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Canada-India Joint Study Group Report: Exploring the Feasibility of a Comprehensive Economic Partnership Agreement

Chapter 4: Investment

4.1 Direct Investment Profiles

India's Foreign Direct Investment in Canada

India is increasingly becoming an important source of global foreign direct investment (FDI). Key factors behind this rise include: the robust growth and dynamism of its economy; progressive liberalisation of outward investment policies; strong corporate profits; substantial increase in international reserves; rapid increase in the competitive capabilities of Indian multinational enterprises in manufacturing and services; and the need for market access for exports, for acquisition of international brand names and for access to technology and resources.

India's outward FDI in Fiscal Year 2008 was US$22.1 billion.14 This high level of outbound FDI was an outcome of various liberalisation measures in line with progressive policies to support India's overseas investment over time. Outflow reached 2007-08 levels due to investment in new projects, expansion of existing units, as well as buying assets and companies across the sector. Indian companies are acquiring international firms in an effort to acquire new markets and maintain its growth momentum, buy cutting-edge technology, develop new product mixes, improve operating margins and efficiencies, and take worldwide competition head-on.

Recent outward FDI from India has targeted resource rich and extractive sectors (oil and gas, steel, aluminium) and strategic sectors (chemicals, pharmaceuticals, banking, automobile and components, information and communications technology/software).

As for Canada, it remains one of the world's most dynamic economies and a destination of choice for foreign investment. The Economist Intelligence Unit ranked Canada as the best place for doing business among G7 countries over the next five years (2010-2014), and the World Bank has ranked Canada as the G7 country with the most streamlined business set-up processes.15 Furthermore, Canada's stable and well-capitalised financial system, which was ranked by the World Economic Forum as the soundest in the world,16 is supported by one of the world's most effective national regulatory frameworks.

Although foreign investment is difficult to track due to the complex international networks through which these investments flow, the most recent figures clearly indicate that India's FDI in Canada is on a sharp upward trend. The stock (level) of Indian FDI in Canada, according to Statistics Canada, reached a record-high US$2.8 billion, at year-end 2009. In Canadian dollar terms, it represents an increase of 11.4% from the previous year, relatively much faster than the 1.6% growth of total FDI stock in Canada in 2009.17 In fact, Indian FDI stock in Canada in the last decade experienced a significant jump - rising from a US$12 million in 1999 to its current level of US$2.8 billion in 2009. These trends have resulted in raising India's importance to being Canada's 5th largest foreign investor from the Asia/Oceania region, and 13th globally. Despite these positive developments, India accounted for 0.5% of total FDI in Canada in 2009. Hence, there is considerable scope and opportunity to engage Indian businesses to invest in Canada in the years ahead, especially in priority sectors that have been identified by Canada for FDI promotion.

The official definition of FDI used by Statistics Canada captures only the country of first destination and this measure can suffer from the use of intermediaries. Alternative sources of information, such as public announcements and media reports, can complement FDI figures and give a broader picture of Indian interests and overall assets in Canada. On the basis of this second source of information, some of the more significant Indian investments in Canada in the past few years included: Essar Steel Ltd., which acquired the Canadian steel manufacturer Algoma Steel in 2007 for US$1.7 billion; Videsh Sanchar Nigam Ltd. which purchased Teleglobe in 2007; Hindalco Limited, of the Aditya Birla Group, which acquired aluminium producer Novelis Inc. for US$3.24 billion in the same year; and Jubilant Organosys, which purchased Montreal-based Draxis Health for US$239 million in 2008.

Other Indian companies with substantial operations in Canada include Tata, Satyam Computer Services, Wipro, Infosys and Aditya Birla Group. Furthermore, Tata Steel Global Mineral Holdings, the subsidiary of Tata Steel Ltd, has entered a joint venture (JV) with Canada's New Millennium Capital (NML) and LabMag for developing a direct shipment ore (DSO) project in Canada in 2009.

Canada's Foreign Direct Investment (FDI) in India

India has been increasingly opening its doors to foreign investment over the last two decades, notably by modifying its regulatory environment to allow the establishment of wholly-owned subsidiaries as well as participation of foreign investors in Indian-based companies. This trend has been accelerating in the last few years, with foreign companies enjoying the rights to set up branch offices, representative offices, repatriation of profits, and also carry out outsourcing activities in terms of software developmental programmes in India. However, certain sectors such as the financial and insurance industries remain relatively closed to foreign investment. Simultaneously, the Indian government, as well as a number of Indian States, have been extremely active in trying to attract foreign investment by creating a number of incentive measures such as Special Economic Zones (duty-free zones), fast-track approval mechanisms and infrastructure development for industrial and technology parks, among other initiatives.

Foreign direct investment is considered to be the most attractive type of capital flow for emerging economies as it is expected to bring latest technology and enhance production capabilities of the economy. High inflows indicate India as an attractive investment destination as a consequence of its increasingly liberalised investment climate, stable and sound economic and political base, and opportunities for economic growth, while capital investment abroad reflects the growing global competitiveness of the Indian corporate sector. The two-way flow of FDI, therefore, means that while the world is taking note of India's market potential, Indian companies are also constantly looking for synergistic acquisitions abroad.

Foreign manufacturers benefit from incentives when establishing part of their operations in India to supply the market in segments such as consumer goods, automotive, heavy manufacturing, to name a few.

Furthermore, new opportunities for investment in the natural resources sector continue to grow, through effective de-regulation. The oil and gas sector has been very active in recent years in attracting foreign companies to develop onshore and offshore assets - a good number of Canadian companies are participating in this development. It is expected that the mines and mineral sector will present similar opportunities in the months to come.

The UN Conference on Trade and Development reports that India witnessed a growth of 85.1% in FDI inflows in 2008, which was the highest growth in FDI inflows globally. The total flows increased from US$25.1 billion in 2007 to US$46.5 billion in 2008. This is despite a 14.5% decline in global FDI inflows from US$1,940.9 billion in 2007 to US$1,658.5 billion in 2008.18

Canada's outward FDI in 2009 decreased by US$42.9 billion and stood at US$566.9 billion according to Statistics Canada data, (which in Canadian dollar terms represents a decline of 7.5%), due primarily to the appreciation of the Canadian dollar against most foreign currencies. Over US$37.3 billion of that investment (or 6.5%) was destined for the Asia/Oceania region, with the stock increasing 2.2% over 2008 in Canadian dollar terms. Canada's primary investments abroad target sectors such as finance and insurance, manufacturing, mining, oil and gas and management services.

Canada's FDI in India has increased during the past decade. According to Canadian data sources, in 2009 Canadian direct investment into India stood at US$574 million, a substantial increase from the US$129 million invested in India in 2000. At the end of 2009, India stood as the 11th largest recipient of Canadian FDI in Asia/Oceania and the 42nd globally. However, despite recent increases, India's share of global Canadian direct investment abroad amounted to a mere 0.1%.

According to Indian statistics, Canadian cumulative FDI in India was US$310.44 million during January 2000 to February 2010.19 Canadian FDI surged by US$126.39 million in 2008, amounting to a cumulative Canadian FDI in India to US$239.13 during the period of April 2000 to December 2008. Despite global decline in FDI inflows, and Canadian direct investment into India during April 2000 to December 2009 was US$284.31 million, up by US$45 million. Canadian FDI is almost 0.28% of total FDI inflows into India during this period. On this basis, Canada stands as 24th largest investor in India.

The Indian economy has attracted many Canadian companies, including BCE, SNC Lavalin, RIM, McCain Foods, CGI, CAE, Sun Life, MDS Nordion, Scotiabank, Bombardier, CAE Electronics, R. V. Anderson Associates Ltd., M. A. Jans & Associates (MAJ), Tele-Direct International and Deloitte & Touche LLP Canada. Recent key investments include Bombardier opening a new US$38 million plant in the state of Gujarat in November 2008 producing metro rail coaches; Canadian flight simulator leader, CAE Inc., in cooperation with Indian-owned Hindustan Aeronautics Limited, beginning construction of a US$57 million flight helicopter simulation centre near Bangalore in June 2009, servicing both civil and military pilots; and a consortium of companies, including SNC Lavalin, being awarded a contract worth US$2.3 billion to build Mumbai's newest metro line.

Though Canadian companies are enjoying increasing success in the Indian market, Canada has a modest presence in India in terms of investment. So far, their major thrust has been in five areas: power & energy equipment & services; oil and gas; environment products & services; telecommunications & information technology; and the financial sector, including insurance.

Growth of service sectors sales reflect Canadian strength in traditional areas such as consulting and engineering, as well as a growing Canadian presence in fields such as education, software development, and financial services. India's rapidly expanding economy and the government's continued commitment to liberalising its investment regime will provide significant opportunities for Canadian investors in a variety of sectors including financial services, infrastructure, information technologies, life sciences and natural resources.

4.2 Investment Environment


A key priority of the Government of Canada is to attract and expand FDI to enhance productivity, support long-term economic growth and increase prosperity for all Canadians. Canada's advantageous geographic location and status as a North American Free Trade Agreement partner gives investors access to more than 448 million consumers and a combined GDP of more than US$16.5 trillion. Canada also offers many advantages that make it conducive to attracting foreign investment including competitive tax rates, a sound regulatory framework and, as part of its objective to attract innovative and knowledge intensive investments, one of the most generous research and development (R&D) tax incentive programs among developed countries.

Canada offers a highly competitive business environment with significant cost advantages. The Economic Intelligence Unit has rated Canada the #1 place to do business in the G7 for the next five years (2010-2014). In 2010, Canada expects to have the lowest overall tax rates of the G7 on new business investment and additionally, Canada is on track to having the lowest statutory corporate income tax rate of the G7 by 2012. In March 2010, KPMG also confirmed that among industrialised countries, Canada is ahead of the pack in terms of cost competitiveness. In fact, Canada enjoyed a 5% cost advantage over the United States. In its Budget 2010, Canada eliminated all remaining tariffs on manufacturing inputs and machinery and equipment to make Canada the first G20 country to offer a tariff-free zone for manufacturers.

Canada offers a strong fiscal position and stability for investors showing the lowest debt-to-GDP ratio in the G7. Canada also offers a sound financial system. The World Economic Forum stated that the Canadian banking system is the soundest in the world. Canada's stable economy with low government debt and low inflation offers security to investors. Canada offers a winning environment to attract investments and research and innovation, including leading research infrastructure and tax incentives and scientific talent. Federal and provincial/territorial R&D tax incentives combine to bring the net after-tax cost of R&D expenditures undertaken in Canada to well below 50 cents per dollar spent, one of the lowest levels anywhere. Canada has also a highly skilled workforce, the highest proportion of post secondary graduates anywhere in the Organisation for Economic Cooperation and Development (OECD) that help contribute to an innovation culture.

The Invest in Canada Bureau of the Department of Foreign Affairs and International Trade is responsible for providing strategic leadership and support in matters related to promoting and attracting FDI into Canada. In the context of Canada's investment strategy, India is identified as a key market to promote FDI into Canada. Based on established selection criteria, Canada has identified the following sectoral priorities for FDI from the Indian market: business services; financial services; software; digital gaming; pharmaceutical; biotechnology; and medical devices.


With the reforms in policies, better infrastructure and a vibrant financial sector, FDI inflows into India have accelerated since 2006-07 registering 146% growth over 2005-06. In 2008, India has a 10.71% share in FDI inflows and 8.03% of FDI outflows of developing economies of Asia, while India has a 6.69% share in FDI inflows and 6.04% of FDI outflows of developing economies in the world.20 Total FDI inflows into India increased from US$9 billion in 2005-06 to US$35 billion (partially revised) in 2008-09. As per provisional estimates, it has declined by 29% to US$25 billion during 2009-10 (up to November). Similarly, FDI equity inflows have increased substantially from US$4.4 billion in 2005 to US$33 billion in 2008. Even as FDI inflows into India grew substantially, a simultaneous pick up in outward investment moderated the overall net inflows. Outward investment by India increased from less than US$2.4 billion during 2003-04 to US$17.5 billion in 2008-09. The net FDI21 was higher at US$15.9 billion and US $17.5 billion in 2007-08 and 2008-2009 respectively, reflecting relatively better investment climate and the role of liberalisation measures in attracting FDI. FDI equity inflows as a percentage of GDP have grown from 0.75% in 2005-06 to nearly 2.49% in 2008-09. Besides the aggregate inflows, inward FDI into various economic sectors has grown multi-fold over the past four years. IT investments grew almost 2.5 times in 2006-07 to US$22.82 billion from US$8.96 billion in 2005-06. FDI inflows are spread across a range of economic activities like financial services, manufacturing, banking services, information technology services and construction. This rise in FDI has been facilitated by favourable FDI policy.

The Government of India has put in place a liberal, transparent investment regime and an investor-friendly FDI policy wherein FDI up to 100% is allowed under automatic route for most of the sectors. Sectoral FDI restrictions have been eased and foreign ownership caps lifted. Foreign exchange restrictions relating to investment have been relaxed. Public ownership of industries was substantially reduced as many sectors which were previously reserved for the public sector have been opened to private enterprises, including foreign investment.

The Government of India has set up the Foreign Investment Implementation Authority (FIIA) to facilitate quick translation of FDI approvals into implementation, to provide a pro-active one stop after care service to foreign investors by helping them obtain necessary approvals, sort out operational problems and meet with various Government agencies to find solution to their problems.

The Government of India has introduced various financial incentives for investments in infrastructure sectors as well as high priority industries such as information technology and through specific schemes such as Growth Centre Schemes, Electronic Hardware Technology Park (EHTP), the Transport Subsidy Schemes, the New Industrial Policy for the North Eastern States, Software Technology Park (STP), Export Promotion Zones (EPZs), Special Economic Zones (SEZs), etc. Similarly, there are a variety of tax concessions for investors in India. For instance, companies in the SEZ are eligible for a total exemption from tax for the first five years and a 50% exemption from the tax due for the next five years. Entrepreneurs who supply infrastructure resources in the SEZ are eligible for a 10 - year exemption from tax. Industrial concerns such as Export Oriented Undertakings (EOU) located in FTZ, Software Technology Parks or in Hardware Technology Parks, are entitled to an exemption from taxes for 10 years as well as to an exemption from import taxes if the total production is intended for export. Companies carrying scientific research and other activities specified by law are also eligible for 5-10 years tax holiday of 30%-100%. Industries located in North East India or the state of Sikkim is entitled to 10 year tax exemption for activities performed from April 1, 2007 to April 1, 2017. To stimulate the export of projects, a tax benefit is available to Indian companies or non-corporate entities resident in India at 50% of the profits earned on a foreign project provided the said 50% of profits are remitted to India in foreign exchange within six months of the end of the relevant previous year and a reserve account is also created for the same. An exporter of goods or merchandise is allowed 100% deduction of profits derived from export trade in computing the taxable income. This benefit can be passed on to the manufacturers when goods are exported through the trading or export house.

According to the UNCTAD Survey 2009-11, China is the most preferred investment destination, followed by the United States, India, Brazil and the Russian Federation. Similarly, AT Kearney's 2010 FDI Confidence Index shows China, the United States and India as the most preferred locations in that order. The OECD termed India as both a major destination for FDI, and a major source of FDI.22 This OECD report adds India as a major global player with high economic growth rates and its performance in the past year has been particularly impressive in view of the global collapse in FDI flows. For long-term prospects, the 2009 Survey of the Japan Bank for International Cooperation (JBIC), conducted among Japanese investors, ranks India as the second most promising country for overseas business operations. India has been ranked at the third place in global foreign direct investments this year, following the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years, according to UNCTAD.23 What emerges is that robust economic growth, an improved investment environment and opening up of critical sectors like telecommunications, civil aviation, refineries, construction, etc. facilitated FDI inflows into India.

4.3 Investment Policy Regimes


Foreign investment in Canada is subject to multilateral obligations (e.g., through the OECD and the WTO) and, to obligations in regional and bilateral free trade agreements and Foreign Investment Protection and Promotion Agreements (FIPAs). The only domestic law of general application with respect to foreign investment is the Investment Canada Act(the Act).

Non-Canadians who wish to establish a new Canadian business or to acquire control of an existing Canadian business are subject to the Act, unless a specific exemption applies. The Act and related "regulations" can be found at the Department of Justice Canada website and more general information on the Act can be found at the Department of Industry Canada website.

The purposes of the Act are to provide for the review of significant investments in Canada by non-Canadians in a manner that encourages investment, economic growth and employment opportunities in Canada and to provide for the review of investments in Canada by non-Canadians that could be injurious to national security. With respect to all investments, except those that fall within a prescribed type of business activity as set out in Schedule IV of the Regulations, the Department responsible for the administration of the Act is Industry Canada. With respect to investments which fall within a Schedule IV prescribed business activity, the Department responsible for the administration of the Act is Canadian Heritage.

Under the Act, an investment is reviewable if there is an acquisition of a Canadian business by a foreign investor and the value of assets of the Canadian business being acquired, as prescribed in the regulations, equals or exceeds the following thresholds:

  1. For non-WTO member investors, the threshold is C$5 million for a direct acquisition and over $50 million for an indirect acquisition; the C$5 million threshold will apply however for an indirect acquisition if the value of assets of the Canadian business being acquired exceeds 50% of the value of assets of the global transaction.

  2. Except as specified in paragraph (c) below, a threshold is calculated annually for reviewable direct acquisitions by or from WTO member investors. The threshold for 2010 is C$299 million. Pursuant to Canada's international commitments, indirect acquisitions by or from WTO member investors are not reviewable.

  3. The limits set out in paragraph (a) apply to all investors for acquisitions of a Canadian business that is a cultural business.

All applicable investments which are not reviewable are nonetheless subject to notification under the Act.

In addition to the Act, there are a number of federal laws of specific application, applying to certain industry sectors, including, for example, the Bank Act, the Canada Transportation Act, the Telecommunications Act and the Broadcasting Act. Similarly, at the provincial level, there are also laws of specific application in certain sectors, such as fisheries, collection agencies, liquor sales, securities dealers, farming and mining.

Foreign Investment Policy of India

Foreign direct investments by non-residents in India was regulated and governed by the FDI Policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA), 1999.24 Keeping in view the current requirements, the Government comes up from time to time with new regulations and amends/changes existing ones through order/allied rules, Press Notes, etc. The regulatory framework over a period of time thus consists of Acts, Regulations, Press Notes, Press Releases, Clarifications, etc. The key Indian regulatory authorities in the context of FDI are: the Foreign Investment and Promotion Board (FIPB), which formulates foreign investment policy; and the Reserve Bank of India (RBI), which has primary responsibility for implementing and enforcing foreign exchange regulations and government policy.

The Indian Government undertook a major exercise of consolidation of all existing regulations on FDI, with the aim of integration of all prior regulations on FDI, contained in FEMA, RBI circulars, various Press Notes etc., into one consolidated document, so as to reflect the current regulatory framework. The final document in this regard was released on March 31, 2010. It has been decided that the consolidated circular would be issued every six months to ensure that FDI policy is kept updated. Such consolidation would ensure that all information on FDI policy is available at one place, which is expected to lead to simplification of the policy, greater clarity and understanding of foreign investment rules among foreign investors and sectoral regulators, as also predictability of policy. The present circular consolidates and subsumes all such/these Press Notes/Press Releases/Clarifications as on March 31, 2010.

Under current rules, foreign investment up to 100% is permitted in almost all industry sectors except a handful of industry sectors in which no FDI or limited FDI is permitted - these tend to be "sensitive" sectors, either for security reasons, such as defence or telecommunications, or for political reasons, such as agriculture, retail, real estate, banking and insurance. FDI is permitted through either the "automatic" route or the "approval" route. Foreign Direct Investment is freely permitted in almost all sectors. Under the Foreign Direct Investments (FDI) Scheme, investments can be made two routes; the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. The investors are only required to notify the Regional Office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares of foreign investors. FDI in activities not covered under the automatic route require prior government approval. Approvals of all such proposals including composite proposals involving foreign investment/foreign technical collaboration are granted on the recommendations of Foreign Investment Promotion Board (FIPB). Indian companies having foreign investment approval through FIPB route do no require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. Application for all FDI cases, except Non-Resident Indian (NRI) investments & 100% Export Oriented Units (EOUs) and Single Brand Retail with FDI up to 51%, should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI & 100% EOU cases and Single Brand Retail with FDI up to 51% should be presented to SIA in Department of Industrial Policy and Promotion.

In March 2003, Automatic Route was further liberalised considerably to enable Indian parties to fund to the extent of 100% of their net worth, which was later increased to 200% and 300%. In a bid to give further impetus to overseas investments, the RBI has further liberalised overseas investment norms for both direct and portfolio investment. It has hiked the overseas investment limit from 300% of the net worth to 400 per cent of the net worth and hiked the limit on overseas portfolio investment by Indian companies from 35% of their net worth to 50% of their net worth. Indian residents can remit up to US$200,000 per financial year, from US$100,000 previously, for any current or capital account transaction or a combination of both. Mutual funds can make an aggregate investment to the tune of US$5 billion in overseas avenues, from an earlier cap of US$4 billion.

Broadly speaking, Indian law recognises the freedom of parties in an international contract to choose both the governing law, the forum (arbitration/courts) and the jurisdiction for settling disputes. India is signatory to the New York Convention, which aids enforcement of arbitral awards in India. India prefers bilateral FIPAs to the present format of multilateral framework on investment in WTO. Presently, foreign investment in India is subject to TRIMS provisions in the WTO and to obligations in regional and bilateral free trade agreements, Foreign Investment Protection and Promotion Agreements (FIPAs) and domestic FDI regulations.

4.4 Bilateral Investment Agreement

Canada and India are engaged in a process of negotiating a bilateral investment agreement.

Through the establishment of a framework of legally binding rights and obligations, this agreement will increase the comfort level and boost the confidence of investors by providing strong investment protection provisions including a minimum standard of treatment, free movement of funds in support of investment, non-discrimination in all matters and a neutral and efficient dispute settlement mechanism. It is anticipated that such an Agreement will serve as a major catalyst for investment flows from India to Canada and vice versa.

Recommendation on Investment

The Canada-India bilateral investment agreement should be concluded and ratified. Consideration of additional investment provisions in a Canada-India CEPA can take place thereafter.

14 Source: RBI, Macroeconomic and Monetary Development, Third Quarter Review, January 2010.

15 IBRD/ The World Bank (2009), Doing Business 2010: Reforming Through Difficult Times.

16 World Economic Forum (2009), The Financial Development Report 2009.

17 Foreign Affairs and International Trade Canada, Foreign Direct Investment Statistics accessed on march 11, 2010).

18 Refer, for example, UNCTAD report titled "Assessing the Impact of the Current Financial and Economic Crisis on Global FDI Flows".

19 India, Department of Industrial Policy and Promotion.

20 UNCTAD, Handbook of Statistics 2009, online.

21 The net FDI refers to inward minus outward FDI.

22 Refer, OECD Investment Policy Reviews: India 2009, OECD, Paris

23 Refer, UNCTAD World Investment Prospects Survey 2009-2011, 2009.

24 Refer, Reserve Bank of India notification no. FEMA 20 /2000-RB dated May 3, 2000.

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