The Indian business structure has undergone a paradigm shift over the years- focusing on liberalization and simplification of inflow of foreign investments. India is today one of the most attractive destinations for the foreign nationals/entities for setting up their businesses or making investments, as the availability of large manpower base, diversified natural resources and strong macroeconomic fundamentals as they offer immense opportunities for the upcoming and the growing sectors.
The Government has played a huge role in the transformation of the Indian Business scenario. To better the possibilities for foreign investors and for them to take exhaustive advantage of the business opportunities available, in India the Government has introduced major changes. This was in terms of macroeconomic reforms, tax reforms, finance reforms and relaxing the capital market.
It was till a certain point of time that the overseas businesses/individuals were restricted by a lot of means to get entry in India, in terms of money transfer, legal formalities and investment options. But then, to act as a defence of globalization, India went ahead in relaxing many of its reforms and regulations. It all revamped the Indian private sector, exchange control rules were eased, convertibility and trade reforms got relaxed and most importantly, the foreign direct investment (FDI) policies got revamped.
After all these relaxations, overseas companies/individuals started expressing more interest in the Indian Businesses and the scope of doing business in India has grown in magnitude.
At present more MNCs& foreign nationals are entering the Indian business scenario and as a result improving the scenario of Indian businesses by leaps and bounds.
We intend to provide the foreign nationals and entities a quick overview on the broad legal perspective & the various entry options available to them for doing business / for setting up its operations, in India.
Foreign companies/ nationals planning to set up business operations in India may do so by incorporating/setting up the following Companies/Offices as the case may be:
- Incorporate a company under the Companies Act, 2013, as a Joint Venture or a Wholly Owned Subsidiary as a (Private or Public Company); or
- Incorporate a Limited Liability Partnership registered under the LLP Act, 2008
- Set up a Liaison Office / Representative Office or a Project Office or a Branch Office of the foreign company which can undertake activities permitted under FEMA.
Companies in India are regulated under the provisions of the Companies Act, 2013. A “Company” can be formed and registered under the Companies Act, in one of the following two ways:
- has a minimum paid-up share capital of Rs. 100000 or higher
- its article restricts the right to transfer its shares
- except in case of One Person Company, limits the number of its members to two hundred
- prohibits any invitation to the public to subscribe for any securities of the company.
“Public Company” (listed or unlisted) formed by seven or more persons, is a Company which is
not a private company
has a minimum paid-up share capital of Rs. 500000 or higher
private company which is subsidiary of a public company
The Companies Act, 2013 prescribes specific requirements for incorporation of a Company in India depending on the type of entity established. Once incorporated, a company set up by the foreign entity is required to carry on business in India in accordance with Indian law.
Wholly Owned Subsidiary (WOS)
A foreign Company can set up wholly owned subsidiary Companies in India in the form of either Private Companies or Public Companies, subject to the prescribed FDI policy. (Further, foreign corporations can set up a joint venture company with an Indian or foreign partner).
FDI in a company engaged in any activities/sectors allowed under the automatic route do not require prior approval from Government or the RBI.
FDI in activities not covered under the automatic route requires prior approval of the Government / FIPB.
A WOS has more flexibility as compared to the Liaison, Branch or Project offices, in many regards such as, the limited liability of partners, can carry on its business till the company decides to close down and many more.
Limited Liability Partnership (LLP)
LLPis a body corporate and a legal entity which provides benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. It enables professional expertise and entrepreneurial initiative to combine and operate in flexible, innovative and efficient manner.
A foreign company/ individual are permitted to make FDI in LLPs.
However, the following persons shall not be eligible to invest in LLPs:
- Citizen/entity of Pakistan and Bangladesh or
- Foreign Institutional Investor (FII) or
- Foreign Venture Capital Investor (FVCI) or
- Qualified Foreign Investor (QFI) or
- Foreign Portfolio Investor registered under (RFPI).
- An LLP, existing or new, would be eligible to receive FDI (with prior approval of FIPB) which is operating in sectors/activities where 100% FDI is allowed under the automatic route. Any FDI in a LLP shall require prior Government/FIPB approval. Any form of foreign investment in an LLP, direct or indirect (regardless of nature of ‘ownership’ or ‘control’ of an Indian Company) shall require Government/FIPB approval.
- An LLP engaged in the following sectors/activities shall not be eligible to accept FDI:
- Sectors eligible to accept 100% FDI under automatic route but are to FDI-linked performance related conditions (for example minimum capitalisation norms applicable to ‘Non-Banking Finance Companies’ or ‘Development of Townships, Housing, Built-up infrastructure and Construction-development projects’, etc.); or
- Sectors eligible to accept less than 100% FDI under automatic route; or
- Sectors eligible to accept FDI under Government Approval route; or
- Agricultural/plantation activity and print media; or
- Sectors not eligible to accept FDI
An Indian company, having foreign investment (direct or indirect, irrespective of percentage of such foreign investment), will be permitted to make downstream investment in an LLP only if both, the company as well as the LLP, are operating in sectors where 100% FDI is allowed under the automatic route and there are no FDI-linked performance related conditions.
An LLP with FDI will not be eligible to make any downstream investments in any entity in India.
Conversion of a company with FDI, into an LLP, will be allowed only with the prior approval of FIPB/Government.
LLPs shall not be permitted to avail External Commercial Borrowings (ECBs).
A foreign company not opting to be incorporated in India is permitted to conduct its business operations in India through any of the following offices.
Liaison / Representative Office
Foreign Corporations are permitted to open liaison/representative office in India (subject to obtaining specific approval from RBI), to undertake liaison activities on their behalf. The Liaison Office acts as a channel of communication between Head Office of foreign companies and parties in India. Such offices are normally established for collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
A Liaison Office can undertake the following activities in India:
- Representing in India the parent company / group companies.
- 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.
The Liaison Office is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India.
Permission to set up a Liaison Offices is initially granted for a period of 3 years and this may be extended from time to time.Further, upon expiry of the validity period, these entities have to either close down or be converted into a Joint Venture (JV) / Wholly Owned Subsidiary (WOS), in conformity with the Foreign Direct Investment policy (FDI).
Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA). Foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Operations and Development (DBOD), RBI.
Foreign Corporations engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Such Branch Offices are permitted to represent the parent / group companies.
A Branch Office can undertake the following activities in India:
- Export / Import of goods.
- Rendering professional or consultancy services.
- Carrying out research work, in areas in which the parent company is engaged.
- Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
- Representing the parent company in India and acting as buying / selling agent in India.
- Rendering services in information technology and development of software in India.
- Rendering technical support to the products supplied by parent/group companies.
- Foreign airline / shipping company.
Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
A Branch Office can not undertake the following activities in India:
- Retail trading activities of any nature.
- Carrying out manufacturing or processing activities whether, directly or indirectly.
Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
Foreign companies can establish branch/unit office in Special Economic Zones (SEZs) to undertake manufacturing and service activities without taking specific approval from RBI.
Foreign banks can open Branch Office in India and for this they are required to obtain approval from Department of Banking Operations & Development (DBOD), RBI.
Foreign Companies, who have secured a contract from an Indian company to execute a project in India, can establish a Project Offices in the country without obtaining prior permission from RBI, provided:
- the project is funded directly by inward remittance from abroad; or
- the project is funded by a bilateral or multilateral International Financing Agency; or
- the project has been cleared by an appropriate authority; or
- a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank of India, Central Office, for approval.
Setting up of Project Offices by foreign Non-Government Organisations/Non-Profit Organisations/Foreign Government Bodies/Departments, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish a Project office in India.
Incorporating a new Company requires certain registrations and regulatory approvals depending on the type of Company/ investment pattern / object of establishment and size of organization etc.
- Incorporation of Entity i.e. Wholly Owned Subsidiary, Private Limited Company, Limited Liability Partnerships, Liaison Office, Branch Office and Project Office
- Arranging of all statutory permissions and registrations required for setting up of business
- Obtaining name approval from the Registrar of Companies and Company registration
- Acquiring of DSC & DIN
- Drawing up the Memorandum of Association and Articles of Association of the company
- Registration and approvals as per Foreign Exchange Management Act
- Registration under Indirect Taxes i.e. VAT, Service Tax, Customs, STPI, 100% EOU
- Registration under Direct Taxes i.e. Income Tax, Withholding Tax
- Import Export Code, RBI, SIA and FIPB Approvals
- Providing Corporate/Registered Office
- Opening of Bank Accounts
- Registration under state Shop & Establishment, Labour Laws i.e. Provident Fund, Employee State Insurance
- Designing and implementation of Internal Controls and procedures.
- Day to Day Management Services by acting as an Authorized Representative on behalf of the Company