Semiconductors or ‘chips’ are the building blocks of electronic devices and are used in a variety of electronic devices from cars to drones as well as smartphones and computers and across various sectors, including the aerospace and defence, telecom and automotive sectors. Currently, a majority of the semiconductor manufacturing market is dominated by countries such as Taiwan, China, the United States, South Korea and Japan. India relies on semiconductor imports from these countries.

While the semiconductor manufacturing industry is currently at a nascent stage in India, due to the worldwide shortage of semiconductors, over the last couple of years, India has taken active steps to tap this market.

This note outlines the key initiatives of the Government of India (“Government”) in relation to the semiconductor industry, regulatory framework for investment, setting up operations in India and recent developments/investments in the semiconductor industry in India.

Key Initiatives of the Government

The Government has taken steps to position India as a leading hub for semiconductor manufacturing by providing fiscal/non-fiscal incentives, research and development support and technological collaborations. Certain key steps in this regard include the following:

Semicon India Program

In December 2021, the Government approved the “Programme for Development of Semiconductors and Display Manufacturing Ecosystem in India” (“Semicon India Program”) for the development of a sustainable semiconductor and display ecosystem, which was subsequently modified in September 2022.

The Semicon India Program, for which the Government committed an outlay of INR 760 billion, is aimed to provide support to companies/consortiums that are engaged in inter-alia silicon semiconductor fabs, display fabs, compound semiconductors/silicon photonics/ sensors fabs, semiconductor packaging and semiconductor design to establish the semiconductor industry in India.

India Semiconductor Mission

In order to drive long-term strategies and streamline the development process for the semiconductor industry, the Government launched the India Semiconductor Mission (“ISM”) to encourage manufacturers to set up their semiconductor facilities in India.

ISM is the designated nodal agency and is responsible for implementing the Semicon India Program and receiving applications, carrying out technical and financial appraisal of applications received, recommending selection of applicants and performing other responsibilities as assigned by the Ministry of Electronics and Information Technology (“MeITY”) from time to time.

Schemes

With effect from 2021, the Government launched various schemes to attract large investments for setting up facilities in India in relation to semiconductor fabs, display fabs, compound semiconductors and design linked incentives under which eligible applicants in the semiconductor sector could apply for fiscal/non-fiscal incentives under the Semicon India Program.

Applications under such schemes are required to be made by a legal entity (private limited company or public limited company) and are subject to certain prescribed eligibility criteria (including in relation to type of technology, operational experience and capital investment and revenue thresholds).

Key terms of these schemes are as set out below:

Scheme for setting up of semiconductor fabs:

Scheme for setting up of display fabs:

Scheme for setting up of compound semiconductors / silicon photonics / sensors fab/ discrete semiconductors fab and semiconductor assembly, testing, marking and packaging (ATMP) / outsourced semiconductor assembly and test (OSAT) facilities in India:

Design Linked Incentive (“DLI”) Scheme:

Non-fiscal support

Apart from financial incentives under the various schemes, the Government has offered non-fiscal support such as infrastructure development, demand aggregation, research and development, skill development and training support under certain schemes.

Incentives by state governments

State governments such as Uttar Pradesh, Gujarat and Odisha have approved separate semiconductor policies to help in effective implementation of the Semicon India Program and to make such states the preferred destinations for the semiconductor industry. Pursuant to such policies, the states aim to provide additional incentives to develop semiconductor manufacturing, including fiscal support in the form of subsidy on land acquisition, reimbursement of stamp-duty, access to good quality water at subsidized rate, subsidy on power tariff, etc., and non-fiscal support such as facilitation of statutory compliances, single window clearance, facilitation in land procurement, assistance with right of way and change of land use permissions, etc.

Regulatory Framework for Foreign Investment

Foreign investment in India is governed by the Consolidated Foreign Direct Investment Policy issued by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry. 100% foreign direct investment under the automatic route is permitted for electronics manufacturing (including semiconductors), subject to applicable laws/ regulations, security and other conditions.

However, investments by entities of a country which shares land borders with India or where the beneficial owner is situated in or is a citizen of such a country will require prior government approval. The countries which share a land border with India are Afghanistan, Bangladesh, Bhutan, China (including Hong Kong), Myanmar, Nepal and Pakistan. The requirement for prior government approval would need to be determined on a case by case basis.

Setting up Operations in India

Investors seeking to set up operations in India would need to consider the following key legal considerations for setting up operations in India including:

While recent Government reforms (including in areas of starting a business and obtaining licenses and permits) have been introduced and India has improved significantly in the ‘Ease of Doing Business’ index and should aid in the Government’s focus to make India a new manufacturing hub, this is still work in progress.

Recent Developments

By the end of 2023, we understand that the Government had received 45 applications under the Semicon India Program, of which (i) five applications were in relation to establishment of semiconductor fabs, (ii) two applications were in relation to establishment of display fabs, (iii) nine applications were in relation to establishment of compound semiconductor facilities, and (iv) 29 applications were in relation to DLI scheme.

Currently, the Government has approved the following key proposals under various schemes outlined above:

Samsung Semiconductor India Research has also recently inaugurated a semiconductor R&D facility at Bengaluru. News reports indicate that other corporations, including Tower Semiconductor (Israel), Foxconn (Taiwan), Qualcomm (United States), Applied Materials (United States) and Advanced Micro Devices (AMD) (United States) are also exploring various investments in India.

With the launch of various Government initiatives, there has been an increased interest in investments in the semiconductor industry in India. Proper implementation of the schemes and policies and reforms for ease of doing business in India would be key to the success of India’s semiconductor strategy which envisions making India a global hub for semiconductor design, manufacturing and technology development.

Footnotes

[1] ‘Project Cost’ includes capital expenditure/investment on (a) land, building, plant and machinery, clean rooms, equipment and associated utilities; (b) research and development; (c) transfer of technology; and (d) other relevant costs including interest during construction and insurance costs.

[2] ‘Capital Expenditure’ means expenditure incurred on building, clean rooms, plant, machinery, equipment & associated utilities (including used / second hand / refurbished); transfer of technology (ToT) including cost of technology; and research & development (R&D).