With India being rooted in the British legal system and having gained independence from the UK, the Indian legal system is derived from common law. Many important statutes, including the Indian Contract Act, have their genesis from the “British Raj” period, and Indian courts apply the common law system with a high emphasis on precedents. However, for certain matters such as property inheritance, and some civil matters, religious and customary law also apply.
The Indian judiciary is central (or federal) and the courts apply the same law regardless of state (except for certain state-specific legislations). The Indian Supreme Court is the paramount court in India and appeals reach the Supreme Court from all High Courts in India. Decisions of the Supreme Court of India are binding on all courts and tribunals in India.
In addition, there are tribunals for specific matters such as the Income Tax Tribunal, tribunals for Customs and GST, National Company Law Tribunal, National Green Tribunal, etc, appeals from which typically go to an appellate tribunal and thereafter to the Supreme Court of India.
Foreign investment in India is dependent on the sector in which the proposed investee company is engaged, as well as the source of funds of the proposed investor. As a general rule, except for certain sectors that are considered sensitive, foreign investment is allowed up to 100% of the capital of the investee company, under the “automatic route”, ie, without the need for prior approval from the government of India.
Sector-Specific Investment Restrictions
In terms of the consolidated FDI policy of the government of India, investment in certain sectors (which is determined by the nature of business of the investee company) is allowed up to a particular limit under the automatic route, and thereafter requires the prior approval of the government of India. These sectors include single-brand product retail trading, brownfield pharmaceuticals, print media, etc.
Additionally, depending on the sector, there are certain conditions to which the investee company would be required to adhere, in order to obtain prior approval of the government of India. In specified sectors, foreign investment is not allowed.
Investor-Specific Investment Restrictions
Foreign investment in any sector (including sectors where 100% investment is usually permitted under the automatic route) would require prior approval of the government of India if the proposed investment is from an entity of a country (or where beneficial ownership is situated in such a country) which shares a land border with India.
Additionally, investments in the financial services sector, specifically non-banking finance companies (NBFCs) are capped where the investment comes legally or beneficially from a country on the FATF list.
Investors who are non-resident Indians enjoy certain relaxations from the restrictions that are otherwise applicable to foreign investors.
A list of restrictions and conditions and the foreign direct investment policy may be accessed through the website of the government of India.
Nature of Investment
Foreign direct investment in India is allowed only in the form of subscription to equity shares, preference shares that are compulsorily convertible into equity shares, and debentures that are compulsorily convertible into equity shares. Investments in redeemable instruments are not permitted under the equity route.
The government of India has specified the Department of Promotion of Industry and Internal Trade (DPIIT) as the nodal agency for approvals. The DPIIT has enabled an online Foreign Investment Facilitation Portal for the submission of applications.
Upon submission of an application in the prescribed format, the DPIIT shall identify and forward this to the concerned ministry for approval. In certain sectors where security clearance is needed, the Ministry of Home Affairs will also be required to provide approval.
Once submitted, applications may require clarificatory or additional documents to be submitted based on the scrutiny of the application. In addition to the government of India, the approval of the Reserve Bank of India (RBI) is sought, as the RBI is the administering authority of the Foreign Exchange Management Act, 1999 (FEMA).
Investing without approval is a contravention under the provisions of the FEMA. A penalty of up to three times the sum involved in such a contravention, where such an amount is quantifiable, may be leviable. In addition, in continuing offences a daily penalty may be leviable.
If any person fails to make payment of the full penalty, such a person may be liable to civil imprisonment.
Compounding of proceedings is permissible as per the Foreign Exchange (Compounding Proceedings) Rules, 2000, as amended.
Conditionalities on investment may be imposed on either the investor or the investee company and form part of the FDI policy. For example, foreign investment in companies engaged in single-brand retail trading mandates minimum investment limits on the part of the investor as well as sourcing and procurement mandates on the part of the investee company. Investment in civil aviation (air transport) has restrictions on the composition of the board of directors and key management personnel.
The nature of the commitment is therefore part of the policy and investors would have visibility on the restrictions, if any, on the use of investment, activity of the investee company and other such matters; Indian policy provides a clear directional framework in this respect.
While writ remedies are available to a person aggrieved by a government decision, such a remedy is normally available where the acts complained of are due to the government acting arbitrarily, or out of bias. Writ courts are normally reticent in examining a matter on merits. Rejection of investment approvals is normally due to insufficient facts being submitted and it is open to an applicant to resubmit an application with the missing information being provided.
While it is possible even for a proprietary entity to be a business vehicle, typical forms of corporate vehicles are limited liability companies (private and public) and limited liability partnerships (LLPs). From a foreign investment perspective, while investment in LLPs (engaged in permitted sectors) is allowed, considering established precedents on exits by way of sale of shares or market listing, investors tend to prefer investment in limited liability companies. Strategic investors not looking for a time-bound exit do consider investment in LLPs.
Companies may be broadly categorised into the following types.
Private limited company:
While it can be estimated that incorporation of a private limited company takes approximately four to six weeks, there are several prerequisites that must be in place prior to an application for incorporation of the company being presented. These include the first directors having valid director identification numbers, the proposed company having identified and obtained a written commitment for use of a registered office, etc. Where there are foreign shareholders and directors, documents may need to be notarised and subject to apostille. Brief steps for incorporating a private limited company in India are set out below, and it may be noted that most of the filing process is now online:
Private companies are subject to reporting and disclosure obligations. The charter documents of the company, filed statutory forms, and the company’s filed annual return (filed with the Registrar of Companies) are all public documents that are capable of being inspected. A private company is required to file the following with the Registrar of Companies: annual financial statements; returns of allotment of shares (including the valuation reports); changes to the articles of association as passed by special resolution with members’ consent; certified copies of resolutions; explanatory statements issued to members and amended articles.
Entities meeting these specified thresholds are required to file a statement of beneficial ownership in a prescribed form with the company, and the company in turn is required to file this with the Registrar of Companies.
Having a board of directors with at least one resident Indian director is mandatory for all companies. Based on the type of company, there may be additional requirements for having independent directors, female directors, etc. In most cases, investors who meet a contractually agreed threshold seek the right to appoint nominee directors. Lenders also have the right to appoint nominee directors, although this is mostly exercised upon the occurrence of certain specified events of default.
Day-to-day management of the company is usually vested with an executive director, managing director or full-time director. Based on the size and nature of the company, companies usually also have CXO-level employees who are one level below the board, such as a chief executive officer, chief finance officer, chief operating officer, etc, whose roles and responsibilities are decided in terms of the employment agreement between them and the company.
Sanctions and penalties on directors are statutorily prescribed under various acts. Penalties can be imposed on the directors and officers of a company for statutory non-compliance. Criminal liability may also arise with prison sentences (for example, Fraud u/s 447 of the Companies Act, 2013). Certain other statutes such as the Income Tax Act, and Goods and Services Tax legislation, may also impose penalties for directors of non-compliant companies.
Liability of a director for corporate criminal liability of the company needs to be specifically provided for in statute, and these usually have knowledge-based exceptions. While independent directors are normally not liable for the compliance failures of the company, all directors including independent directors are expected to exercise their fiduciary obligation, and under certain circumstances, all directors may be liable.
Piercing the corporate veil is rare but not unknown. Usually, in limited liability companies, shareholders do not stand directly liable. However, in certain specified cases such as fraud, or in the case of specified offences such as those involving the prevention of money laundering, liability may flow back to the ultimate beneficiary, notwithstanding the structure of the legal entity as a limited liability company.
Employment laws in India comprise both central and state laws and can be broadly categorised into (i) laws on wages; (ii) laws on industrial relations; (iii) laws on social security and welfare benefits; and (iv) laws on working conditions, health and safety. The applicability of and compliance with the legislations is dependent on the nature of the establishment (manufacturing or non-manufacturing), number and category of employees and wage threshold of the employee. Employees are categorised into “workman” and “non-workman”. The “non-workman” category typically means those who are engaged in a managerial or supervisory capacity.
Some of the key labour legislations governing the employment relationship include:
State governments are also empowered to legislate on labour; in addition to state rules under various central legislations, there are state-specific legislations such as shops and establishments acts (“S&E Acts”), labour welfare fund acts and national and festival holidays acts.
It is also pertinent to note that with the objective of the ease of doing business in India and a step towards digitalisation, the Central Government of India proposes to replace 29 labour legislations with four labour codes – namely, the Code on Wages, 2019 (the “Wages Code”), the Industrial Relations Code, 2020 (the “IR Code”), the Occupational Safety Health And Working Conditions Code, 2020 (the “OSH Code”) and the Code on Social Security, 2020 (the “SS Code”). These labour codes have been notified but are yet to come into force. Based on the latest news reports, they are likely to come into force soon.
Apart from the legislations set out above, the employment relationship is also governed by judicial precedents, employment agreements executed between the employer and the employee, the internal policies and employee handbooks of the employer, and collective bargaining agreements with trade unions, if any.
Certain S&E Acts prescribe the format for appointment letters where details of appointment of the employee is to be provided. Even though oral/verbal employment agreements are valid and enforceable in India (except where S&E Acts prescribe), it is neither recommended nor market practice, given the difficulty in enforcing terms of employment of verbal contracts. Even under the proposed OSH Code, the employer is required to issue an appointment letter to every employee of the establishment with the minimum information prescribed by the appropriate government.
As regards the duration of employment agreements, they are typically valid until terminated by either party. That said, in India, there is also a concept of fixed-term employment. A fixed-term employment workman is a workman who has been engaged for a fixed period or a specific project. Such an employment relationship expires with time as stipulated in the contract of employment.
Although the format of an appointment letter is prescribed under certain state laws, employers have the discretion to decide on the terms and conditions of employment contracts so long as such terms are not contradictory to those prescribed under the applicable law and general principles of contract law.
As per the various S&E Acts, the appointment letter should essentially include the following:
In addition to the terms and conditions stipulated above, there are certain other terms and conditions of employment which are typically included in employment contracts – for instance: duties and obligations, representations and warranties, exclusivity, confidentiality, non-disclosure, termination provisions and post-separation obligations.
There are limits to the daily and weekly number of hours an employee can be required or allowed to work in an establishment. Such limits to the number of hours vary from state to state as per the applicable S&E Acts. While most states prescribe a weekly limit of 48 hours, the daily limit varies from eight to nine hours. For manufacturing units, the Factories Act also provides for similar thresholds. The S&E Acts and Factories Act also provide for an interval of rest ranging from 30 minutes to one hour. Under the OSH Code, the appropriate governments have been given the power to prescribe requirements in relation to daily hours, weekly hours, spread-over and rest intervals.
With respect to overtime, any overtime work done by the employee beyond their daily/weekly hours of work would entitle them to payment of overtime wages at the rate of twice the ordinary rate of wages. Any overtime work done in factories must be for prescribed reasons such as workers engaged on urgent repairs, work in the nature of preparatory or complementary work which must necessarily be carried on outside the general working of the factory, any work which for technical reasons must be carried on continuously, etc. The S&E Acts and Factories Act (with respect to certain specified work/industries), also provide for daily/monthly/quarterly annual limits on the number of overtime hours that an employee can be required to work. Once the OSH Code comes into force, it will be mandatory for an employer to obtain the prior written consent of the worker before requiring him/her to work overtime.
The applicability of labour legislations pertaining to termination in India are dependent on various factors which include the nature of the establishment, the category of employees and the location of the establishment. While the ID Act provides for the termination of workmen-category employees, the termination of non-workmen-category employees is regulated by the state-specific S&E Acts, contracts of employment and company policies.
In India, employment at will is not recognised. Irrespective of whether the termination is stigmatic on account of misconduct or simpliciter by way of notice, the employer is required to have reasonable cause for termination.
Depending on whether there is any reason for termination, the following kinds of termination are prescribed under Indian law.
A termination simpliciter is typically effected by providing a notice of termination or salary in lieu thereof in accordance with the law or contract of employment, whichever is more beneficial.
In the event the employee is a “workman” under the ID Act, which is a fact-based analysis and would depend on the nature of roles and responsibilities of the employee, requirements with respect to retrenchment under the ID Act, as set out below, would be applicable. “Workman” means any person doing manual, unskilled, skilled, technical, operational, clerical or supervisory work, excluding those employed mainly in a managerial or administrative capacity, or supervisory capacity drawing monthly wages exceeding INR10,000 or performing functions mainly of a managerial nature.
Ordinarily, termination of employment for reasons other than on account of a disciplinary action, voluntary retirement, resignation, expiry of a fixed-term contract or on grounds of continued ill-health would amount to a “retrenchment” within the meaning of the ID Act, thereby requiring compliance with the process of retrenchment as per the ID Act. Typically, the grounds for retrenchment are redundancy, business exigencies, business restructuring or reorganisation, excessive workforce or economic slowdown of business. The procedure of retrenchment for workmen is as set out below.
An industrial establishment which is classified as a factory, mine or plantation (in accordance with the ID Act) and has had at least 50, 100, or 300 workmen (depending on the state) in the preceding 12 months, must do the following:
An industrial establishment which classifies as a factory, mine or plantation, and has less than 50, 100, or 300 workmen (depending on the state), or any other industrial establishment, must:
In addition, there is a requirement of payment of retrenchment compensation equivalent to 15 days’ average pay for every completed year of continuous service or any part thereof in excess of six months.
The process of retrenchment also requires an employer to follow the “last in, first out” principle, unless an agreement exists with the workman, or the employer has justifiable reasons recorded in writing to deviate from such a principle. In this regard, a seniority list is required to be displayed seven days before effecting the retrenchment. Further, the employer is required to give preference to the retrenched workmen in the matters of re-employment over other persons, in the event a vacancy in the same position arises with the employer in the future.
The IR Code introduces a re-skilling fund for training of retrenched workers. The fund will consist of the contribution of the employer of an amount equal to 15 days’ wages last drawn by the worker immediately before the retrenchment, or another number of days, as may be notified, and contribution from such other sources as may be prescribed by the appropriate government. The retrenched employee would be paid from the fund within 45 days from the date of retrenchment, in addition to the retrenchment compensation.
In the case of non-workman-category employees, for termination to be in compliance with the relevant S&E Acts, a prior notice of at least one month or wages in lieu of such a notice should be provided.
There is no statutory concept of “collective redundancy” in India. The obligations set out above are triggered regardless of the number of employees affected, unless a collective bargaining agreement with employee representatives specifies otherwise. The employer must comply with any additional process with respect to consultation/notification prescribed in any applicable collective bargaining agreement.
Termination With Cause
Termination of employment for cause requires the employer to conduct an enquiry, in accordance with principles of natural justice, to determine the veracity of the misconduct/negligence/breach of company policy or non-observance of duties prior to taking any action of termination. Ordinarily, the process for termination with cause involves a preliminary inquiry followed by suspension, framing of charges and issuance of a charge-sheet, conducting a detailed internal investigation by an independent investigating officer, issuance of show-cause notice, examination of findings and hearing before the disciplinary committee. In certain situations, where an employee has engaged in malpractices or wrongdoing, the requirement of a domestic enquiry can be dispensed with (either entirely or partially), such as where holding of the enquiry will either be counter-productive or may cause such irreparable and irreversible damage which on the facts and circumstances of the case need not be suffered.
This is a package deal of give and take. In a golden handshake/mutual separation, the employer and the employee voluntarily enter into an arrangement whereby they mutually agree on the cessation of the employment at a specified date. It is essential that the employee enters into such an arrangement on his/her own volition so as to mitigate any claim of coercion. Ordinarily, to ensure a smooth exit of the employee from the organisation, the employer typically offers an additional amount as an incentive. The terms of a mutual separation agreement are decided pursuant to discussions/negotiations between the employer and employee until they finally arrive at terms acceptable to both.
As regards indemnification, the terminal benefits/payouts include salary till the last date of employment; notice pay (not applicable in the case of termination by giving notice, termination for cause and mutual separation); retrenchment compensation for workman-category employees who have completed one year of continuous service at the rate of 15 days’ average pay for every completed year of service or part thereof in excess of six months (not applicable in the case of termination for cause and mutual separation); gratuity for employees who have completed four years and 240 days of continuous service at the rate of 15 days’ last-drawn wages for every completed year of service or part thereof in excess of six months; pro-rated statutory bonus for employees with salary below INR21,000; and encashment of unavailed earned leaves. Contractual dues such as severance, incentive payments, employees’ stock options and reimbursements would also need to be paid out in accordance with the contract of employment, settlement agreements and company policies.
Typically, trade unions are constituted in establishments or factories for the purpose of representation of the employees. A “trade union” is defined under the Trade Unions Act, 1926 (the “TU Act”) as “any combination, whether temporary or permanent, formed primarily for the purpose of regulating the relations between workmen and employers or between workmen and workmen or between employers and employers, or for imposing restrictive conditions on the conduct of any trade or business, and includes any federation of two or more trade unions.” Therefore, a trade union is essentially an association of workmen formed to protect and promote the interest of workmen who are its members.
Recognition of a trade union is the process through which the employer accepts a particular trade union as having a representative character, and hence will be willing to engage in discussions with the union with respect to the interests of the workmen. Recognition cannot be demanded as a matter of right by a trade union. Therefore, it is not mandatory for the employer to recognise a trade union, and a registered trade union does not have a statutory right to be recognised except in states such as Maharashtra, Madhya Pradesh, Andhra Pradesh, Gujarat and Orissa who have introduced legislations for compulsory recognition. Notwithstanding this, although recognising a trade union is not an obligation on the management, it cannot refuse to hear the grievances raised by it.
Any consultation requirements with trade unions would depend upon the terms of collective bargaining agreements between the management and trade unions.
Where there are 100 or more workmen in an industrial establishment, there is a requirement to constitute a works committee consisting of representatives of employers and workmen engaged in the establishment. The number of representatives of workmen on the committee should not be less than the number of representatives of the employer.
Indian tax residents are taxable in respect of their global income in India. Non-residents may be taxed in India in respect of their employment income, if such income relates to services rendered in India or is received in India.
Salary income is taxable as ordinary income in the hands of employees, at the applicable marginal tax rates. Employers are required to withhold such income taxes from salaries and deposit such tax with the Indian government.
Employees can claim a standard deduction of INR50,000 or the amount of salary received – whichever is lower – while computing their taxable salaries. Tax benefits are also available in relation to certain allowances provided by the employer (such as house rent allowance and leave travel allowance). Generally, the value of any non-monetary benefits and perquisites (determined per tax rules) received from the employer is also included in the employee’s taxable salary. Employees are also taxed in respect of any stock awards on the allotment of shares. The difference between the fair value of the shares (determined per tax rules) minus the exercise price is treated as salary income.
Under Indian tax laws, companies that are tax residents in India are taxable on their global income. A corporation is resident in India if:
Domestic companies are taxed at 15%, 22%, 25%, and 30% (plus applicable surcharge and cess). The applicable tax rate depends on the nature of activity, tax regimes opted for, level of income and turnover, and nature of business of the company. The lower 15% rate is applicable to newly incorporated manufacturing companies, if they opt to forgo specified deductions that may otherwise be available, and subject to prescribed conditions.
A surcharge of 7% and 12% is levied on the income tax payable if the total income of the domestic company is between INR10 million and INR100 million, and above INR100 million, respectively. In the case of domestic companies eligible for the reduced tax rate of 15% or 22%, a flat surcharge rate of 10% is applicable. The total tax and surcharge amount is further increased by a health and education cess of 4%.
Additionally, domestic companies are subject to a minimum alternate tax of 15% (plus applicable surcharge and cess) on their adjusted book profits, if the income tax payable by them on their total income is less than 18.5% of their book profits. Further, domestic companies eligible for the 15% and 22% brackets are not subject to minimum alternate tax.
Foreign companies are taxed on the business income earned from a business connection in India. If a tax treaty exists between India and the country of residence of the taxpayer, the provisions of the domestic tax law or the tax treaty, whichever is more beneficial, will apply. Where a tax treaty exists, the concept of a business connection is replaced by permanent establishment (PE) which provides a narrower threshold for creating a taxable business presence. Foreign companies are taxed at 40% (plus applicable surcharge and cess) on their business profits.
Additionally, foreign companies are also taxed on their income in the nature of interest, dividends, royalties or fees for technical services (on a gross basis) received or sourced from India, subject to tax treaty benefits, if any.
A surcharge of 2% and 5% is levied on the income tax payable if the total income of the foreign company is between INR1 million and INR100 million, and over INR100 million, respectively. The total tax and surcharge amount is further increased by a health and education cess of 4%.
Withholding Tax on Repatriation of Profits to Non-residents
Dividend income is taxable on the shareholders. Dividend income received by non-residents from domestic companies is subject to withholding tax at 20% (plus applicable surcharge and cess) of the gross amount (subject to tax treaty benefits).
Interest income received by non-residents from domestic companies is subject to tax withholding at the applicable rates, ranging from 5% to 40% (plus applicable surcharge and cess) of the gross amount, depending on the currency in which the debt is incurred, timing of issuance of the debt, and the Indian regulatory regime under which the debt is issued (subject to tax treaty benefits).
Royalties/fees for technical services
Royalties and fees for technical services (being technical, managerial or consultancy services, etc) are subject to withholding tax at 10% (plus applicable surcharge and cess) of the gross amount (subject to tax treaty benefits).
A recent trend in India’s income tax policy has been to phase out tax holidays and incentives, and replace these with lower corporate tax rates. The few key tax holidays/incentives that are still available are as follows.
Indian tax laws do not provide for tax consolidation.
Indian tax law also provides for “thin capitalisation norms” in order to limit tax base erosion through the use of excessive interest deductions. Indian thin capitalisation norms provide that where an Indian company, or a PE of a foreign company in India (except those engaged in banking or insurance), pays interest in respect of any debt borrowed by it from its non-resident associated enterprise (AE), in excess of INR10 million, the deduction of such interest expense will be limited to the lower of either (a) 30% of the earnings before interest, taxes, depreciation and amortisation (EBITDA) of the Indian taxpayer, or (b) actual interest.
The interest expenditure, so disallowed, will be allowed to be carried forward up to eight years, for future set-offs against the business income (to the extent permitted under thin capitalisation rules).
Under India's transfer pricing regulations, any international transaction and/or specified domestic transaction between two or more AEs must be at arm’s length.
The arm’s-length price is to be determined in accordance with any of the prescribed methods, namely:
Taxpayers entering into international transactions and/or specified domestic transactions must maintain prescribed documents and furnish an accountant's report/certificate, capturing prescribed details and attesting to the arm’s-length nature of transactions. Indian transfer pricing regulations also allow for secondary adjustments subject to certain conditions.
Indian tax law also prescribes safe harbour rules and advance pricing arrangements (APA) to determine the arm's-length price (or the manner of determining the arm's-length price) in relation to the international transactions to be entered into by a person for a specified period. Indian tax rules also provide for secondary adjustments.
Under Indian general anti-avoidance rules (GAAR), tax authorities can determine the tax consequences for taxpayers and can disregard or recharacterise an arrangement or transaction (including any step of such an arrangement/transaction) by declaring it an “impermissible avoidance arrangement” if the arrangement/transaction (or relevant step) was entered into by the taxpayer with the main purpose of obtaining tax benefits and lacks commercial substance (among other things).
GAAR provisions apply to both cross-border and domestic transactions and have an overriding effect on all the other provisions of the Indian Income-tax Act, 1961. In the case of an abuse of a tax treaty, the GAAR provisions can also override the provisions of such a tax treaty.
However, the GAAR provisions do not apply to, inter alia, the following transactions or taxpayers:
Jurisdiction of the Competition Commission of India
The Indian merger control regime is a mandatory and suspensory regime. All acquisitions (of shares, voting rights, assets or control), mergers and amalgamations which meet the prescribed jurisdictional thresholds set out in the Competition Act, 2002 (the “Competition Act”) and which are not otherwise exempt require a notification to the Competition Commission of India (CCI).
Jurisdictional Thresholds and Exemptions
The Competition Act provides jurisdictional thresholds based on the combined assets and turnover of the parties or the groups involved in the transaction. If any of the tests is met, then the transaction must be notified to the CCI unless it is specifically exempt.
There are various exemptions available from the notification requirement. The CCI regulations exempt from notification certain transactions which ordinarily do not have an appreciable adverse effect on competition (AAEC). Two examples of such transactions are:
Certain exemptions have also been notified by the Indian government. For example, the target exemption exempts from notification any transaction where the target either has assets less than INR350 cores (approximately USD46.5 million) or turnover less than INR1,000 crores (approximately USD133 million), in the financial year preceding the financial year in which the transaction occurs. There are also certain sector-specific exemptions, such as for the oil and gas sector and the banking sector.
Notification Requirements for Joint Ventures
A “greenfield” joint venture would typically not require a notification to the CCI. However, a joint venture may require a notification if one or more of the parent enterprises of the joint venture is contributing existing assets which cross the jurisdictional thresholds under the Competition Act.
When evaluating the notification requirements of a joint venture, only the value of the assets being contributed by the parent enterprises should be considered.
Obligation to Notify and the Trigger
Parties can notify a transaction at any time after the trigger event, but before consummating any step of such a transaction.
In the case of acquisitions, the obligation to notify is upon the acquirer. The trigger document can be an executed agreement or any other binding document (for instance, a term sheet, a letter of intent or a memorandum of understanding which sufficiently captures the key commercial elements of the transaction). A public announcement under the relevant takeover regulations can also act as a valid trigger document.
For mergers/amalgamations, there is a joint obligation to notify upon the merging/amalgamating parties. Typically, the trigger is the final board approval approving the merger.
Forms and Filing Fees
Depending on the levels of overlap between the parties, there are different notification forms that can be filed with the CCI.
The CCI is required to form a prima facie opinion on whether a transaction causes or is likely to cause an AAEC within the relevant market in India within 30 working days (excluding clock stops for additional information requests, seeking the opinion of third parties and the offering of any remedies). In practice, this process can last between 60 and 90 days in non-problematic transactions.
If the CCI orders a detailed investigation, it has to be completed within 210 calendar days (excluding clock stops for additional information requests and time taken to negotiate modifications) from the date of notification.
If there is complete or part consummation or closing of a notifiable transaction prior to CCI approval or the expiry of the 210 calendar days, whichever is earlier, the CCI may levy a penalty of up to 1% of the combined turnover or assets of the combination, whichever is higher. The penalty is imposed upon the party(ies) who have the obligation to notify.
The CCI additionally has the power to "unscramble" a reportable transaction which was not notified to it and which was subsequently found to cause an AAEC in India, although it has not done so to date.
Scope of Horizontal Anti-competitive Agreements
The Competition Act prohibits anti-competitive agreements (both horizontal and vertical) if they cause or are likely to cause an AAEC in India.
Horizontal agreements between competitors (including cartels) raise a rebuttable presumption of having an AAEC if they involve:
However, this presumption does not apply to a joint venture agreement if it “increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services”.
Implementation Versus Effect
The CCI has made it clear that if exchange of commercially sensitive information results or is likely to result in anti-competitive effects in any market in India, it would most likely be found to be in contravention of the Competition Act, irrespective of whether the parties acted in furtherance of the information exchange or not.
Penalties and Leniency
The CCI can impose a penalty on the infringing parties of up to 10% of the average of the relevant turnover for the last three preceding financial years as well as from behavioural remedies such as cease and desist orders or modification of the anti-competitive agreement. For cartels specifically, the CCI has the power to impose a monetary penalty which would be the higher of either:
Individual directors, managers and officers of companies in breach may also be liable to penalties calculated on the basis of their income.
Cartel members can also apply for leniency to the CCI. Subject to certain conditions, the applicants (companies and their employees) may get a penalty reduction depending upon their place in the queue of applicants and the value added by the information provided by them. 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 of Abuse of Dominance
The Competition Act prohibits the abuse of a dominant position by an enterprise or a group. Dominance is defined in terms of the “ability to operate independently of market forces” or “affect its competitors or consumers in its favour”. It is the abuse of dominance, rather than the underlying dominance, that is prohibited. Dominant enterprises have a special responsibility to maintain fairness in the market.
A dominant firm is prohibited from:
Where an enterprise is found to have abused its dominant position, the CCI can impose:
The CCI can also order the division of the infringing dominant enterprise to prevent it from abusing its dominance. This power has not been exercised by the CCI to date.
Application, grant and enforcement of patents in India is governed by the Patents Act, 1970 (the “Patents Act”) and Patents Rules, 2003, as amended by (Amendment) Rules, 2021 (the “Patents Rules”). A patent is granted for any invention, which is a new product or process involving an inventive step and capable of industrial application.
The term of a patent is 20 years from filing the application.
Application and grant of a patent involves, inter alia, the following steps.
Remedies and Enforcement of Rights
A patent is a negative right, and the patentee has the exclusive right to prevent third parties from making, using, offering for sale, selling or importing for those purposes the patented product/process in India. In the case of infringement of a patent, civil proceedings can be instituted in courts not inferior to a District Court. Where the defendant has filed a counter-claim for revocation of a patent, the suit along with the counter-claim shall be transferred to the High Court. Reliefs in infringement suits include injunction (temporary and permanent) and either damages or account of profits (at the plaintiff’s option), seizure, forfeiture or destruction of infringing goods or such materials/implements used in the creation of infringing goods. Patent infringement does not amount to a crime and there are no criminal remedies.
Application, registration and enforcement of trade marks is governed by the Trade Marks Act, 1999 (the “TM Act”) and Trade Marks Rules, 2017 (the “TM Rules”). “Trade mark” refers to a mark which includes a device, brand, heading, label, ticket, name, signature, word, letter, numeral, shape of goods, packaging, combination of colours or any combination thereof, which is capable of being represented graphically and is an indication of the source of goods or services.
The term of a trade mark’s registration is ten years, which is renewable in ten-year increments.
The application and registration process involves the following steps.
Remedies and Enforcement of Rights
Registration grants statutory protection from unauthorised use of the trade mark, or any other deceptively similar mark, in India.
India is a common law country and recognises passing off as a remedy for protecting the goodwill generated on account of use. Accordingly, goodwill generated upon use of an unregistered trade mark is protected and enforced by the courts in India.
For infringement or passing off, civil proceedings may be initiated in courts not inferior to a District Court. Reliefs granted include injunction (temporary and permanent), damages, rendition of accounts and delivery-up of the infringing labels and marks for destruction or erasure.
A criminal complaint may also be filed for falsifying and falsely applying trade marks, in which case the penalties include imprisonment of up to three years and a fine up to INR2,00,000.
Application, registration and enforcement of industrial designs is governed by the Designs Act of 2000 (the “Designs Act”) and Designs Rules, 2001 (the “Designs Rules”). A design constitutes the aesthetic aspect of an article. A design is any composition of lines, colours, or three-dimensional form that leaves a unique impression on a product.
The term of design registration is ten years, renewable for five years.
The application and registration process involves the following steps.
Remedies and Enforcement of Rights
Registration of designs grants copyright in registered designs, giving an exclusive right to apply a registered design to any article. Registration of a design affords protection against its piracy, which includes the unauthorised application of a design or its imitation to any article belonging to a class of articles in which the design has been registered for the purpose of sale, importation of such articles without the consent of the registered proprietor, and publishing such articles or exposing them for sale with knowledge of the unauthorised application of the design to them.
The penalty for design piracy is up to INR25,000 for every contravention, recoverable as a contract debt, subject to an upper cap of INR50,000 in respect of any one design. A civil suit for injunction and recovery of damages in cases of design piracy can be instituted in a court not inferior to a District Court. Where any ground available for cancellation is used as a defence in such a suit, this shall be transferred to the High Court.
Relief under passing off is available for unregistered designs in the event the owner of the design is able to demonstrate that the aesthetic features of the design have a recall value and the public would associate such an aesthetic feature in an article with the owner of the design alone and no other person.
Application, registration and enforcement of copyright is governed by the Copyright Act, 1957 (the “Copyright Act”) and Copyright Rules, 2013 (the “Copyright Rules”). “Copyright” refers to the exclusive right of the author or owner of an original literary, dramatic, musical or artistic work, a cinematographic film and sound recording. Copyright is also granted to the expression of an idea. Copyright is a bundle of rights, and the author or owner is free to choose how to exercise these rights.
The term of copyright in the case of literary, dramatic, musical, or artistic work (other than a photograph) is the lifetime of the author plus 60 years. In the case of anonymous and pseudonymous works, posthumous works, photographs, cinematographic films, sound recordings and government works, the term of copyright is 60 years from the beginning of the calendar year following the year in which the work was first published.
Registration of copyright is not mandatory, and copyright arises in a work upon creation. However, registration of copyright is prima facie evidence of the particulars entered therein. The registration is valid for the entire term of the copyright.
The application and registration process involves the following steps.
Remedies and Enforcement of Rights in Copyright
The Copyright Act affords protection from unauthorised use of copyrighted work, amounting to infringement. In the case of infringement, civil proceedings in the District Court or High Court having original jurisdiction can be instituted. Reliefs granted include injunction (temporary and permanent), damages and rendition of accounts.
Criminal remedies are available for infringement of copyright, including imprisonment up to three years and a fine up to INR200,000. The Copyright Act also envisages an enhanced penalty upon a second or subsequent conviction.
Protection of Trade Secrets
There is no codified law for protection of trade secrets in India. Indian courts have held trade secrets (like client lists or technical drawings) to consist of works created and developed by a proprietor, protectable under copyright laws. Trade secrets are also protected under the law of contract and the principles of equity, which are recognised by courts in India.
Protection of Software
Software falls within the scope of “literary works” under the Copyright Act, and hence is protectable as copyright. Software which can demonstrate a technical effect is also eligible for patent protection, subject to it meeting the other requirements under the Patents Act.
Protection of Databases
Tables and compilations including computer databases fall within the scope of literary works under the Copyright Act and hence are protectable thereunder.
Primary Legal Framework in India
To date, the framework for governance of data privacy and protection is evolving in India. Pending the finalisation of proposed data protection legislation (see 9. Looking Forward), the Information Technology Act, 2000, as amended ( the “IT Act”), read with the Information Technology (Reasonable Security Practices and Procedures and Sensitive Personal Data or Information) Rules, 2011 (the “SPDI Rules”) constitute the primary data privacy and protection framework. These may be read together with other sectoral laws, as applicable.
The IT Act requires a body corporate (including a company, a firm, or any other association(s) of individuals engaged in commercial or professional activities) to implement and maintain “reasonable security practices and procedures” while possessing, dealing in, or handling personal information (PI), including sensitive personal data or information (SPDI) in computer resources owned, controlled, or operated by it. Such reasonable security practices and procedures are stipulated under the SPDI Rules, as discussed below.
At the outset, the SPDI Rules govern the handling of or dealing in PI (such as an individual’s name, contact details, address, etc), and SPDI (such as financial information, medical information, passwords, and biometric information). The obligations under the SPDI Rules apply at the entity level, and include:
Further, the SPDI Rules operate based on a consent framework for the collection, processing, disclosure, and transfer of SPDI. In essence, consent from an individual needs to be obtained in advance, after informing them about the purposes behind usage of their SPDI. In addition, at the time of collection of information, the SPDI Rules require information providers to be informed about the intended recipients of their information, and details of the agency collecting and/or retaining such information (if any).
Additionally, the disclosure or transfer of SPDI to a third-party can only be performed when:
Reasonable Security Practices and Procedures
The IT Act read with the SPDI Rules requires entities to implement reasonable security practices and procedures to protect PI, including SPDI. This obligation includes obtaining relevant security certifications as part of an entity’s security systems and practices (such as an IS/ISO/IEC 27001 certification) and formulating comprehensive information security policies that are commensurate with the type of information assets being handled and the nature of business undertaken by such an entity. Note that in each instance of transfer of SPDI, the recipient third party is also required to maintain an equivalent level of data protection by adhering to reasonable security practices as prescribed under the SPDI Rules.
Separately, the Indian Computer Emergency Response Team (CERT-In), under the aegis of the Ministry of Electronics and Information Technology, Government of India (MeitY), has been designated as the national nodal agency for preventing and responding to cybersecurity incidents, which may occur on account of entities’ failure to implement reasonable security practices. Details of cyber-incident reporting procedures, along with the imposition of specific obligations, such as the designation of a point of contact by relevant entities, etc, are set out under the Information Technology (The Indian Computer Emergency Response Team and Manner of Performing Functions and Duties) Rules, 2013. In addition, based on the directions on “information security practices, procedure, prevention, response and reporting of cyber-incidents for a safe and trusted internet” issued on 28 April 2022, several incremental obligations have been imposed on entities, such as mandatory reporting of certain types of cyber-security incidents to the CERT-In within a period of six hours, as well as maintenance of logs of ICT systems for a fixed period, amongst others.
Penalties for Non-Compliance Under the IT Act
In terms of the IT Act, any negligence in implementing and maintaining reasonable security practices and procedures that results in wrongful loss to a person, may expose entities to uncapped damages by way of compensation payable to the affected person(s). Further, failure to comply with any of the other requirements under the SPDI Rules is punishable with a penalty or compensation payable to each affected person(s), for an amount up to INR25,000 (approximately USD320).
Separately, if a person (including an intermediary) providing services under a lawful contract and having access to PI, discloses such information to a third party without consent and with the intent to cause or having the knowledge that they are likely to cause wrongful gain or loss, such a person may be punished with imprisonment up to three years, with a fine up to INR500,000 (approximately USD6,450), or with both.
Applicable Sectoral Laws
In addition to the IT Act and the SPDI Rules, there are sectoral laws that govern the use and processing of specific categories of PI, including SPDI. These frameworks are generally enforced by sectoral regulators, such as the Reserve Bank of India (RBI), the Unique Identification Authority of India (UIDAI), the Insurance Regulatory and Development Authority of India, amongst others. Typically, the applicability of such a framework is assessed on a case-to-case basis, depending on the nature of business operations undertaken by an entity.
Examples of sectoral regulations include the following.
Section 1 read with Section 75 of the IT Act provides that the law applies to the whole of India, as well as to any offence or contravention committed outside India by any person, if the act or conduct constituting such an offence or contravention involves a computer, computer system or computer network located in India. Therefore, the provisions of the IT Act generally apply to Indian entities, as well as foreign entities that operate or maintain electronic systems in India.
Additionally, based on a clarification issued by the MeitY in 2011, the SPDI Rules, in particular, apply to body corporates, as well as persons located within India. Accordingly, the SPDI Rules are applicable to Indian entities, as well as foreign entities that provide services to individuals located in India.
To date, India does not have a dedicated data protection authority, although the proposed data privacy legislation (see section 9. Looking Forward) contemplates the setting up of such an authority, ie, the Data Protection Authority (DPA). However, pending the finalisation of such law, the MeitY is the ministry in charge of regulating matters under the IT Act and its rules, including the SPDI Rules.
Note that the IT Act and the rules thereunder are primarily enforced through the appointment of central and state-level adjudicating officers who are empowered to hear cases under the civil provisions of the IT Act (such as Section 43A of the IT Act). Accordingly, individuals who are aggrieved by any such contravention of the IT Act or its rules may approach the relevant adjudicating officer, provided that the claim for injury or damages does not exceed INR50,000,000 (approximately USD645,860). Where a claim is of a higher value, an aggrieved individual is required to approach a court of competent jurisdiction to initiate proceedings.
In addition, criminal complaints for offences under the IT Act (such as under Section 72A of the IT Act) are subject to the regular criminal procedure in India and may be initiated by a complaint to the local police or magistrate.
In February 2020, the Ministry of Corporate Affairs released a draft Competition (Amendment) Bill 2020, proposing substantial amendments to the Competition Act. Some of the key changes proposed are:
The Bill also proposes changes which would reduce the burden of doing business in India, such as:
At the time of writing (June 2022) the Bill is pending before the Indian Parliament.
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 last decade, this recruitment 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 regimes are also largely supportive of such initiatives.
For instance, the government has adopted the strategy of simplifying compliance through self-certification and deemed approvals; eliminating the compliance burden, wherever possible; bringing in transparency through digitalisation; and decriminalising minor offences.
Commercial Real Estate
The real estate sector generates the second-highest employment opportunities in India after the agriculture sector. Real estate has witnessed high growth after the pandemic due to the increased demand for residential and office properties. The sector is expected to reach USD1 trillion in market size by 2030, from USD200 billion in 2021, and contribute 13% to the country’s GDP by 2025.
India’s market regulator, the Securities and Exchange Board of India, lowered the minimum application value for real estate investment trusts from INR50,000 to INR10,000–15,000 in July 2021 to make the market more conducive to small and retail investors.
According to government data, construction is the third-largest sector in terms of foreign direct investment (FDI) inflow.
The Education Sector
The sector witnessed revolutionary changes during the pandemic, with the migration of decades-old physical infrastructure to online platforms. Even after the pandemic, online education platforms continue to flourish, and they attract significant foreign investment.
As India has a population of 580 million between the ages of 5 and 24, the online education industry has great potential. It is estimated that the online education industry will grow by USD11.6 billion by 2026. The USD4 billion funding that the industry received between January and August 2021, and three unicorns created in the past two to three years, is a clear indication that the edtech ecosystem has been thriving in India.
Media and Entertainment
The Indian media and entertainment sector grew to USD21.5 billion in 2021, and it is expected to reach USD25.2 billion in 2022.
Digital media grew to be the second-largest segment in the sector.
The increased commercial participation of over-the-top platforms triggered by the pandemic has given a major boost to this sector.
One of the most 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, the need for local management, etc recently introduced by the Indian government under the Information Technology (Intermediary Guidelines and Digital Media Ethics Code) Rules, 2021.
The Ministry of Information and Broadcasting recently announced two schemes at the 2022 Cannes Film Festival to incentivise global collaborations with India and attract investments from foreign film-makers in India.
Under the scheme for the shooting of foreign films in India, an international producer can claim a reimbursement of 30% of their qualifying production expenditure and an extra 5% bonus for employing more than 15% manpower from India.
Under the second scheme, official Indian co-productions can claim up to a 30% reimbursement, up to USD2.6 million.
Indian employment law and jurisprudence have undergone a significant evolution over recent years.
A major development is the codification of 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 start of 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 working from home has been a major support for businesses. However, many employers have been preparing policies specific to working from home.
The filing trends of intellectual property applications in India indicate steep growth. The number of patent filings climbed from 42,763 in 2014–15 to 66,440 in 2021–22 due to the government's efforts to strengthen the country's intellectual property rights framework. India proposes to grant 30,074 patents in 2021–22, up from 5,978 in 2014–15. Furthermore, the number of domestic patent filings in India surpassed the number of international patent filings for the first time in 11 years. Other intellectual property applications such as trade marks, industrial designs and geographical indications also show an upward filing trend.
The Indian intellectual property office has recently appointed a large pool of officials, which will significantly bring down the backlog. The pendency was impacted during the pandemic due to restricted functioning.
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 an increase of FDI 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 2022 guide for further details.
India’s nodal agency for cybersecurity (Cert-In) has recently introduced directions for all intermediaries, service providers and body corporates mandating cyber breach reporting and other compliance matters, including data localisation, conducting KYC of clients, data storage, and appointing a point of contact for cybersecurity incidents.
Although the majority of the corporates are bringing in compliance with the Cert-In directions, certain service providers have also exited Indian business due to the compliance burden.
Judicial Intervention and Policies
The Indian courts – including the Supreme Court, the High Courts and district courts – 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. Following this, courts across India have implemented online filing systems. Furthermore, the Indian courts allow service of documents on the opposite parties through email, SMS and WhatsApp.
Furthermore, the government and the judiciary are working together to address the pendency issue by appointing more judges and creating more courts across the country.
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 measures to ease doing business.
Although India has seen a lot of development and both Indian and international business initiatives in recent decades, there remains 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 and a well-developed legal system may continue to position India as a preferred destination for global businesses.