuances of withholding tax certificates and uploading of withholding tax return).
Professional tax is levied, in certain states, on persons engaged in any profession, trade, calling or employment within those states. This tax is generally charged on the income of individuals, profits or gains from business or profession, and is levied in terms of the applicable state-specific professional tax legislation. The rates for the levy of this tax vary from state to state.
Indian Corporate Tax Regime
An Indian resident company is generally taxed at a rate of 30%. However, if the gross turnover (in relation to a particular year) does not exceed INR4 billion, then this rate of 30% is reduced to 25%. Furthermore, the IT Act allows (i) companies to offer income to tax at the rate of 22%; and (ii) companies operating in the manufacturing sector offer their income to tax at the rate of 15%, provided certain conditions are fulfilled such as the company not being allowed to claim certain deductions/exemptions and no set-off of carried forward losses.
A foreign company having a place of effective management (POEM) in India or having taxable presence in India is also subject to tax in India. While a foreign company having a POEM in India is taxed on its global income in India at a base tax rate of 40%, a foreign company with a taxable presence is taxed at the rate of 40% on its business profits attributable to the activities carried out in India.
Furthermore, a corporate entity is also required to pay minimum alternate tax (MAT) at the rate of 15% on its book profits if the total tax payable by the corporate entity is less than 15% of its book profits. MAT is not applicable to companies opting to be taxed at the reduced rate.
All the tax rates discussed in this section are subject to an applicable surcharge (depending upon the threshold of income) and education cess of 4%.
Withholding Tax and Applicable Rates on Certain Payments
Payments such as dividends, technical/consultancy fees, commission, rent and royalties to resident payees are subject to a withholding tax ranging between 2% and 10% which is adjustable against the final tax liability of the recipient. In the case of a non-resident recipient, dividend income and interest pay-out are subject to a withholding tax rate of 20% (plus surcharge and education cess), whereas income in the nature of royalties and fees for technical services are subject to a withholding tax rate of 10% (plus surcharge and cess). This withholding tax is the ultimate tax liability for such non-resident recipients and subject to any beneficial treatment under the relevant tax treaty. In certain cases, interest payments are subject to a beneficial withholding tax of 5% under the domestic law.
Income Tax Incentives
The IT Act provides a host of incentives for businesses operating in certain sectors. Some of the key tax incentives are discussed below.
Businesses operating in an International Financial Service Centre (IFSC)
In recent times, the Indian government has actively promoted IFSCs in India. Among various benefits being conferred upon foreign banks set up in IFSCs, one of the benefits is a 100% exemption from income tax on profits of such units for the first five years and 50% exemption for next five years. Furthermore, several sector-specific tax incentives are granted for units located in IFSCs making it lucrative for foreign taxpayers to operate in India.
To boost start-ups in India, the IT Act provides a host of incentives (provided they have obtained prescribed recognition and fulfil certain conditions) such as:
Furthermore, investors in such start-ups are also conferred with an exemption from capital gains on the sale of residential property provided such sale proceeds are invested in start-ups subject to specified conditions.
Sector-specific upfront deductions for capital expenditure
Generally, deduction for capital expenditure is offered in the form of tax depreciation over the life of the asset. However, for entities engaged in specified businesses (such as setting up and operating cold chain facilities or warehousing facilities for agricultural produce, building and operating a hospital or hotel subject to certain conditions, and developing affordable houses) the IT Act offers a 100% upfront deduction for capital expenditure in the year of incurring such expenditure.
The IT Act does not provide tax consolidation for group entities.
Effective 1 April 2017, interest paid by an Indian company or permanent establishment (PE) of a foreign company to its associated enterprise is not tax deductible to the extent such interest exceeds 30% of the profits of that Indian company/PE provided such interest expenditure exceeds INR10 million. Such unclaimed interest can be carried forward for a period up to eight years and claimed as deduction in the year in which the interest amount is within the 30% limit.
The IT Act provides detailed rules and guidelines for applicability of transfer pricing provisions including rules for computation of arms’ length consideration. Such taxpayers are also required to undertake mandatory compliances such as filing of prescribed forms along with the tax return, and to maintain robust transfer pricing benchmarking study reports that support the transaction value.
The Indian transfer pricing law, inter alia, provides for safe harbour margins for specified transactions and gives the option to enter into advance pricing agreements with the Indian tax department.
Furthermore, the Indian tax law also provides for country-by-country reporting and maintenance of master and local files for transfer pricing documentation for large taxpayers.
The Indian government has been very active in the implementation of anti-evasion rules under the Indian income tax regime. The Indian government has time and again amended several domestic tax provisions to avoid any tax abuse transaction. Illustratively, the Indian income tax law requires certain transactions such as purchase and sale of shares, immovable properties and other assets to take place at fair value and any difference between the fair value and transaction price is treated as "deemed income" in the hands of the recipient/buyer – which is taxable at ordinary tax rates. Similarly, the transferor/seller of shares and immovable properties is liable to pay capital gains tax by considering the fair value of such assets as the minimum sale consideration.
Furthermore, effective 1 April 2017, the government introduced General Anti Avoidance Rules (GAAR) wherein any transaction which meets certain criteria, is subject to GAAR provisions. The Indian tax authorities have wide powers to recharacterise such transactions and tax it accordingly. The underlying principle behind applying GAAR provisions is to discourage any transaction which has been entered into with the primary purpose of obtaining any tax benefit. The provisions of GAAR are widely worded to cover any transaction wherein the tax impact exceeds the prescribed threshold of INR30 million.
Additionally, India is a signatory to the Multilateral Instrument (MLI), with majority of the jurisdictions included as covered tax jurisdictions. Accordingly, Indian tax treaties with such jurisdictions stand modified to the extent impacted by MLI. For instance, one of the provisions of the MLI requires any transaction to be substantiated from a commercial standpoint and any transaction which has been entered into with the primary objective of obtaining a tax benefit may be denied benefits under the applicable tax treaty.
Scope of the Indian Merger Control Regime
India has a mandatory and suspensory merger control regime. Acquisitions (of shares, voting rights, control or assets), mergers and amalgamations, require a notification to the Competition Commission of India (CCI), if the parties to the transaction jointly exceed any of the eight assets/turnover-based financial thresholds (Notification Thresholds) set out in the Competition Act, 2002 (Act).
Antitrust Notification Requirements for Joint Ventures
The formation of a joint venture (JV) may require a notification if:
Where an existing company (target) is being converted to a JV by way of acquisition of shares/control/voting rights/assets by an incoming JV parent, the transaction may be notifiable if the incoming parent and the target jointly exceed the Notification Thresholds.
A transaction is exempted from notification if the target either has assets less than INR3.5 billion (approximately USD49.44 million) in India, or a turnover of less than INR10 billion (approximately USD141.21 million) in India in the FY preceding the FY in which the transaction occurs.
Additionally, certain categories of transactions are exempted from being notified, as ordinarily such transactions are considered unlikely to cause an appreciable adverse effect on competition (AAEC) in India.
Certain sector-specific exemptions are also notified by the Indian government from time to time.
Notification Obligations and Timeline
After the “trigger document” for a notifiable transaction is executed, the merger notification can be filed any time prior to consummating any aspect of the transaction.
For acquisitions, the trigger document is generally the executed definitive acquisition agreement. For mergers/amalgamations, the board resolution approving the notifiable merger/amalgamation is considered the trigger document.
The obligation to file the merger notification in case of an acquisition, is upon the acquirer. In case of mergers/amalgamations the obligation lies jointly upon the merging/amalgamating parties.
After a notification is filed, if no AAEC concerns are identified, the CCI typically approves the transaction within 30 working days (excluding clock stops). The majority of the notified transactions are approved within this timeline.
If, after 30 working days, the CCI is of the prima facie opinion that the transaction can cause AAEC in India, a detailed investigation is initiated where the approval may take up to 210 calendar days (excluding clock stops and prescribed statutory carve-outs).
Prior to receipt of the CCI approval or the lapse of 210 calendar days (excluding clock stops and prescribed statutory carve-outs), whichever is earlier, the parties are prohibited from consummating the transaction, either in part or in full.
If the transaction is consummated prior to the receipt of approval or the expiry of 210 calendar days, parties can be penalised for “gun-jumping” with a fine of up to 1% of the combined assets or turnover of the parties to the transaction, whichever is higher. The penalty is imposed upon the party(ies) upon whom filing obligation lies.
Scope of Horizontal Anti-competitive Agreements
The Act prohibits anti-competitive agreements including horizontal and vertical anti-competitive agreements which cause or are likely to cause an AAEC in India. Horizontal agreements, as defined under the Act, include cartels.
Horizontal agreements are presumed to cause an AAEC in India if they pertain to:
However, these prohibitions are not applicable to JV agreements which result in increased efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services.
The presumption of an AAEC is rebuttable, and the obligation to disprove it lies on the defendants.
Where a contravention by way of a cartel is found, the CCI may, inter alia:
The Act provides for a leniency regime where cartel participants can benefit from reduction in penalties in exchange for vital disclosures. The Indian leniency regime works on a “first past the post” basis.
Under the leniency regime, the CCI may grant the first applicant a reduction in penalty of up to 100%, the second applicant a reduction in penalty of up to 50%, and all subsequent applicants a reduction in penalty of up to 30%.
Prohibition on Abuse of Dominance
The Act prohibits the abuse of a dominant position. As such, a dominant firm is prohibited from:
Under the Act, a firm is considered as dominant if it can either operate independently of the market forces or affect its competitors or consumers in its favour. However, the Act does not recognise “collective dominance”.
Pertinently, dominance, in and of itself, is not considered anti-competitive. Only the abuse of a dominant position is considered to violate Indian competition law.
Where an enterprise is found to have abused its dominant position, the CCI may, inter alia:
Division of a Dominant Firm
The CCI is also empowered to direct the division of a dominant enterprise to ensure that it does not abuse its dominant position.
Definition under the Patents Act, 1970 (Patent Act)
Inventions in relation to new products or processes can be protected by patents if they involve an inventive step, are capable of industrial application, and are not specifically excluded from being protected under the Act. Publication/public disclosure/commercial use of the invention before applying for a patent should be avoided to maintain the novelty of the invention.
Length of Protection
A patent is protected for 20 years from the date of filing of the patent application provided renewal fees are paid from time to time. It should be noted that infringement proceedings can only be instituted in a court of law after a patent has been granted.
The registration process commences with an application for a patent which includes a specification (provisional and/or complete specification) and the details of the inventor(s) and applicant(s). Applications through the Patent Cooperation Treaty (PCT) are also possible under the Patent Act. Similarly, priority can also be claimed under the Paris Convention.
Thereafter, the application is published in the Journal and is open for opposition prior to the grant of patent. Once the application is published, the application goes through examination for which, a request for examination is mandatory. The Patent Office may also schedule personal hearings after the response to examination report is filed.
Once the objections are cleared, the patent application proceeds to grant and is protected for the above term subject to renewals. A granted patent can also be opposed (through post-grant opposition) or revoked (through revocation proceedings). Furthermore, every patentee is required to file an annual statement of commercial working of a patent.
Depending on the urgency, a prior art and/or freedom to operate search is recommended before commencing the registration process.
Enforcement and Remedies
Enforcement of patent rights is possible through a civil suit filed in appropriate court. Reliefs for patent infringement include injunction, damages, search and seizure orders, an account of profits, and delivery up. A counterclaim for revocation of the patent is available to the defendant in a suit for infringement of the patent. Furthermore, in case of contractual disputes, parties can resort to arbitration proceedings. Criminal remedies are not available in cases of patent infringement.
Definition under the Trade Marks Act 1999 (TM Act)
A trade mark means:
The TM Act protects conventional trade marks (such as device, brand, heading, label, ticket, name, signature, word, letter, numeral, certification marks, and collective marks) as well as non-conventional trade marks (such as shape marks, 3D marks, sound marks, packaging, and combination of colours). Furthermore, well known trade marks (including those with cross-border reputation) are protected in India, and it is also possible to request the Trade Marks Registry to include such marks as well-known marks in the Trade Marks Registry’s records.
Length of Protection
Once a trade mark is registered, it is valid for ten years from the date of application and can be renewed perpetually by filing renewal applications. Trade marks are also protected without registration under common law and prior use/prior adoption rights are considered superior. However, registration of trade mark provides additional privileges.
A separate class or a multi-class trade mark application can be filed in relation to goods/services as classified under the Nice Classification, either directly in India or through the Madrid Protocol.
The application is required to set out whether the mark has been used prior to the date of application or is proposed to be used. Priority can also be claimed under the Paris Convention when the application is filed.
Thereafter, the application is examined by the Trade Marks Registry which may either accept it or raise objections. After the objections are replied to, the application may be accepted, or a hearing may be fixed for satisfying the objections raised.
In the event of acceptance, the same is advertised in the Journal and is open to oppositions. If there are no oppositions filed, the application proceeds to registration. A registered trade mark can be cancelled for non-use or on the grounds available for oppositions.
A prior availability search on the records of the Trade Marks Registry and in the market (depending on the timelines for launch of the brand) is recommended before adoption of the trade mark.
Enforcement and Remedies
The Act provides for both civil as well as criminal remedies in the case of trade mark violations. Civil actions can be filed with appropriate courts through a suit for infringement and/or passing off (a common law remedy available without registration of a trade mark). Reliefs for civil actions include injunction (including ex parte injunctions), damages, search and seizure orders, an account of profits, and delivery up.
Newer forms of reliefs such as John Doe orders and dynamic injunctions have also been considered in recent times. Furthermore, in the case of contractual disputes, parties can resort to arbitration proceedings. The registered trade mark owner can also register its trade mark with the Customs Office and stop the import of infringing products. In case of domain name disputes related to .IN domain names, a domain name complaint could be initiated through IN Domain Name Dispute Resolution Policy.
Criminal proceedings can be filed with the police authorities or with appropriate criminal courts and the reliefs thereto include imprisonment and/or fine, and search and seizure.
Definition under the Designs Act 2000
Only new, original or undisclosed features of shape, configuration, pattern, ornament or composition of lines or colours applied to any article in two dimensional or three dimensional or in both forms, by any industrial process, which in the finished article appeal to the eye, can be registered as designs. Design registration is also available for a part of an article capable of being made and sold separately. Any mode or principle of construction or anything which is in substance a mere mechanical device, or is a trade mark or an artistic work, does not enjoy design protection.
Length of Protection
Design registration is valid initially for a period of ten years from the date of the application and is renewable for another five years. Thus, the maximum protection for a registered design is 15 years.
The application for registration of a design must be filed with the Patent Office in an appropriate class along with representations of different views of the article and a statement indicating, inter alia, the novelty of the design. Although Locarno classification has been adopted in India, it is subject to the provisions of the Designs Act, which limits certain entries in the Locarno Classification. Thereafter, the application is examined for procedural requirements and to check whether the design is registrable under the Designs Act. If objections are raised, a response is required to be filed and the application may either pass the examination stage or a hearing is scheduled with the Patent Office. If objections are cleared, the design is registered, and a registration certificate is issued, and the design is published in the Journal. The Designs Act requires the registered proprietor to indicate on the article in question that the design is registered, with appropriate marking setting out the registration number. It may be noted that there are no opposition proceedings possible prior to registration of designs. However, cancellation proceedings can be filed once the design application is registered.
Enforcement and Remedies
The Designs Act only provides for civil remedies through suits for infringement which can be filed at the appropriate courts. Although traditionally, only registered design rights were recognised, recently courts have started granting reliefs under the common law remedy of passing off. Reliefs for design violation include injunction, damages (subject to certain conditions set out in the Designs Act), search and seizure orders, an account of profits, and delivery up.
Definition under the Copyright Act 1957
The Copyright Act protects original literary (including computer programs), dramatic, musical, and artistic works; cinematograph films; sound recordings; and related rights such as performer’s rights and broadcaster’s rights. The owner of a copyright has an exclusive right, inter alia, to reproduce or issue copies of the work, communicate the work to the public, adapt the work, and translate the work. In the case of derivative works such cinematographic works (derived from literary works, etc), the Copyright Act protects the underlying works separately. Authors of underlying works in cinematograph films and sound recordings are entitled to continuing royalties for the use of their works and performances. Further, the Copyright Act permits registration of Copyright Societies and protects an author’s moral rights. International copyright works are also protected through the Berne Convention and Universal Copyright Convention.
Length of Protection
In the case of literary, dramatic, musical, or artistic work (other than a photograph), the term of protection is the lifetime of the author plus 60 years.
In the case of anonymous and pseudonymous works, posthumous works, photographs, cinematograph films, sound recordings and government works, the term of protection is until 60 years from the beginning of the calendar year following the year in which the work was first published.
Copyright registration is not mandatory in India; copyright comes into existence upon creation of the work. However, registration provides evidentiary value.
Once an application is filed, the Copyright Office allots a diary number to the application. The application is thereafter examined by the Copyright Office and an examination report with objections is issued in relation to the application. Upon clearing the objections, the application may either be fixed for a hearing, or it proceeds to registration.
In the case of registration of artistic works which are capable of being used as trademarks (such as logos), before the above process has taken place, an application has to be filed with the Trade Marks Registry to seek a no objection certificate to the effect that there are no trade marks which are identical/similar to the proposed artistic work.
It may be noted that there are no opposition proceedings possible prior to registration of a copyright. However, cancellation proceedings can be filed after registration.
Enforcement and Remedies
The Copyright Act provides for both civil as well as criminal remedies in cases of infringement. The Copyright Act also includes a long list of fair use provisions, which should be reviewed before initiating an infringement action. Civil actions can be filed with appropriate courts through a suit for infringement. Reliefs for civil actions include injunction (including ex parte injunctions), damages, search and seizure orders, an account of profits, and delivery up. Newer forms of reliefs such as John Doe orders and dynamic injunctions have also been considered in recent times.
Furthermore, in case of contractual disputes, parties can resort to arbitration proceedings.
Criminal proceedings can be filed with the police authorities or with appropriate criminal courts and the reliefs thereto include imprisonment and/or fine, and search and seizure.
In addition to the above laws, Indian law also includes the following Acts under the intellectual property regime:
Software and Databases
Software codes and databases are protected under the Copyright Act 1957 as literary works. Software per se is not patentable, but computer-related inventions could be patented in certain cases for which the guidelines issued by the Patent Office could be referred to.
India does not have a specific statute for protection of trade secrets, but these can be protected contractually through specific confidentiality clauses in the contract.
Presently, Indian laws pertaining to data privacy and data protection are still evolving. Whilst there is no dedicated legislation in India addressing the issues pertaining to data privacy and data protection, the Information Technology Act 2000 (IT Act) and rules thereunder, such as the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules 2011 (SPDI Rules), are the primary pieces of Indian legislation that deal with these issues, on a sector-neutral basis. General legislation, such as the Consumer Protection Act 2019 and the Indian Penal Code 1860, also provide for certain obligations regarding data protection.
There are also sectoral laws and regulations which impose data privacy and protection-related obligations, which are issued by sectoral regulators for the sectors they regulate, such as the RBI for the banking and finance sector or the Insurance and Regulatory Development Authority of India for the insurance sector.
The IT Act has extraterritorial applicability in certain cases. The provisions of the IT Act extend to any offence or contravention committed outside India by any person irrespective of their nationality, if the act or conduct constituting the offence or contravention involves a computer, computer system or a computer network located in India.
Currently, India does not have a national data protection regulator. In this regard, please note that, for the purpose of adjudicating any offence committed under the IT Act, the central government has appointed adjudicating officers. These officers can adjudicate matters in which the claim for injury or damage does not exceed INR50 million (approximately USD6.7 million). Jurisdiction in respect of claims for injury or damage exceeding INR50 million (approximately USD6.7 million) vests with the competent court. The Telecom Disputes Settlement and Appellate Tribunal has been notified by the central government as the competent appellate tribunal under the IT Act.
With a view to improve the ease of doing business in India, the Indian Parliament enacted the following four Labour Codes in 2019 and 2020, to amalgamate and replace 29 extant central labour laws: (i) the Code on Wages 2019; (ii) the Code on Social Security 2020; (iii) the Industrial Relations Code 2020; and (iv) the Occupational Safety, Health and Working Conditions Code 2020 (Labour Codes). The President of India has assented to the Labour Codes. However, at time of writing (July 2021), barring a few provisions relating to the Central Advisory Board on minimum wages in the Code on Wages 2019, and certain provisions of the Code on Social Security 2020, the Labour Codes are yet to be brought into effect by the central government by way of a notification in the Official Gazette. Having said that, as part of the roadmap to implement the Labour Codes, the central government has finalised the draft rules under the respective Labour Codes.
Recently, the Indian government incorporated various provisions under Indian tax laws to bring foreign digital players under the ambit of income tax law which, inter alia, include the Equalisation Levy for online purchase or sale of goods. These changes are likely to impact entities operating in, inter alia, the gaming industry, e-commerce marketplaces and the hospitality sector (where the customer purchases goods online or merely initiates an online inquiry), and accordingly, such entities would need to evaluate the impact of recent changes on the digital tax front.
In early 2020, the Ministry of Corporate Affairs, released a draft Competition (Amendment) Bill 2020, proposing substantial amendments to the Competition Act. The Bill, inter alia, contemplates:
Interestingly, subject to certain conditions, the Bill also proposes to exempt the implementation of both:
At time of writing (July 2021) the Bill is pending before the Parliament.
The (Indian) Copyright Act 1957 is likely to get amended, as comments have been sought from stakeholders by the government of India. Furthermore, the Intellectual Property Appellate Board has been abolished, causing appeals from the decisions of Indian intellectual property offices to be filed with competent civil courts. The jurisprudence and procedure in this regard is likely to evolve.
As regards well-known marks, the Delhi High Court is likely to decide on whether, once a competent court has determined a trade mark to be well-known, the procedure stipulated under the Trade Marks Rules 2017 (along with payment of fees) for inclusion of such a mark in the list of well-known marks maintained by the Trade Marks Registry, is applicable or not.
Significant developments are expected in the near future in the data privacy and protection legal regime in India. The Joint Parliamentary Committee, a committee constituted to examine the Personal Data Protection Bill 2019 (PDP Bill), is expected to present its report before the Indian Parliament in the upcoming session of the Parliament.
The PDP Bill is modelled around the EU General Data Protection Regulation and is expected to be a path-breaking development for India as it provides for several new concepts and obligations in relation to protection of personal data. The PDP Bill includes aspects relating to the rights of individuals (termed as data principals), mechanisms for data localisation, setting up of a dedicated data protection authority, etc.
India has always witnessed investment, both domestic and international, into traditional and new generation businesses, and the growth of larger companies and their diversification. Similarly, post-liberalisation, overseas companies have been accessing India for manpower. Towards the latter part of the decade, this recruitment has focused on low-cost skilled services in the information technology sector. However, many industries have subsequently come to understand the consumption potential of the Indian marketplace. Apart from the consumption aspect, one of the things that makes India particularly attractive from an investment standpoint is the country's very large and untapped potential as a market, and that even well-established Indian companies with organised consumer-facing businesses cater to only a very small percentage of the Indian population. This leaves room for significant opportunities.
India allows foreign investment in most sectors. Although there have been federal and state level initiatives to ease doing business in India, it is advisable to carry out due diligence on sector-specific, state-specific, and culture-specific practical and legal aspects, prior to making investment decisions, to avoid unwelcome surprises.
As regards recent trends, India has been witnessing a surge of entrepreneurial action and start-ups across all sectors. These range from businesses supporting rural India and agriculture to urban-facing solutions for well-being as well as technology-related businesses. The legal, regulatory and taxation regime are also largely supportive of such initiatives.
Commercial Real Estate
The pandemic has had a significant impact on the commercial real estate sector. There have been conflicts, defaults and litigation, although the users did not gain much. These continuing uncertainties have induced many businesses to move out of expensive commercial real estate. However, the situation has led to unprecedented convenience in operating with low-cost real estate, or on a cloud-based model, and more importantly, without the hassle of various compliances and costs for operating out of physical infrastructure. Furthermore, currently there are no major legal hurdles in this regard and it is likely that such models will continue to the benefit of business owners, workers and consumers even after the pandemic.
Simultaneous with the growth of digital media initiatives, the education sector has seen revolutionary changes with the migration of the decades-old physical infrastructure to online platforms. While this could give rise to a number of legal, commercial and privacy concerns, all stakeholders have been largely co-operative and the virtual education platforms are only likely to grow further, even after the pandemic. This sector has attracted considerable foreign exchange and can potentially attract a lot more investment, in addition to many international institutions establishing operations in India.
Media and Entertainment
The entertainment industry has demonstrated during the past several months that, even in the context of large-scale movies, it can seamlessly and profitably function through digital media platforms. The increased commercial participation of over-the-top (OTT) platforms has been a major boost to this sector.
One of the serious legal concerns is that the media and social media companies operating in India have been debating the various compliance requirements relating to encryption, accountability, need for local management, etc, recently introduced by the Indian government under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules 2021.
India employment law and jurisprudence have undergone a significant evolution over recent years.
A major development is the codification nearly 44 archaic laws into four pieces of legislation:
A significant number of changes have been introduced by these yet-to-be-implemented Labour codes.
Additionally, the majority of India's white-collar workforce has been working from home since the pandemic. Some of the legal issues regarding working from home include:
The absence of any major legal requirements or statutory compliance requirements, specific to work from home has been a major support for businesses. However, many employers have been preparing policies specific to working from home.
As most consumer-facing businesses have been operating virtually and through online marketplaces, the importance of intellectual property has increased like never before. Notwithstanding the pandemic-related difficulties and lockdowns, the Indian Intellectual Property Registries have been working efficiently. Similarly, courts across the country have been very receptive to intellectual property dispute resolution.
Furthermore, considering the difficulties faced by patent owners in practicing their inventions, the government of India has simplified the compliance requirements or patent working statements.
India’s intellectual property appellate tribunal (IPAB) was recently abolished, resulting in chaos among intellectual property owners in dispute. Thereafter, the Delhi High Court proposed to establish a specific Intellectual Property Division (IPD) for the High Court, and also to handle all the disputes that were pending before the IPAB prior its abolition. The Delhi High Court will notify the comprehensive rules thereto in 2021.
E-commerce and Data Protection
India's e-commerce industry has been on a growth curve, while contributing to the growth of the country's technology and logistics infrastructure. The government's initiatives on interoperability of payments, support for the growth of digital payment systems, and increase of foreign direct investment limits have been supportive for the sector.
The growth of the e-commerce sector has also opened up a large amount of intellectual property disputes and domain disputes. India has adequate laws and a well-developed legal system to address such concerns.
Similarly, non-compliance and breach of data privacy obligations have been a major concern. While India is in the process of implementing its new data privacy law, the current legal regime also has necessary provisions regarding the collection, processing, use and storage of data. However, various stakeholders still lack awareness, resulting in poor compliance. Notwithstanding this, many Indian entities' international business relationships and corresponding obligations help to ensure data privacy compliance in relevant sectors. Please refer to the India Law & Practice chapter in Chambers' Data Protection & Privacy Guide for further details.
Judicial Intervention and Policies
The Indian courts, including the Supreme Court, the High Courts and district courts, have proactively addressed the potential delays caused by the pandemic, and have enabled online filing of documents and virtual hearings, including remote screen sharing by judges and lawyers. Furthermore, the Indian courts allow service of documents on the opposite parties through email, SMS and WhatsApp.
Moreover, the Supreme Court of India has extended various statutory deadlines and limitations, taking into consideration that pandemic-related lockdowns have impacted people's ability to function normally. This has significantly helped the people protect their legal rights and statutory obligations in these difficult times.
The Indian market appears to be on a long-term growth curve. The stock market indications have been encouraging. In addition, the legal and regulatory regime has been adopting measure to ease doing business.
Although India has seen a lot of development and both Indian and international business initiatives in recent decades, there remain significant untapped opportunities. Furthermore, the demographic peculiarities of the nation (ie, a large part of the population is available to work, earn and spend) and domestic consumption patterns make it an attractive market for all kinds of businesses. Finally, in the background of other geopolitical considerations, India's democracy, internationally aligned commercial policies as well as a well-developed legal system may continue to position India as a preferred destination for global businesses.