Strategies for South Korean investment in India

This year marks the 50th anniversary of successful diplomatic relations between South Korea and India. The milestone adds a new dimension to the growing relationship, underscored by recent surging South Korean investment alongside bilateral trade growth of 17.3% last year, solidifying South Korea’s position as one of India’s largest trading partners.

The previous article of this series discussed investment opportunities for South Korean investors along with the relevant regulatory framework, available investment routes (foreign direct investment, foreign portfolio investment and foreign venture capital investment) and typical regulatory challenges.

This article focuses on structuring foreign investment and offers further insights into the dynamics of South Korean investment, with special emphasis on the policy and regulatory framework.

SECTORS OF INTEREST

Electric Vehicles (EVs). India is witnessing a significant influx of investment from South Korean automotive giants like Hyundai and Kia in the EV sector. Recently, Hyundai announced it is acquiring General Motors’ plant in Maharashtra, and will utilise the increased production capacity to launch additional EV models in India. The government is actively stimulating demand by offering both buy-side and sell-side incentives. Additionally, various measures aim to facilitate a significant shift towards EVs, including the Vehicle Scrappage Policy 2021, the Battery Waste Management Rules 2022, the Production Linked Incentive (PLI) scheme for advanced chemistry cell battery storage, and the National Mobility Mission.

Electronics. Government policies provide financial and infrastructure support to incentivise domestic electronics production such as the PLI scheme for large-scale electronics and IT hardware, electronic manufacturing clusters, and the SEMICON India programme and Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors. These policies have received positive responses and not only significant investment from established players like Samsung and LG, but also from companies like leading semiconductor and memory chip maker SK Hynix, seeking to establish manufacturing units.

Logistics. The logistics sector has seen dynamic growth with the introduction of the National Logistics Policy aiming to enhance its attractiveness, multi-nodal connectivity and logistics efficiency. Among South Korean investors exploring prospects, Mirae Asset Global Investments recently bought a logistics centre near Mumbai.

Medical Devices. Government drives to develop this sector are led by introducing the PLI scheme and establishing medical device parks. In addition to proposed regulatory revamping through the Medical Device Rules 2022 and Draft Drugs, Medical Devices and Cosmetics Bill 2023 (DMDC), the National Medical Policy 2023 proposes to provide infrastructure and regulatory support to the industry, and aims to grow the sector to USD50 billion by 2030.

Cosmetics. The beauty and wellness market is among the fastest growing in the country, estimated to reach a market cap of USD20 billion by 2025. The sector is currently governed under the Drugs and Cosmetics Act 1940 (DCA), which ensures the safety, efficacy and quality of cosmetics in the market, but the government plans to revamp the old DCA law with the new DMDC. Several South Korean brands including Amorepacific and Innisfree recently announced partnerships with Indian e-retailers to enhance their presence in the market.

Defence. India has emerged as a new investment destination for South Korea’s defence industry. Aerospace industry leader Hanwha Aerospace is planning several defence collaborations with the Indian army, including the ambitious Future Infantry Combat Vehicle (FICV) Project, which aims to replace ageing Soviet-made infantry vehicles. Among other projects, Hanwha Aerospace will also collaborate with Larsen & Toubro (L&T) in producing infantry fighting vehicles.

Additionally, Korean investors have exhibited significant interest in sectors such as food processing (Havmor), textiles (Youngone), gaming (Krafton), and steel (POSCO).

With specific reference to the manufacturing sector, 100% foreign investment is allowed under the automatic route (whether by way of self-manufacturing or contract manufacturing). A manufacturer is permitted to freely sell the Indian manufactured goods through wholesale, retail or e-commerce without any restrictions.

However, when it comes to selling goods manufactured outside India (whether self-manufacturing or contract manufacturing), there are some conditions. For example, sales (either offline or online) come within the definition of “trading”, which is regulated under Foreign Exchange Management Act (FEMA) rules.

POLICY INITIATIVES

Korea Plus. This is a bilateral initiative between the governments of South Korea and India to generate prospects and streamline investment. This desk collaborates with various stakeholders to facilitate investment, assist in addressing challenges encountered by South Korean companies, and advocates for policy matters to the Indian government on their behalf. In a trade show organised by Korea Plus last year, the desk had discussions with 17 Korean investors and is now facilitating up to 10 of them on investment proposals.

Korea Trade Investment Promotion Agency (KOTRA). KOTRA is a government initiative for the promotion of trade and investment, both outbound and inbound. With a wide network of offices worldwide, it acts as a link to enhance business engagement between South Korean firms and global organisations.

KOTRA has offices in Delhi, Mumbai and Chennai, organising trade shows, exhibitions and business fairs supporting investors exploring the Indian market. Following one such event for South Korean investors, Vedanta Group signed MoUs with 20 South Korean display glass companies to develop an electronic manufacturing hub in India.

PRIMARY STRUCTURES

Foreign investors usually prefer incorporated entities for investing in India, which can be through either greenfield or brownfield investments. Compliance with sectoral caps and related conditionalities (such as approvals and pricing) prescribed under FEMA are crucial for any foreign investment. Investment structures like cross-border mergers, share acquisitions, slump sales and itemised asset purchases may be explored, among others.

KEY STRUCTURING CONSIDERATIONS

Pricing guidelines and reporting. Equity instruments offered by Indian companies to non-residents (including to South Koreans) must be equal to or above the fair market valuation of such instruments, determined by an approved method and certified by a chartered accountant or merchant banker. This principle is also applied for share transfers from Indian residents to non-residents. The issuances of shares to non-residents must be reported to the Reserve Bank of India in form FC-GPR, and inter se transfers between residents and non-residents must be reported in form FC-TRS.

Optionality clauses. Equity instruments can contain optionality clauses subject to a minimum lock-in of one year or as prescribed for the specific sector, whichever is higher. After completion of the lock-in, non-resident investors are permitted to exit without any assured return, as per pricing guidelines.

Employee stock options (ESOPs). Under the Companies Act, 2013, Indian companies can grant ESOPs to their employees, which can be converted into company shares. However, except for startup entities, ESOPs cannot be provided to promoters or to company directors who own more than 10% of outstanding shares. A period of at least one year must separate the granting and vesting of ESOPs for grantees.

Deferred consideration. Payment of consideration on a deferred basis (not more than 25% of the total consideration within a period not exceeding 18 months from the date of transfer agreement) is permitted for transfer of equity instruments by an Indian to a foreign resident.

Downstream investment. Any investment by an Indian entity that has received foreign investment and is owned and controlled by persons resident outside India is treated as a downstream investment, and such investments are required to comply with entry routes, sectoral caps, pricing guidelines and other attendant conditionalities. Eligible Indian entities making downstream investments are required to bring in requisite funds from abroad and not leverage funds from the domestic market for such investments.

Tax considerations. Section 281 of the Income Tax Act, 1961 (IT Act), prescribes that transfers of assets made during the pendency of any proceedings under the IT Act are void. Therefore, typically in all transactions concerning acquisitions, the buyer requests a no objection certificate under section 281 of the IT Act from taxation authorities confirming no encumbrance, undisclosed tax proceedings, demands or litigation concerning the property.

However, this is usually time consuming, and as a practical alternative buyers have resorted to accepting a certificate issued by practising chartered accountants conducting a similar investigation to the tax authorities confirming no encumbrances, proceedings, etc. It is crucial to obtain adequate tax warranties under the transaction documents in addition to these certificates.

Antitrust considerations. Where there are acquisitions, mergers or amalgamations exceeding the asset and turnover thresholds prescribed under the Competition Act, 2002, the acquisitions will require prior approval of the Competition Commission of India (CCI).

However, certain exemptions are available, such as if a transaction is not likely to cause an appreciable adverse effect on competition in India, or does not cross the de minimis threshold provided by the Ministry of Corporate Affairs. Notably, such approval from the CCI is required not only for domestic or inbound transactions, but also foreign-to-foreign transactions that result in an indirect acquisition in India.

LOOKING AHEAD

Growing South Korean investment in India presents promising avenues for both nations to foster economic growth and strengthen bilateral ties.

As South Korean companies continue to seek opportunities in this dynamic market – and India remains steadfastly committed to attracting foreign investment – the stage is set for a mutually beneficial partnership that transcends geographical boundaries. By harnessing this collaboration, both countries can pave the way for innovation, job creation and a sustainable future.