The Indian law allows different types of entities that can be set up for doing business by Indians such as Proprietorship, Partnership, Public limited Company, Private limited Company and Limited Liability Partnership. However, with the rapid economic growth in India and due to an added influence of globalization, foreign investors are looking forward to do business in India. Practically, the options open to Foreigner Non- Resident are:
- To retain its identity as Foreign Company, following can be set up in India:-
- Liaison Office
- Branch Office
- Project Office
- To set up in India:-
- Limited Company
- Limited Liability Partnership
- Foreign wholly owned subsidiary (WOS)
- Joint Venture Companies with an Indian partner (JV) and collaborations, such company shall be treated as Indian Company under Indian law.
The Proprietorship and Partnership form of business is not available. However, a Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis.
A Foreign Company, not getting to engage in business on permanent basis, may opt for this option. It is the easiest way with the least of formalities. Such an office acts as a communication gateway between Foreign Company and Indian customers and hence also called Representative Office. Basically, no business or commercial activities can be carried out through such an office, therefore, there is no income earned in India which can be taxable. Its role is as follows:
- Collecting information about possible market opportunities.
- Providing information about the company and its products to prospective Indian customers.
- Promoting export/import from/to India.
- Facilitating technical/financial collaboration between parent company and companies in India.
Foreign Companies are allowed to set up their Branches in India except for manufacturing purposes. However, it is permitted to subcontract these to an Indian manufacturer.
Following are the purposes for which branch office can be set up:
- Export and Import
- Professional Consultancy services
- Research for Parent Company requirements
- Promoting Foreign collaborations
- Representing and acting as buying/selling agent of Parent Company
- Rendering technical support to the products supplied by Parent Company
- Branches of Foreign Airline and Shipping Companies
A prior permission from Reserve Bank of India (RBI) is required for setting up such office in India. As per the guidelines issued by RBI, these branch offices are subject to specified conditions.
It is like a temporary Branch Office or Site Office, which is set up to accomplish or execute specified projects in India. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.
Opening a Liaison/Branch Office in India:-
Foreign companies/entities desirous of setting up of Liaison Office / Branch Office (LO/BO) are required to submit their application in Form FNC along with the documents mentioned therein, which will be considered by the Reserve Bank under two routes:
- Reserve Bank Route – Where principal business of the foreign entity falls under sectors where 100 per cent Foreign Direct Investment (FDI) is permissible under the automatic route.
- Government Route – Where principal business of the foreign entity falls under the sectors where 100 per cent FDI is not permissible under the automatic route.
The following conditions should be fulfilled by foreign entities:-
- Profit Making Track Record:-
- For Branch Office: during preceding five financial years in the home country.
- For Liaison Office: during preceding three financial years in the home country.
- Net Worth
- For Branch Office: not less than USD 100,000.
- For Liaison Office: not less than USD 50,000.
The Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and
- 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.
Joint Venture companies are the most preferable choice by foreign investors for doing business in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. A Joint Venture may be any of the business entities available in India.
The major advantages for foreign investors by entering into Joint Venture Agreements are:
- Established distribution/ marketing set up of the Indian partner
- Available financial resource of the Indian partners
- Established contacts of the Indian partners which help smoothen the process of setting up of operations
Wholly owned subsidiary:-
Foreign companies can also to set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. It is very much like incorporating a new Limited Company, whether private or Public, as the circumstances admit. 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. There are two ways to incorporate a Limited Company:
- Incorporate company with foreign directors and shareholders.
Incorporate company in India with Indian directors and shareholders, and after incorporation transfer shares to foreign entities.
Routes of FDI that can be received for JVs and WOSs:-
There are categories in which FDI is prohibited, FDI is permitted but requires approval of Government and FDI which requires no approval.
Permitted Foreign Direct Investment under the two routes as given under:
- Automatic Route:-
FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
- Government Route:-
FDI in activities not covered under the automatic route requires prior approval of the Government which is considered by the Foreign Investment Promotion Board (FIPB).
Categories of Permissible FDI:-
FDI is prohibited in:-
- Lottery Business including Government/private lottery, online lotteries, etc.
- Gambling and betting including casinos etc.
- Chit funds
- Nidhi Company
- Trading in Transferable Development Rights (TDRs)
- Real Estate Business or Construction of Farm Houses
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Activities/sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems).
Sectors where Automatic entry route is permitted:-
- Agriculture and Animal husbandry : 100%
- Mining & Exploration of metals and nonmetals except titanium, Coal & lignite and set up of processing plants, Exploration of Petroleum & Natural Gas : 100%
- Petroleum refining : 49%
- Broadcasting Carriage services : 49%
- Greenfield Airport : 100%
- Existing Airport : 74%
- Air transport Services : 49%
- Civil Aviation Sector maintenance and training : 100%
- Courier Services : 100%
- Construction Development, township, housing : 100%
- Industrial Parks : 100%
- Wholesale trading : 100%
- E-commerce B2B : 100%
- Telecom : 49%
- Single brand Product retail trading : 49%
- Asset Reconstruction Companies : 49%
- Banking: Private sector : 49%
- Commodity Exchange : 49%
- Credit Information Companies : 74%
- Infrastructure in Securities market and Insurance : 26%
- NBFC : 100%
- Pharmaceuticals-Greenfields : 100%
- Power Exchanges : 26%
Sectors where Government approval is required:-
- Tea plantation : 100%
- Mining and mineral separation of titanium : 100%
- Manufacturing of items reserved for MSE : 24%
- Licensed Defense Industries : 26%
- Broadcasting Carriage Services : beyond 49% to74%
- Broadcasting FM &News & Current affairs TV channels : 26%
- Non News TV channels : 100%
- Publishing of newspaper, periodicals and magazines : 26%
- Publishing specialist journals and facsimile edition : 100%
- Satellites : 74%
- Private Security Agencies : 49%
- Telecom : beyond 49%
- Single brand Product retailing : beyond 49%
- Multi brand retail Trading : 51%
- Banking-Private sector : beyond 49% to 74%
- Banking-Public Sector : 20%
- Pharmaceuticals- Brown fields : 100%
Investment by way of Share Acquisition:-
A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.
New investment by an existing collaborator in India:-
If a foreign investor with an existing venture or collaboration (technical and financial) with an Indian partner in particular field proposes to invest in another area, such type of additional investment is subject to a prior approval from the FIPB.
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