Asia Business Legal Affairs Q&A
INDIA・Vol.1

INDO JAPANESE COLLABORATIONSJune, 2012

INDO JAPANESE COLLABORATIONSMOVING UP THE VALUE CHAIN
By NITIN POTDAR
M&A Chair & Partner
J. Sagar Associates, India

Backdrop
The roots of the Indo‐Japanese relationship can be traced many centuries back to the cultural
exchanges that gained momentum following the spread of Buddhism in Japan. Ever since, bothcountries have made rich forays through co‐operation predominantly in the areas of trade,
economy and technical know‐how.
Among the milestone covenants of the bilateral relation is the December 2006 Memorandum ofUnderstanding for the construction of Delhi‐Mumbai Industrial Corridor, the USD 90 billion mega
infra‐structure project with financial and technical aid from Japan, and the Comprehensive
Economic Partnership Agreement since August 2011 aimed at abolishing import duties oninter‐trades, enabling Indian professionals and contractual service suppliers to set foot in Japanand liberalizing corresponding investment policies and procedures.
Now, Japan is the 4th largest foreign investor in India with foreign direct investment (FDI) equity
inflows amounting to US$ 12,313.08 million, a figure that forms 7.23 % of the India’s total FDI
inflows during April 2000 to March 2012. The Japanese Bank for International Cooperation lists
India as a favored destination for long‐term Japanese investment. 70% of Japanese manufacturers
cite India as the most attractive business destination. Since 1991, Japan has actively invested inIndian industries like automobile (31%), electrical equipment (14%), telecommunications (9%),
trading (8%) and services (7%) with total trade aggregating to USD 10.4 billion. The impressive
statistics is that this accounts to only about 2% of total Japanese world trade. Clearly, the scope forIndo‐Japan ties is immense.
This article has been prepared as a general service to clients and does not constitute legal advice.

Asia Business Legal Affairs Q&A
INDIA・Vol.1

INDO JAPANESE COLLABORATIONS
June, 2012

India Calling
India has recognized the need for propagating foreign investment by liberalizing its economy andmaking itself an attractive business destination for the world. Since 1991, when India eased up its
policies for FDI and Industrial Licensing, it has never looked back. The new FDI Policy effectively
weeded out many a rigid government approval for inviting foreign investment into Indianindustry across sectors.
The new‐look India finds an ideal trading partner in Japan, the world’s fourth largest exporter
possessing the third largest GDP. Japan has achieved phenomenal industrial success in the second
half of the twentieth century through its core competence in manufacturing, construction,distribution, services, and communication.
India possesses a plethora of highly skilled, educated and cost‐effective workforce tailored toJapanese needs. The benefits can already be gauged in the automobile industry where crossborder investments have enabled Japanese majors like Toyota, Honda and Mitsubishi to tap theIndian market and employ its colossal R&D expertise.
Japanese industries like Automobiles and Information Technology seek high end research anddevelopment (R&D) support. India’s R&D potential is epitomized by its technology services
sector. India’s wealth of skilled and competent professionals is the outcome of its prestigious
technical institutions. The Indian government has actively promoted this sector by enabling
foreign investments without prior approval, a gesture that has already housed Japanese bluechips establishments like Hitachi, Panasonic and Sony in the Indian markets.

This article has been prepared as a general service to clients and does not constitute legal advice.

Asia Business Legal Affairs Q&AINDIA・Vol.1

INDO JAPANESE COLLABORATIONS
June, 2012

A closer look
Investment Policy:
India’s FDI Policy envisages investment into Indian companies through two routes namely, theautomatic route calling for no prior governmental approval whatsoever and the approval routerequiring prior permission of the Foreign Investment Promotion Board which is accorded on acase to case basis.
The Indian government has placed a majority of volume‐driven key sectors like Manufacturing
and Non‐banking financial services under the automatic route, while reserving the approvalroute for sensitive and strategically important sectors like defense, telecommunications, andmicro & small scale industrial manufacture.
Further, the Industrial Policy has abolished the erstwhile compulsory licensing requirements
prescribed for a majority of Indian manufacturing industries and now exempts most industries
from procuring an industrial license; ‘Drugs and Pharmaceuticals’ being the latest beneficiary in
the exempt list. As on date, only five industries require compulsory license.
Notably, the service industry which includes financial services has been placed exclusively under
the automatic route. The FDI Policy delineates 18 specific financial activities as activities
permitted to be undertaken by a non‐financial banking company (NBFC). Investment into a
NBFC is permissible up to its entire share capital and can be made without prior regulatory
approval.
However, such investment is required to comply with certain capitalization norms dependingupon the level of investment sought. Alternatively, investment into the banking sector is capped
at 74% in the private banking sector and 20% in the public banking sector.
However, a foreign bank is permitted to incorporate a wholly owned subsidiary for undertaking
business in India. Further, investment in the Insurance sector is also permitted at 26%.

This article has been prepared as a general service to clients and does not constitute legal advice.

Asia Business Legal Affairs Q&AINDIA・Vol.1

INDO JAPANESE COLLABORATIONS
June, 2012

Exchange Control:
As a concerted step towards achieving full capital account convertibility, India revamped its
exchange control laws through the enactment of the Foreign Exchange Management Act in 1999
(FEMA). FEMA identifies the Reserve Bank of India (RBI) as the nodal agency for regulatingexchange control transaction in India. Further, it provides for additional entry routes to foreign
entities like establishment of branch/liaison/representative/project office. However, such routes
are only available in case the entrant seeks to limit its activities solely to solicitation without
undertaking any business operation.
Under FEMA, general permission is accorded for most exchange control transactions such asremittance of proceeds accrued from sale of securities held in an Indian entity, proceeds ofliquidation/winding‐up of Indian entity, dividends accrued on equity shares, interest payable on
fully, mandatorily and compulsorily convertible preference shares / compulsorily convertible
debentures (CCPS/CCD), etc. In addition, no prior RBI approval is required where transfer ofshares or CCPS/CCD between a resident and non‐resident entity is undertaken in accordance withthe pricing guidelines mandated by it. Further, transfer of Indian security between two
non‐resident entities can be at a price mutually agreed to by the parties without prior RBIapproval.
Last but not the least, FEMA governs payments in relation to current account transactions.
Accordingly, royalty payments under foreign collaboration agreements or remittance for purchaseor licensing of trademarks are also permitted without prior approval. This carries immense
significance for foreign technical collaborations, as now any aligned consultancy or trade marklicensing agreement would not require government approval at the time of remitting consultancy
or licensing fees.

This article has been prepared as a general service to clients and does not constitute legal advice.

Asia Business Legal Affairs Q&A
INDIA・Vol.1

INDO JAPANESE COLLABORATIONS
June, 2012

The latest cheer
India’s commitment towards facilitating investment is witnessed in the recent amendments to theFDI Policy and the contemplation of a single window clearance for all foreign investments. The
Consolidated FDI Policy of March 31, 2011 has announced the removal of prior approvalrequirements for investments into industry/activity made by existing investors with investments
made from January 12, 2005. This is a key de‐regulation in the spirit of the free market economy
envisaged during the liberalization initiative of the early nineties.
Further, in relation to portfolio and venture capital investments, the Ministry of Finance has
released a working group report proposing a single window clearance mechanism. The working
group report is contemplating the abolishment of ‘Foreign Institutional Investor, Foreign Venture
Capital Investor and Non Resident Indian investment vehicles in favor of constituting a ‘qualified
foreign investor’ (QFI) concept, to be the sole vehicle for investment across all permissible
sectors in India. Keeping in line with international standards, investment below 10% would beconstrued as portfolio investment; whereas investment in excess of 10% would be foreign directinvestment.
The impending introduction of the Direct Tax Code (Code) spells great news for foreign investors.
The Code seeks to encourage investment by proposing among other things, a reduced corporate
income tax rates, simplified permanent establishment criteria, and an imperative for adducing tax
liability on a foreign assessee. This development could lead to alleviation of some majorunresolved issues encountered whilst structuring a tax effective entry strategy.
On the investment front, recent entrants such as Nippon Life Insurance and NTT Docomo in the
Insurance and Telecommunications sectors, respectively, reflect India’s humungous potential tocomplement Japan’s core competence in manufacturing and technological services. In theinsurance sector, it has been proposed to increase the investment cap to 49% to achieve a
projected industry target of 65 billion USD. In Pharma, the Japanese have made great inroads byvirtue of the Daiichi Sankyo stake in India’s largest drug manufacturer Ranbaxy.

This article has been prepared as a general service to clients and does not constitute legal advice.

Asia Business Legal Affairs Q&A
INDIA・Vol.1

INDO JAPANESE COLLABORATIONS
June, 2012

In a latest policy initiative, the government is likely to entertain prospects of opening hitherto
prohibited sectors such as multi‐brand retail trading to foreign investment, a lucrative
proposition for Japanese majors such as Aeon and Yamada Denki. Likewise, the proposed
enhancement of the FDI limit to 74% in sectors like defense will allow foreign firms a controllingstake and the confidence to transfer sensitive technology to joint ventures in India. On thelegislative front, the government has promulgated the Foreign Educational Institution (Regulationof Entry and Operation) Bill, 2010. Although, awaiting legislation, the educational bill seeks to set
forth a judicial mechanism to attract foreign investment into a sector which might touch 400
billion dollars of investment over the decade.
The recent Ernst & Young Attractiveness Survey released in January 2012, interviewed 506
management heads across industries about the potential of the Indian market. The report notedthat majority have expressed intention to expand their operations within India during 2012 andcited “potential of the home market, cost competitiveness and qualified workforce as the factors
driving FDI into India.” It also stated “Investors perceive that India presents value and promising
growth dynamics in this increasingly unstable global economy.”
India is among the few countries to have shown a remarkable recovery following the globaleconomic crisis. This resilience and sustainability obviously emanates from its robust domestic
market –a fact that spells great news for markets worldwide, particularly so for Japan. A symbiotic
relationship between Japan and India, if nurtured with prudence and precision, will create
phenomenal mutual gains. The time is ripe for the Japanese corporate cream to explore thepotent possibilities on the Indian shores and reap rich rewards.

＜Contact＞
Atsumi & Sakai
Fukoku Seimei Bldg. (Reception: 12F)
2-2-2 Uchisaiwaicho, Chiyoda-ku,
Tokyo 100-0011 JapanTel: 03-5501-2111 Fax: 03-5501-2211
E-Mail: info@aplaw.jp
http://www.aplaw.jp＜Contact＞
J. Sagar Associates l advocates & solicitors
Vakils House, 18 Sprott Road
Ballard Estate, Mumbai 400 001. India
Nitin Potdar (Partner)
Tel: +91-22-4341-8505 Fax: +91-22-4341-8616
E-Mail: nitin@jsalaw.com
http://www.jsalaw.com/

This article has been prepared as a general service to clients and does not constitute legal advice.