UAE's Outbound Investment in India
'Foreign Investment is what keeps the whole show going.'
- Patrick Barkey
Think about a predicament in which a bank would charge its customers a fee amounting to two-thirds of your deposits for the purpose of handling the finances. Bizarre, some might say! However, this may not sound so odd in the oil industry. UAE has never failed to top the international headlines with its glamor and records. However, they stunned the planet by striking a one-of-a-kind deal with India whereby the Abu Dhabi National Oil Company (ADNOC) agreed to store about 5.33 million tons of crude oil in India's strategic storage. However, the catch lies in the fact that the UAE would provide two-thirds of the crude oil stored to India as a consideration for storing its oil. India, which is 79% dependent on imports to meet crude oil needs, welcomed this agreement with open arms and had since then commenced the building of the underground storages in Andhra Pradesh and Karnataka to store crude oil.
The cultural, traditional and economic ties between India and UAE are centuries old. The expatriate Indian community constitutes the largest migrant group in the UAE. Therefore, it is no surprise that the UAE-India relations go beyond economic, trade and investment platform, primarily due to an overwhelming population of expatriate Indians in UAE, ensuring a steady inflow of remittances from the UAE into India. Further, to cater to the large Indian diaspora within the UAE, there are over 950 direct weekly flights between the UAE and India, a number that evidences the nexus and economic ties between the two countries. Further, and to benefit and capitalize from such nexus, in 2013, Jet Airways and Etihad Airways signed an eight billion dollar (USD 8 billion) agreement, under which Etihad Airways invested USD 379 million in Jet Airways for a 24% stake in its shareholding.
The above clearly evidences that the two countries are making constant endeavors to take their investment, trade, and commerce understanding to new heights. The total UAE investments in India approximates to USD 8 billion, including USD 2.89 billion in the form of foreign direct investments (FDI). UAE investments in India primarily concentrate in five sectors: construction (16%), energy (14%), metallurgy (10%), services sector (10%), computer software and hardware (5%). The other areas include petroleum products, precious metals, gems and jewelry, minerals, chemicals, wood and wood products.
The Indian Government has been making herculean efforts, to promote ease of doing business in India and facilitating investment, by making the regulatory and operational landscape of India lucrative and attractive to foreign investors. Further, the Indian government launched the ‘Make in India’ initiative under which FDI policy for 25 sectors was liberalized, and foreign equity caps in various sectors along with other norms and procedures were relaxed.
Wisely, Indian states have launched their respective conferences to attract investments from foreign as well as domestic investors. Vibrant Gujarat Investors’ Summit in the state of Gujarat, Resurgent Rajasthan in the state of Rajasthan and Invest Madhya Pradesh in the state of Madhya Pradesh substantiate that these 'states' are leaving no stone unturned to entice investors in the Indian market. Further, Indian states also compete with one another by giving tax incentives, single-window clearances, and better infrastructure to attract investors.
Impediments in FDI Growth Plans
While the Indian government has made several endeavors to increase the inflow of investments in India, it is also taking prudent steps to eliminate any concerns and reservations regarding the manner, route, and treatment of foreign inflow of investment in India. Accordingly, India and Mauritius signed a protocol (Protocol) in 2016 to amend their tax treaty which took the tax world by storm. The Protocol gives India the right to tax capital gains on transfer of Indian shares acquired on or after 1 April 2017. Existing investments will stand exempted from the amendment. Investment through such countries has come under scrutiny in India amidst concerns about round tripping, whereby Indian investors and companies have routed their money through countries such as Mauritius to reduce tax liabilities.
This amendment to the tax loophole could hit UAE firms planning to invest in India through Mauritius. However, India needs to be cautious of the impact of this development on foreign inflows, at least in the near term, due to the surfeit of companies that has invested in India through Mauritius. Therefore, policy makers will need to assess the competitiveness of India’s taxation system vis-à-vis other competitive economies, so no one is getting the undue benefit and also since India-Mauritius tax treaty will no longer be beneficial for capital gains on the sale of shares, will the UAE companies start investing from their home country.
Another matter of concern, which needs to be addressed at the earliest, is the unresolved tax issue before ADNOC can begin storing oil at India’s strategic storage. Karnataka government has not yet agreed on waiving value added tax on the crude oil imported for the strategic storage, which UAE wants to use to stock oil when prices are low and thereby supply to its customers, when the rates are good.
Regulatory Framework in UAE and India
To facilitate an unhindered exchange of investment and capital, the UAE and India signed the Bilateral Investment Promotion and Protection Agreement (BIPPA) in 2013, the agreement on reciprocal tax exemption for national carriers in 1989, Double Taxation Avoidance Agreement (DTAA) on income and capital for sovereign funds in 1993, as amended in 2007. It appears that the essential reason for executing a number of agreements between the two countries was to promote cooperation in key sectors and extend mutual assistance in a number of sectors including civil and commercial matters, trade and economy.
Moreover, investments by UAE nationals and entities, including sovereign wealth funds, are protected under international law as a result of such bilateral and multilateral treaties entered into by the UAE. UAE bilateral treaties ensures that; (a) UAE nationals; (b) companies or enterprises constituted or organized under UAE law; and (c) the UAE Government, are adequately protected and their rights are given effect when they have made an investment in another country.
At present in India, the FDI framework is governed by the Foreign Exchange Management Act (FEMA), the extant FDI Policy, effective from 7 June 2016 and Press Notes released by the Department of Industrial Policy and Promotion (DIPP) (collectively referred to as the Legal Framework). Foreign investment is considered as FDI only if the investment is made in equity shares, fully and mandatorily convertible preference shares and debentures. Further, Indian companies may receive FDI under (i) the automatic route - where FDI is allowed without prior approval from the Government or the Reserve Bank of India (the RBI); or (ii) the government route or approval route - where FDI would require a prior approval of the Government.
In accordance with the Legal Framework, the types of investors who can invest in Indian companies by way of FDI are individuals, foreign venture capital investors, pension or provident fund, financial institutions, foreign trust, sovereign wealth funds, NRIs or PIOs, foreign, private equity funds and partnership or proprietorship firms. Further, the entities that may be engaged for investments are Indian company, partnership firms or proprietary concerns, venture capital funds, limited liability partnerships and also liaison office, branch office or project office. These offices can undertake only the activities specified by the RBI. Approvals are granted under the government and RBI route. Automatic route is also available to branch offices or project offices that satisfies certain conditions.
It is imperative to note that the Government of India has constantly revised the FDI policy with the view to adopt a pro-investment approach in a phased manner. 100% FDI under the automatic route has been permitted in sectors including but not limited to construction and development projects, more particularly, norms pertaining to minimum area, minimum capitalization and repatriation of funds or exit from the project have been relaxed. However, FDI is prohibited under the government route as well as the Automatic Route in lottery, gambling, betting, business of chit fund, nidhi companies , real estate business (except development of townships, construction of residen¬tial or commercial premises, roads or bridges), trading in Transferable Development Rights (TDRs), manufacture of cigars, cheroots, cigarillos and cigarettes of tobacco or its substitutes and other activities that are not open to private sector investment like atomic energy.
Exit Options and Repatriation of Funds
Repatriating earnings or funds out of India can be done in numerous ways, but it is essential to consider the tax and regulatory issues around each exit. The earnings can be classified in the following manner:-
I. Dividends – Dividends that are paid by the companies in India to their shareholders’ on the shares held by them. Payment of dividend on equity shares is a straightforward way of extracting earnings for a foreign investor holding an equity interest. However, the dividend distribution tax borne by the company distributing such dividend may not necessarily receive credit against any direct tax payable by the foreign investor who receives such dividend in its home jurisdiction.
II. Buyback - Buyback of securities provides an investor the ability to extract earnings as capital gains and consequently take advantage of tax treaty benefits. However, buybacks in India have certain restrictions and thus need to be strategically planned. For instance, a company may not buy back more than 25% of its outstanding shares in a year.
III. Redemption - Preference shares and debentures can both be redeemed for cash. While redemption is perhaps the most convenient exit option for investors, optionally convertible securities, which are effectively redeemable, have been classified as ECB. However, this entails greater restrictions.
IV. Initial Public Offer (IPO) - An IPO is the first offer for sale of the shares of a company to the public at large via listing the company’s stock on a stock exchange. While an initial public offering may usually be regarded as a long term exit option, it is also usually included as an exit option in transaction documents as it may provide investors with large returns.
V. Sale proceeds - AD Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and a non objection certificate or tax clearance certificate from the Income Tax Department has been produced.
VI. Interest - Interest on fully, mandatorily & compulsorily convertible debentures are also freely repatriable without any restrictions (net of applicable taxes).
VII. Investments - Investments in the construction development sector are subject to lock-in period of 3 years.
India has already marked its presence as one of the fastest growing economies of the world. Consequently, major UAE companies have made investments in, and undertaken projects jointly with, Indian companies with the aim to capitalize on the Indian market's economic and foreign trade growth of recent years. Moreover, the economic relationship is further strengthened, given the fact that UAE is believed to be one of the most preferred investment locations for Indians, both individuals as well as corporates. Indians are the biggest investors in the resurging real estate sector of Dubai, accounting for a total investment of around UAE Dirhams 18 billion (USD 4.9 billion) in 2013.
In these circumstances it appears that UAE-India relations continue to grow, and the achievements made as a result have helped the two countries gain advanced cooperation status, in terms of regional and international relationships, especially since the UAE's policy, is based upon strong foundations, such as respect for international laws and cooperation at the global level, which principles have always been reciprocated by India.