Focus on: Doing business in India

This month we focus on doing business in India.

The following is an extract from a guide to doing business in India. It covers the business environment, and key employment laws.

Click here to read the full guide, which also includes :

  • Information on forming a company
  • Financing a company, opening a bank account
  • Utilising office space
  • Immigration controls
  • Contracting with third parties
  • Regulatory compliance
  • An overview of taxation
  • How to protect key assets and employees.

Produced in partnership with LVV Iyer and Lakshmi Visweswaran of LVV Iyer & Associates

Introduction

India, the world’s largest democracy with a population of over 1.2 billion, has seen a robust growth trajectory since it opened its doors to the global market in 1991. With a stable political environment, an independent judiciary, liberal investment policies, cost competitiveness and a large pool of skilled workforce fluent in English, India today is a preferred investment destination for many global players and business houses.

The 2012 AT Kearney Foreign Direct Investment Confidence Index has ranked India as the second most attractive destination for foreign direct investment. As per the World Bank report Doing Business 2013, India also ranks amongst the top 50 improvers and also the top improver in its region since 2005, which India achieved by focusing on simplifying and reducing the cost of regulatory processes in such areas as starting a business, paying taxes and trading across borders.

There are various options available to a foreign company to start a business in India. This guide highlights some of the key areas that a new business will need to address before it begins to operate in India. This guide is not to be looked upon as an authoritative treatise and it is imperative that specific Indian legal advice be sought before setting up and running a business in India.

In India, businesses are subjected to two types of laws—laws enacted by the Parliament, which are applicable across the country, and laws enacted by individual states, which are applicable only within the state concerned.

The business environment

India is a federal state with a parliamentary form of democracy. The constitution of India is the supreme law of the country. In India, at the central level, laws are formulated by the parliament, while at the state level, it is the Legislative Assemblies and Councils. Most of the primary laws related to businesses are enacted at the central level. Some of the key regulations that businesses in India need to be aware of are:

  • Companies Act 1956—relates to formation, financing, functioning and winding up of companies
  • Indian Contract Act 1872—the governing legislation for contracts, which lays down the general principles relating to formation, performance and enforceability of contracts and the rules relating to certain special types of contracts like indemnity and guarantee, bailment and pledge, as well as agency
  • Industrial Disputes Act 1947—main legislation for adjudication and settlement of all industrial disputes
  • Competition Act 2002—ensures a healthy and fair competition in the market economy
  • Arbitration and Conciliation Act 1996—prime legislation relating to domestic arbitration, international commercial arbitration and enforcement of foreign arbitral awards
  • Foreign Exchange Management Act 1999 (FEMA)—law relating to foreign exchange that facilitates external trade and payments and promotes orderly development and maintenance of the foreign exchange market in India
  • The Securities and Exchange Board of India (SEBI) is the central body that regulates the Indian capital markets and protects the interests of investors.

The Confederation of Indian Industry (CII) is a non-governmental body that works to create and sustain an environment conducive to the growth of industry in India.

Special Economic Zones (SEZs) established under the Special Economic Zones Act 2005 provides for the establishment of special economic zones in the country. These economic zones have been established to promote industrialisation, foreign investment and economic growth. Units set up in these areas enjoy tax rebates, fiscal incentives, simplified procedures and single window clearance, to name a few.

The Indian judicial system, one of the oldest legal systems in the world, incorporates the common law system along with the statutory law and the regulatory law. The Supreme Court is the apex body in the judicial hierarchy, which, along with the High Courts, has the power of judicial review. Thus legislative and executive actions are subject to judicial scrutiny and the judiciary can strike down any action that is ultra vires the constitutional provisions. Indian courts interpret the laws by applying them to the specific cases brought before them. Thus, when trying to understand any piece of legislation, it is necessary to also look into various decisions given by the Indian courts in respect of such legislations.

Key employment laws

An employee’s employment rights arise mainly from central and state legislation and regulations. They also arise to some extent from an employment contract or the collective bargaining agreement between labour unions and employers.

Equal treatment

Article 15 of the Constitution of India prohibits the state from discriminating on the grounds of religion, race, caste, sex and place of birth in various day-to-day activities, including when it comes to providing equal employment opportunities.

The Equal Remuneration Act 1976 provides for the payment of equal remuneration to men and women workers for same or similar nature of work. Under this law, no discrimination is permissible in recruitment and service conditions, except where employment of women is prohibited or restricted by law.

The Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act 1995 (PWD Act) provides equal opportunities in education, employment, social security and an unbiased atmosphere for the disabled.

Transfers of undertakings

Under the Industrial Disputes Act 1947, when the ownership or management of an undertaking is transferred, whether by an agreement or by operation of law, notice and compensation has to be given to every worker who has been in continuous service of the undertaking for at least one year. The payment of compensation, however will not be applicable where employment has not been interrupted, the terms and conditions of service are as favourable as they were before such transfer and the acquirer has committed to pay the employees their dues.

Termination

The termination process in the case of white collar jobs is dependent on the company policy and the terms of the employment contract. Normal practice is to provide for a notice period of 30–90 days or salary in lieu of the notice period for immediate termination. Misconduct, inefficiency, dereliction of duty, breach of the employment contract on the part of the employee or mismanagement or change of business on the part of the employer could be some of the grounds for termination. The practice of 'hire and fire' is not encouraged in India. Thus, termination without valid grounds will not be upheld by Indian courts.

In case of factories, the Industrial Disputes Act 1947 and the Industrial Employment (Standing Orders) Act 1946 lay down the conditions of employment as also the conditions to be complied with before terminating/laying off/retrenching a worker. The shops and establishment acts of individual states lay down conditions of work for employees in shops and commercial establishments.

Accidents and compensation

The Workmen’s Compensation Act 1923 provides that compensation shall be provided to a workman for any injury suffered during the course of his employment or to his dependants in the case of his death. The Act provides for the rate at which compensation shall be paid to an employee.

Medical and retirement benefits

Employees' State Insurance Scheme of India under the Employees’ State Insurance Act 1948, is an integrated social security scheme tailored to provide protection to workers in the organised sector and their dependants in contingencies, such as sickness, maternity or death and disablement due to an employment injury or occupational disease. This is applicable to all establishments employing ten or more persons. The employee contribution towards the scheme is 1.75% of wages and the employer’s contribution is 4.75%. All employees drawing wages up to INR 15,000 per month are covered by this scheme.

The Maternity Benefit Act 1961 regulates employment of women in certain establishments for a certain period before and after childbirth and provides for maternity and other benefits. The employer is required to pay maternity benefits and/or medical bonus and allow maternity leave of 12 weeks and nursing breaks.

The Employees' Provident Funds and Miscellaneous Provisions Act 1952 seeks to ensure the financial security of the employees in an establishment by providing for a system of compulsory savings. The Act provides for establishments of a contributory Provident Fund in which employees’ contribution shall be at least equal to the contribution payable by the employer. Minimum contribution by the employees shall be 10–12% of the wages. This amount is payable to the employee fully after retirement and could also be withdrawn partly for certain specified purposes.

The Payment of Gratuity Act 1972 provides for payment of gratuity to an employee who has rendered continuous service of five years or more on their termination of employment, superannuation, retirement or resignation, at the rate of 15 days for every completed year of service. Under this Act, the maximum gratuity amount payable on that date is INR 10,00,000. In case of death of an employee, the gratuity is paid to their nominee irrespective of the service period.

The Payment of Bonus Act 1965 imposes a statutory liability upon the employers of every establishment covered under the Act to pay bonuses to their employees who have worked for no less than 30 working days during the year. However, in respect of a newly-established company, such liability to pay bonuses during the first five financial years after the accounting year in which sales or services have commenced, arises only in the year in which profits are earned. Bonuses are based on the profits earned by the establishment during the accounting year. The minimum rate is 8.33% of the basic salary and the cap is 20%. All employees drawing wages up to INR 10,000 per month are eligible for a bonus.

To find out more about what LexisNexis does for in-house lawyers, click here.

Filed Under: Analysis

Relevant Articles
Area of Interest