Entry Options for Foreign Investors to Set Up Business in India

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Foreign investment plays a significant role in economic development of any economy like India. Abundant and diversified natural resources, amendments in tax laws, implementation of new initiatives (such as Make in India and Digital India), simpler and transparent foreign direct investment (FDI) policy, and high skilled human resources are some of the important factors which make India as an attractive destination for foreign investors. According to AT Kearney’s FDI confidence Index, India become 8th preferred location for foreign investments in 2017 compared to its ranking of 11th in 2015.

India has its own qualities and offers distinct advantages to the foreign investors at large. India is the world’s third largest economy in purchasing-power-parity terms. The country has young population in the world. About 47 per cent of the people are below the age of 25 years. It is predicted that India’s working-age population will increase by 240 million over the next 20 years. Availability of skilled labour at relatively low cost among Asian countries, is another advantage. In India, the labour cost per hour is around $0.48 compared to $0.62 in Sri Lanka. The presence of a vast network of bank branches, financial institutions, and a well-organised capital market are other influential factors for foreign investments in India.

The Indian government have implemented numerous reforms in the past one decade. These include raising of FDI caps, elimination of minimum capital requirement, introduction of on-line portals (such as eBiz, Sharam Suvidha), reduction in duration and procedures for starting a business, introduction of E-VISA, etc. All these efforts led to ease of doing business in India for foreign companies. In India, there are many options are available for foreign companies to set up their businesses. Depending upon its business needs, a foreign company can choose an appropriate form.

 

A foreign company can set up their business in India through two routes. Either in the form of incorporated entity (as an Indian company) or unincorporated entity (as a foreign company).

Indian Company

A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian companies Act, 2003. A foreign company can set up wholly-owned subsidiary or can have joint venture with an Indian company or have Limited Liability Partnership.

Wholly-owned Subsidiary

A foreign company can set up wholly-owned subsidiary company in India in sectors where 100 per cent foreign direct investment (FDI) is allowed through automatic route (where approval is not required from the government or RBI). According to the Consolidated FDI Policy dated 7th June 2016, 100 per cent FDI is allowed in sectors such as agriculture and animal husbandry, plantation, mining, exploration and marketing of oil and gas, broadcasting carriage services, civil aviation (green-field projects, ground-handling services, maintenance and repair organizations; flying training institutes; and technical training institutions), construction development (townships, housing, built-up infrastructure), industrial parks, satellite (establishment and operation), cash and carry wholesale trading, e-commerce, railway (infrastructure), pharmaceuticals (greenfield projects), asset reconstruction companies, credit information companies and Non-Banking finance companies (NBFC).

A company can be registered as private limited or public limited subject to the rules and regulations framed by the Companies Act, 2013. For registration and incorporation, a set of applications have to be filed with Registrar of Companies. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.

A wholly owned or a subsidiary company has the maximum flexibility to conduct business in India. The wholly owned subsidiary is treated as domestic company and is allowed to have all the exemptions and deductions enjoyed by the Indian companies.

Joint Venture (JV) with Indian Partner

A foreign company can set up the operations in India by forming a joint venture with an Indian company in the areas which are not reserved exclusively for the public sector or which are not under the prohibited categories.

Setting up of operations through a joint venture may entail the following advantages for a foreign investor:

  • Established distribution or marketing set up of the Indian partner
  • Available financial resources of the Indian partner
  • Established contacts of the Indian partner that help ease the process of setting up operations

Drafting of joint venture agreement (JVA) is of key importance as it lays down the terms and conditions and the governing powers of the JV partners. The foreign company can enter into JV by forming a company or any other forms of entity like Limited Liability Partnership (LLP) (define below).

There are no separate laws for joint ventures in India and laws governing domestics companies apply equally to joint ventures.

Limited Liability Partnership (LLP)

Limited Liability Partnership (LLP) is a new corporate form in India. It provide the benefits of limited liability to a company and, at the same time, allow its members the flexibility of organising their internal management on the basis of a mutual agreement. LLP gives a more structured business vehicle compared to a sole proprietorship or a conventional partnership.

Incorporation of LLP by foreign investors is allowed in sectors where 100 per cent FDI is allowed through automatic route (as explained in wholly-owned subsidiary section) and sectors which do not have any FDI-linked performance conditions (such as NBFCs, development of townships, housing, built-up infrastructure and construction-development projects, etc.). LLPs with FDI are not allowed to operate in agricultural or plantation activity, print media or real estate sector.

LLP is regulated by the Limited Liability Partnership Act, 2008 and Limited Liability Partnership Rules, 2009. An LLP should have a minimum of two designated partners who are individuals, with at least one of them being residents of India. The designated partners will be responsible for the LLP confirming with the provisions of LLP laws and will be liable in the event of contravention of such provisions.

Foreign Portfolio Investors (FPI)

Foreign Portfolio Investor (FII) refers to a company/entity which established/incorporated outside India and proposes to make investment in securities in India.

A FPI can invest in India in financial markets such as pension funds, mutual funds, investment trusts and asset management companies or their power of attorney holders. FPI’s can also invest in all securities in primary and secondary markets including the equity and other instruments of companies which are listed or are to be listed on stock exchanges of India.

FPI is being regulated in India by the Securities and Exchange Board of India (SEBI) (FII) Regulations, 2014. FPI has to register with SEBI.

As FPI only invest in securities and other financial assets in India, it does not provide the foreign investor with direct ownership of financial assets and is relatively liquid depending on the volatility of the market.

Foreign Company

Foreign Company refers to a company which has been incorporated outside India and conducts business in India (Companies Act, 2003). Foreign Company can set up different types of office in India. These include Liaison or Representative Office, Project Office and Branch Office. Such offices can undertake activities permitted under the Foreign Exchange Management Act (Establishment in India of branch office or other place of business) Regulations, 2000.

Liaison/Representative Office

One of the practices for foreign companies to enter the Indian market is the setting up of a Liaison/Representative office. A foreign which is looking for an office in India as a sourcing division or to facilitate export or to test the Indian market with a prospective business venture to improve the relations with the authorities and business community or to have the presence in the country from worldwide business outlook, liaison or representative office is the best option.

A liaison/representative office can undertake the following activities in India:

  • Representing the parent company or group companies in India
  • Promoting export/import from/to India
  • Promoting technical/financial collaborations between parent/group companies and companies in India
  • Acting as a communication channel between the parent company and Indian companies

Foreign companies can open a liaison/representative offices in India after getting prior approval from the RBI.

The rules and regulations in respect to Liaison Offices are framed under Foreign Exchange Management Act (FEMA), 1999. Liaison/representative offices also have to file an annual activity certificate from a chartered accountant to RBI. Permission to set up a liaison/representative office is initially granted for a period of 3 years and may be extended from time to time.

It is easier form of setting up a business in India. The operations are easy, have less formalities, simple to close. However, the role of such offices is very limited. It can collect information about possible market opportunities and providing information about the company and its products to the prospective Indian Customers. A Liaison office cannot undertake any business activity in India nor can it generate any income in India without the approval of RBI. The expenses of such offices must be met through inward remittances to the office from abroad through normal banking channels. It cannot borrow, lend money, or accepts deposits. Although, it is not subject to taxation in India, liaison office would be required to withhold taxes from certain payments.

Branch Office

Foreign companies can conduct their business in India through branch office. A Branch Office is set up as an extension of a foreign company in India, to undertake permitted commercial activities. Unlike liaison/representative office can undertake a broader scope of activities. These include:

  • Importing and exporting goods
  • Rendering professional or consultancy services
  • Carrying out research work in which its parent company is engaged
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company
  • Representing parent/group companies in India and acting as buying/selling agent in India
  • Providing information and technology (IT) services and developing software in India
  • Providing technical support for products supplied by parent company/group
  • Foreign airline or shipping companies

Normally, the Branch Office should be engaged in the activity undertaken by its parent company. However, a branch office is not allowed to carry out manufacturing (except manufacturing within Specific Economic Zones – SEZs) or processing activities (directly/indirectly) in India. Branch office are allowed to be set up in SEZs to carry out manufacturing and service activities in India without specific approval from the RBI, subject to prescribed conditions.

For opening a branch office, a foreign company requires specific approval from the RBI. After getting the branch license from RBI, the foreign company is allowed to commence the operations. Branch Office also have to submit activity certificate from a Chartered Accountant on an annual basis to RBI. Branch offices established may remit outside India profit of the branch, net of applicable Indian taxes.

A branch office provides the advantages of ease of operation and simple closure. Unlike liaison office, branch offices can generate revenue from the sales in the local market and repatriate the profits to the foreign parent company. On the contrary, since the exchange control guidelines relating to such operations are strict, a branch office may not prove to be an optimum structure for a foreign corporation undertaking expansion or diversification in India. A branch office of a foreign company in India is taxed at higher rates of corporate income tax than a domestic company.

Project Office

Project Office refers to a place of business to represent the interests of the foreign company executing a project in India.

A foreign company that has secured a contract from an Indian company to execute a project in India can set up a project office in the country, provided the following conditions are compiled with:

  • The project is funded directly by inward remittance from abroad
  • It is funded by a bilateral or multilateral international financing agency
  • It has been cleared by an appropriate authority
  • A company/entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.

A project office of a foreign company can be set up with the prior approval from the RBI. In case, approval from RBI is not taken at the time of setting up of project office, the company has to inform to Registrar of Companies in the prescribed form and with important documents within the time specified.

A project office is treated as an extension of foreign company. Project Office can acquire property for their own use and to carry out permitted/incidental activities. Project offices may remit outside India the surplus of the project, after meeting the tax liabilities, on its completion. Project office is not allowed to undertake any activity other than the activity relating and incidental to the execution of the project. A project office is taxed at the rate applicable to foreign companies.

At the end, it can be said that India, with a young skilled work force, high growth rate and reforms being undertaken by the government, is set to become an important destination for foreign investment. Today, there are various easier entry options available for a foreign investor in India to start up a business.