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INDUSTRIAL POLICY

  1. About The Industrial Policy

The Industrial Policy (IP) deals with issues relating to: -

  1. Industrial Licensing, Location Restrictions, Environmental Clearance,

  2. Foreign Direct Investment,

  3. Foreign Technology Agreements,

  4. Small-Scale Sector,

  5. EOU/EPZ/FTZ units, and

  6. Electronic Hardware/Software Technology Parks and Industrial Parks.

A few salient features of the Industrial Policy, 1991 as amended from time to time are given below.

  1. Industrial Licensing

Industrial Licenses are regulated under the Industries (Development & Regulation) Act, 1951. With progressive liberalization and deregulation of the economy, the requirement of industrial licensing have been substantially reduced. At present industrial license for manufacturing is required only for the following:

  1. Industries retained under compulsory licensing,

  2. Manufacture of items reserved for small scale sector by non-SSI units; and

  3. When the proposed location attracts locational restriction.

2.1 Industries requiring compulsory licensing

  1. Distillation and brewing of alcoholic drinks.

  2. Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

  3. Electronic Aerospace and defence equipment: all types;

  4. Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose and matches;

  5. Hazardous chemicals;

  1. Hydrocyanic acid and its derivatives

  2. Phosgene and its derivatives

  3. Isocyanates and di-isocyanates of hydrocarbon, not elsewhere specified (example: Methyl Isocyanate).

Industrial undertakings exempt from obtaining an industrial license are required to file an Industrial Entrepreneur Memoranda (IEM) in Part 'A' with the Secretariat of Industrial Assistance (SIA), Department of Industrial Policy and Promotion, Government of India and obtain an acknowledgement. No further approval is required. Immediately after commencement of commercial production, Part B of the IEM has to be filled in the prescribed format. It is possible to amend an existing IEM if it has been filed after July 1, 1998. No amendment can be made to IEM filed before June 30, 1998. If any changes are required, a fresh memorandum has to be filed.

All industrial undertakings subject to compulsory industrial licensing are required to submit an application in Form FC-IL to the EAU of the SIA, Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Udyog Bhawan, New Delhi - 110011.

All industrial undertakings whether or not exempt from compulsory industrial licensing, are statutorily required to submit monthly production return in the prescribed proforma every month. This should reach the Industrial Statistics Unit (ISU) of the Department positively by the 10th of the following month.
 

2.2. Locational Restrictions

There are no locational restrictions, as regards setting up of manufacturing units, or industrial undertakings. But if the industrial undertakings are located in cities with population of more than a million (as per the 1991 census), then the proposed location should be at least 25 KM away from the Standard Urban Area limits of that city, unless they are located in designated "industrial units". However, Electronics, Computer software, Printing and any other industry that may be notified as "non-polluting industry", are exempt from such locational restrictions. Relaxation in the aforesaid locational restriction is possible if an industrial license is obtained as per the notified procedure. But these industrial units continue to be regulated by local zoning and land use regulations as well as environmental regulations.

2.3. Environmental Clearance

Industrial units are required to obtain Statutory clearances relating to Pollution Control and Environment for setting up an industrial project from the Ministry of Environment, Government of India. This list of 31 projects includes industries like petro-chemical complexes, petroleum refineries, cement, thermal power plants, bulk drugs, fertilizers, dyes, paper etc. However, if investment in the project is less than Rs. 1 billion, such Environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries. Setting up industries in certain locations considered ecologically fragile (e.g. Aravalli Range, coastal areas, Doon valley, Dahanu, etc.) are guided by separate guidelines issued by the Ministry of Environment and Forests.

  1. FOREIGN DIRECT INVESTMENT

FDI is freely allowed in all sectors including the services sector, except where the existing and notified sectoral policy does not permit FDI beyond a ceiling. Income from such investments is free from any restrictions on repatriation. FDI for virtually all items/activities can be brought in through the automatic route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government Approval. The guidelines laying the procedure for FDI approval by the SIA/FIPB are stated in Annexure-III of the IP. The sector specific guidelines for FDI and Foreign Technology Collaborations are stated in Annexure-IV of the IP. Kindly refer to the FEMA section for details.

  1. New Companies

FDI up to 100% or up to the limits prescribed under the sectoral policy/caps is permitted for all items/activities under the automatic route except the following, for which permission from the Government will have to be sought by making an application to the SIA/FIPB: -

  1. All proposals that require an Industrial License which includes (i) the item requiring an Industrial License under the Industries (Development and Regulation) Act, 1951; (ii) foreign investment being more than 24% in the equity capital of units manufacturing items reserved for small scale industries; and (iii) all items which require an Industrial License in terms of the locational policy notified by Government under the New Industrial Policy of 1991.
     

  2. All proposals in which the foreign collaborator has a previous venture/tie up in India. This restriction will not apply to investments made in the IT sector or to investments made by Multilateral Financial Institutions like ADB, IFC, CDC, DEG, etc.
     

  3. All proposals relating to acquisition of shares in an existing Indian company in favour of a foreign/NRI/OCB investor.
     

  4. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted and/or whenever any investor chooses to make an application to the FIPB and not to avail of the automatic route.

Investment in Public Sector Units as also for EOU/EPZ/EHTP/STP units would qualify for the Automatic Route. Investment under the Automatic Route shall continue to be governed by the notified sectoral policy and equity caps and RBI will ensure compliance of the same. Any change in sectoral policy/caps shall be notified by the Secretariat for Industrial Assistance (SIA).

  1. Existing Companies

All existing companies can also avail of the automatic route for FDI/NRI/OCB investment. For existing companies with an expansion programme, the additional requirement are that (i) the increase in equity level must result from the expansion of the equity base of the existing company without acquisition of existing shares by NRI/OCB/foreign investors, (ii) the money to be remitted should be in the sector(s) under the automatic route. Otherwise the proposal would need Government approval through the FIPB.

For existing companies without an expansion programme, the additional requirements for eligibility for automatic route are (i) that they are engaged in the industries under automatic route (including additional activities covered under the automatic route regardless of whether the original activities were undertaken with Government approval or by accessing the automatic route), (ii) the increase in equity level must be from expansion of the equity base and (iii) the foreign equity must be in foreign currency.

The automatic route for FDI and/or technology collaboration would not be available to those who have or had any previous joint venture or technology transfer/trade mark agreement in the same field in India. This restriction will not apply to investments made in the IT sector or to investments made by Multilateral Financial Institutions like ADB, IFC, CDC, DEG, etc.

Investors are required to notify the Regional Office concerned of the RBI of receipt of inward remittances within 30 days of such receipt and file required documentation within 30 days of issue of shares to Foreign Investors. This facility is available to NRI/OCB investment also.

Foreign Investment Policy for Trading Activities

FDI up to 51% is permitted for trading activity under the automatic route, and beyond 51% by the Government through FIPB. For approval through the automatic route, the requirement would be that the activity should primarily be export activity and the undertaking concerned should be an export house, trading house, super trading house or a star trading house registered under the provisions of the Export and Import policy in force.


However, under the non-automatic or Government route: -

  1. 100% FDI is permitted in case of trading companies for the following activities: -

  • exports;

  • bulk imports with export/ex-bonded warehouse sales;

  • cash and carry wholesale trading;

  • other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.

  1. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: -

  1. Companies for providing after sales services (that is not trading per se).

  2. Domestic trading of products is permitted at the wholesale level by such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India.

  3. Trading of hi-tech items/items requiring specialised after sales service.

  4. Trading of items for social sector.

  5. Trading of hi-tech, medical and diagnostic items.

  6. Trading of items sourced from the small-scale sector, which based on technology provided and laid down quality specifications, a company can market that item under its brand name.

  7. Domestic sourcing of products for export.

  8. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.

  9. FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian public in 5 years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

Investments By NRI
 

NRIs are granted some additional concessions under FDI route. They are allowed to invest in housing and real estate development sector, in which foreign direct investment is not permitted. They are allowed to hold even 100 per cent equity in civil aviation sector in which otherwise foreign equity only up to 40 per cent is permitted.

  1. FOREIGN TECHNOLOGY AGREEMENTS

Foreign technology collaborations for induction of know-how are permitted either through the automatic route under delegated powers exercised by the RBI, or by the Government. However, automatic route will not be available to the following, and Government approval will be required in case of: -

  1. Proposals attracting compulsory licensing.
     

  2. Items of manufacture reserved for the small scale sector.
     

  3. Proposals involving any previous joint venture, or technology transfer/trademark agreement in the same or allied field in India. The definition of "same" field would be as per 4 digit NIC 1987 Code and 3 digit NIC 1987 Code.
     

  4. Extension of foreign technology collaboration agreements (including those cases which may have received automatic approval in the first instance).
     

  5. Proposals not meeting any or all of the parameters for automatic approval.

Further, there are separate provisions for automatic approval for EOU/EHTP/STP units.

Foreign Technology Transfer Agreements
 

Under the automatic route payment of technical know-how fees is permitted in case of foreign technology collaboration agreements if (i) the lump sum payment does not exceed US $ 2 Million; (ii) royalty payable is limited to 5 per cent for domestic sales and 8 per cent for exports. There is no time limit upto which payments can be made. (The aforesaid royalty limits are net of taxes and are calculated according to standard conditions). Also payment of royalty up to 8% on exports and 5% on domestic sales by wholly owned subsidiaries to offshore parent companies is allowed under the automatic route. There are standard formulas according to which payments can be made. Please see relevant paras in FEMA section.

The items of foreign technology collaboration which are eligible for approval through the automatic route, and by the Government are technical know how fees, payment for design and drawing, payment for engineering service and royalty. Payments for hiring of foreign technicians, deputation of Indian technicians abroad, and testing of indigenous raw material, products, and indigenously developed technology in foreign countries are governed by separate RBI procedures and rules and are not covered by the foreign technology collaboration approval. Similarly, payments for imports of plant and machinery and raw material are also not covered by the foreign technology collaboration approval.

Use of foreign trademarks and foreign brand names


Under the automatic route payment of royalty up to 2% for net exports sales and 1% for net domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer. Royalty on brand name/trade mark shall be paid as a percentage of net sales, viz., gross sales less agents'/dealers' commission, transport cost, including ocean freight, insurance, duties, taxes and other charges, and cost of raw materials, parts, and components imported from the foreign licensor or its subsidiary/affiliated company.

  1. Small-Scale Industrial Undertakings

    An industrial undertaking is defined as a small-scale unit if the investment in fixed assets in plant and machinery does not exceed Rs 10 million. The small-scale units can get registered with the Directorate of Industries/District Industries Centre in the State Government concerned. Such units can manufacture any item including those notified as exclusively reserved for manufacture in the small-scale sector. Small-scale units are also free from locational restrictions, except those prescribed by local zoning and land use regulations.

    A small-scale industrial unit is free from obtaining environmental clearances, but if it manufactures or produces a chemical or a by-product recoverable through pollution control measures it needs to obtain an Industrial License for such reserved items. In such cases export obligation will not be made mandatory.

    An industrial undertaking either foreign or domestic is not permitted to hold more than 24 per cent equity in the paid up capital of a small-scale industrial undertaking. But if foreign investment increases beyond 24 per cent in a small-scale unit, which manufactures small scale reserved item(s), an industrial license carrying a mandatory export obligation of 50 per cent would need to be obtained, also it will have to give up it small-scale status.

    Manufacture of items reserved for the small-scale sector can also be taken up by non small-scale units, if they apply for and obtain an industrial license. In such cases, it is mandatory for the non small-scale unit to undertake an export obligation of 50 per cent. In addition, if the equity holding from another company (including foreign equity) exceeds 24 per cent, even if the investment in plant and machinery in the unit does not exceed Rs. 10 million, the unit loses its small-scale status. An IEM is required to be filed in such a case for de-licensed industries, and an industrial license is to be obtained in the case of items of manufacture covered under compulsory licensing.

    A small-scale unit manufacturing small scale reserved item(s), on exceeding the small-scale investment ceiling in plant and machinery by virtue of natural growth, needs to apply for and obtain a Carry-on-Business (COB) License. No export obligation is fixed on the capacity for which the COB license is granted. However, if the unit expands its capacity for the small scale reserved item(s) further, it needs to apply for and obtain a separate industrial license. The application for COB license should be submitted in prescribed form "EE" to the SIA, Department of Industrial Policy and Promotion.
     

  2. 100% Export Oriented Units, Units in Export Processing Zones And Units in Special Economic Zones

    A special package of incentives and facilities, such as duty free imports of all types of capital goods, raw material, and consumables, in addition to tax holidays against export, is available to 100% Export Oriented Units (EOU) and units in the Export Processing Zones (EPZ) and Special Economic Zones (SEZ).

    Automatic approval to projects of EOU/EPZ/SEZ is granted where: -

  1. items do not attract compulsory licensing or falls in the services sector except IT enabled services;
     

  2. where the location is in conformity with the prescribed parameters;
     

  3. the units undertake to achieve exports and value addition norms as prescribed in the Export and Import Policy in force;
     

  4. where the unit is amenable to bonding by customs authorities; and
     

  5. the unit has projected the minimum export turnover, as specified in the Handbook of Procedures.

FDI upto100% is allowed through the automatic route for all manufacturing activities in Special Economic Zones (SEZs) either by way of a branch/unit or as a Joint Venture or as a WOS, except for the following activities: -

  1. arms and ammunition, explosives and allied items of defence equipments defence aircraft and warships;

  2. atomic substances;

  3. narcotics and psychotropic substances and hazardous chemicals;

  4. distillation and brewing of alcoholic drinks; and

  5. cigarettes/cigars and manufactured tobacco substitutes.

All proposals for FDI/NRI investments in EOU/EPZ/SEZ units qualify for approval through Automatic Route subject to the sectoral norms. Proposals not covered under the automatic route would be considered and approved by FIPB. Also conversion of existing Domestic Tariff Area (DTA) units into EOU is permitted under automatic route, if the DTA unit satisfies the parameters mentioned above and there is no outstanding export obligation.

  1. Electronic Hardware Technology Park, Software Technology Park Schemes

    In order to provide impetus to the electronics industry, to enhance its export potential and to develop an efficient electronic component industry, Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes offer a package of incentives and facilities like duty free imports on the lines of the EOU Scheme, deemed exports benefits and tax holidays.

    Automatic approval is available to all proposals in respect of STP and EHTP projects if: -

  1. The items do not attract compulsory licensing;

  2. The location is in conformity with the prescribed parameters;

  3. The export obligation laid down in the respective EHTP scheme or STP scheme is fulfilled;

  4. The unit is amenable to bonding by the Customs, and all the manufacturing operations are carried out in the same premises and the proposal does not envisage sending out of the bonded area any raw material or intermediate products for any other manufacturing or processing activity.

All proposals for FDI/NRI investments in EHTP/STP units are eligible for approval through Automatic Route subject to conditions applicable to new companies in clause 3(a) above.

All proposals which do not meet any or all of the parameters for automatic approval need to be considered and approved by the Government.

Application, in the prescribed form, should be submitted to the concerned Directors of STP or the Designated Officers of EHTP for automatic approval, and to the SIA for Government approval.

  1. Industrial Parks And Industrial Model Towns

FDI up to 100% is permitted under automatic route for setting up of Industrial Park/Industrial Model Town in the country. To encourage investment in this sector, 100 per cent income tax exemption for 10 years within a block of 15 years is also granted for the Industrial Parks set up during the period 1.4.1997 to 31.3.2009.

All proposals which do not meet any or all of the parameters for automatic approval need to be considered and approved by the Government.

Application, in Form IPS-1, should be submitted to the SIA for Government approval. 


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