India Entry Strategies for Foreign Investors
With the liberalization of FDI policy 2013, most restrictions on foreign investment have been removed and procedures have been simplified. Today, there are very few industries where foreign investment is prohibited. Moreover, investment ceilings, which are applicable in certain cases, are gradually being removed or phased out. Government of India on a yearly basis formulates a consolidated FDI Policy, with the intent and objective to promote FDI through a policy framework, which is transparent, predictable, simple and reduces regulatory burden.
A non-resident entity can invest in India, subject to the FDI Policy, except in those sectors/activities, which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. An entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other then defence, space and atomic energy and sector prohibited for foreign investment.
FDI is allowed either under the automatic route without prior approval of the Government or the RBI in all the sectors as specified in the FDI Policy. FDI in sectors not covered under the automatic route requires prior approval of the Government, which is considered by the Foreign Investment Promotion Board (FIPB).
Depending upon its business needs, a foreign company can choose between setting up a liaison office, a branch office or a project office or incorporating an Indian company, either its wholly owned subsidiary or joint venture with an Indian/overseas partner.
A. AS AN INDIAN COMPANY
A foreign company can start its business operations in India by incorporating a company under the Companies Act, 1956 through either a Joint Venture (JV) or forming a Wholly Owned Subsidiary (WOS). Foreign equity in such Indian companies can be up to 100%, subject to sectoral equity caps under the FDI policy.
1. Joint Venture with an Indian partner
Foreign companies can set up their operations in India by entering into strategic partnership with Indian entities and forming a Joint Venture (JV). JV can provide many advantages to the foreign investor, like access to established distribution/marketing set up of the Indian partner and established contacts of Indian partners to smoothly run the operations in India.
2. Wholly Owned Subsidiaries
Foreign companies can also set up their operations in India by forming a Wholly Owned Subsidiary in sectors, where 100% foreign direct investment is permitted under the FDI policy. An application has to be filed with the registrar of Companies (ROC) for registration and incorporation of the Company in India. 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. Such a subsidiary is treated as an Indian resident and an Indian company for all Indian regulations (including Income Tax, Foreign Exchange Management Act, 1999 and the Companies Act), despite being 100% foreign owned. For detailed procedure and guidelines for incorporation of company in India, read here.
B. AS A FOREIGN COMPANY
Foreign companies can set up their operations in India through Liaison Office, Project Office or a Branch Office.
1. LIAISON OFFICE
Foreign companies are allowed to open liaison offices in India, subject to obtaining specific approval from the RBI, to undertake liaison activities on their behalf. Liaison office acts as a channel of communication between the principal places of business and entities in India.
Scope of Activities
Under the current exchange control regulations, a liaison office is permitted to:
• Represent the parent/group companies in India;
• Promote exports and imports from/to India;
• Promote technical /financial collaborations between parent/group companies and companies in India;
• Act as a communication channel between parent/group companies and companies in India.
Typically, a liaison office is not permitted to:
• Earn any income;
• Undertake any industrial, trading or commercial activity;
• Enter into any agreement on behalf of the head office;
• Borrow or lend money for any commercial activity;
• Charge any fee or commission or otherwise earn any income, in respect of liaison activities carried on in India.
For detailed procedure and guidelines for opening the liaison office in India, read here.
2. BRANCH OFFICE
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Office in India for the following purposes:
• Undertake the export and import of goods;
• Render professional or consultancy services;
• Carry out research work in which the parent company is engaged;
• Promote technical and financial collaborations between Indian companies and parent/overseas group companies;
• Represent the parent company in India and act as buying and selling agents;
• Render services in information technology and development of software in India;
• Render technical support to the products supplied by the parent/group companies;
• Operate as a foreign airline/shipping company.
Apart from obtaining RBI approval for establishing a liaison office, project office/branch office, the foreign company is also required to register with the Registrar of Companies ("ROC"). An application has to be filed in the prescribed form within 30 days of the establishment of the office in India with ROC, pursuant to which ROC would issue a certificate of establishment of place of business in India to the foreign company.
3. PROJECT OFFICE
Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish project offices, subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
- By Ritambhara Agrawal, Managing Partner, Intelligere; www.intelligere.in