How Foreign Companies Can Enter India!

Major Requirements for incorporation of company in India:

To start a company in India, a minimum of two persons and an address are required in India. A company at least should have two directors and minimum of two shareholders. According to Indian rules and regulations, one of the director’s should be both a citizen and as well as resident of India. In this case, 100% of the shares of the Indian company can be held by foreign nationals/ NRI. The address in India is served as the registered office of the company. Foreign companies establish their offices in metro cities like Delhi, Bangalore, Mumbai and Chennai, etc.

But why India? What are the main advantages of doing business in India?

• Wholly owned subsidiary- permits 100% Foreign Direct Investment under the FDI policy.
• Joint Venture- with an Indian partner, for example, strategic partnerships with Indian partner organizations
• Limited Liability Partnership (LLP)- a new arrangement of business structure in India, that combines the advantages of a company with the benefits of organizational flexibility associated with a partnership.
• Skilled Workforce: Highly-rated human capital base.
• Growth Potential: The world’s largest democracy and the 2nd fastest-growing major economy.
• Healthy Legal System: Efficient legal and judicial system, improved enforcement of laws.
• Work Ethics: Professional manner of working and willing to learn.
• Stability of Government: Political stability is vital to foreign investments.
• Extensive Trade Network: Trade network backed by regional and bilateral free trade agreements with numerous trading partners helps leverage investor’s role.
• Competitive Tax System: Competitive tax regime and comprehensive network of Tax Treaties, further modified by the introduction of Direct Taxes Code and the Goods and Service Tax – single tax for the whole nation. 

Additionally, Government of India has reduced the corporate taxes from 1st April 2019 onwards.

Corporations in India are classified either into domestic corporation or foreign corporation.

o   For domestic corporation with annual turnover less than 250 crore, corporate tax is 25% with 7% surcharge on income greater than 1 crore and less than 10 crore. However, if the net income is more than 10 crore then the surcharge applicable is 12%.

o   For domestic corporation with annual turnover more than 250 crore, corporate tax is 30% with identical surcharge applicable i.e. 7% and 12% for net income between 1 crore & 10 crore and for net income greater than 10 crore, respectively.

o   For foreign companies, corporate tax is 40% with 2% and 5% surcharges.

A Well Developed Financial System: Well-regulated financial system with access to developed capital markets as an alternative source of financing.

Foot-in-the-Door Strategy:

Making a local existence in India is strongly advised, yet if your organization isn't prepared to set up a branch office or an auxiliary, you can get this on-the-ground presence by appointing an agent or wholesaler. Remember that India is a huge and diverse country, with more than 30 regional languages. It is strategically important to think about adopting a regional approach. If your product/item, has a wide market appeal, finding regional representatives and wholesalers is suggested.

What all options does the foreign companies have to enter the Indian market?

A foreign company planning to set up business operations in India has the following options:

• As an incorporated entity
• Liaison Office
• Branch Office
• Joint Venture
• Wholly owned subsidiaries
• As an office of a foreign entity through

A foreign company can begin processes in India by incorporating a company under the companies Act, 2013 through registration of company or establishing a branch or liaison office.

Starting a private limited company is the coolest and fastest way to set up in India. FDI of up to 100% into a public limited or private limited is permitted under the FDI policy.

Other entry strategy is to open a liaison office, branch office and Project Office. In this case, approval from RBI or central government is mandatory. Therefore, the time required is much more than setting up a private limited company.

What is the procedure for opening Branch/Project/Liaison Office in India?

Foreign company can set up Liaison/Branch Offices in India after obtaining approval from Reserve Bank of India. Reserve Bank of India has given general permission to foreign companies to establish Project Offices in India subject to certain conditions.

What are the types of business entities that can be set up in India? What is the process, time and cost for setting up each?

Automatic Route

Under the automatic route, FDI up to 100% is allowed in all activities/sectors, except in some of the cases which requires prior approval of the government.

Let’s have a look at the subdivisions where FDI is not allowed in India, under the Automatic Route as well as Government Route?

FDI is forbidden under Government as well as Automatic Route for the following sectors:

• Lottery Business
• Retail Trading (except single brand product retailing)
• Atomic Energy
• Housing and real estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in Notification No. FEMA 136/2005-RB dated July 19, 2005)
• Gambling and Betting
• Business of Chit Fund
• Trading in Transferable Development Rights (TDRs).

Government Route

FDI in activities not covered under the automatic route requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Request can be made through Form FC-IL, which can be copied from www.dipp.gov.in.

What will be the next step, once the investment is made under the Automatic Route or with Government approval?

A two-stage reporting procedure has been introduced for this purpose.

On receipt of money for investment:

• Within 30 days of receipt of money from the non-resident investor, the Indian company will report to the regional office of the Reserve Bank of India, containing details such as:
• Name and address of the foreign investor or investors
• Date of receipt of funds
• Name and address of the authorized dealer
• Details of the Government approval, if any.

Upon issue of shares to non-resident investors:

Within 30 days from the date of issue of shares, a report in Form FC-GPR, PART A together with the following documents should be filed with the concerned regional office of the Reserve Bank of India.

• Certificate from the company secretary of the company
• The proposal is within the sectoral policy under the automatic route of RBI and it fulfils all the conditions laid down for investments under the Automatic approval route.

What is the procedure to be followed for obtaining Reserve Bank's approval for opening Liaison Office?

• A Liaison office can carry on only liaison activities and 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 completely through inward payments of foreign exchange from the Head Office abroad.
• The companies eager of opening a liaison office in India can make an application in form FNC-1 along with the documents mentioned therein to Foreign Investment Division, Reserve Bank of India, Central Office, Mumbai.\
• Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office.

What is the procedure for setting up Project Office?

• Foreign companies have settled projects in India by Indian entities. General Permission has been granted by Reserve Bank of India
• The projects are cleared by an appropriate authority
• However, if the above criteria are not met, such applications are forwarded to Central Office of the Foreign Exchange Department of the Reserve Bank at Mumbai for approval.

What is the procedure for setting up branch office?

Reserve Bank permits companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes:

• A branch office is not allowed to carry out manufacturing, processing activities directly/indirectly. A Branch Office is also not allowed to undertake Retail Trading activities of any nature in India.
• To represent the parent company in different issues in India e.g. acting as buying/selling agents in India.
• To direct research work in the region in which the parent organization is locked in
• Rendering professional or consultancy services
• Rendering administrations in Information technology and programming in India
• To undertake export and import exercises and exchanging on discount premise
• To advance possible specialized and financial collaboration joint efforts between the Indian organizations and overseas companies.
• Rendering technical support to the items provided by the parent/Group organizations.
• Branch Offices must submit Activity Certificate from a Chartered Accountant on an annual basis to the Central Office of FED.
• Permission for setting up branch offices is granted by the Reserve Bank of India. Reserve Bank of India considers the track record of the Applicant Company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinizing the application.

Can a foreigner invest through Preference Shares? What are the regulations applicable in case of such investments?

Foreign investment through preference shares is treated as foreign direct investment. Foreign investment in preference share is considered as part of share capital.

Preference shares to be treated as foreign direct equity for purpose of sectoral caps on foreign equity, where such caps are prescribed, provided they carry a conversion option. If the preference shares are structured without such conversion option, they would fall outside the foreign direct equity cap.

Can a foreigner set up a partnership/proprietorship concern in India?

No, only NRIs/PIOs can set up partnership/proprietorship concerns in India. Even for NRIs/PIOs (Non-resident of Indian/Person of Indian Origin) investment is allowed only on non-repatriation basis.

What are the key businesses related legislations in India?

• The Companies 2013 Act:  this act governs the incorporation management, restructuring and dissolution of companies
• The Competition Act (which regulates combinations (merger control) and anti-competitive behavior)
• The Income Tax Act (which prescribes the tax treatment of dividend, capital gains, mergers, demergers and slump sales).
• The Indian Contracts Act: this act basically lays down the general principles relating to the formation and enforceability of contracts
• The FEMA (Foreign Exchange Management Act, 1999):  it regulates the inflow and outflow of foreign exchange and investment into/from, India including sector-specific requirements
• The SEBI Act (Securities and Exchange Board of India): SEBI has consistently tried to lay down market rules in line with the best market practices. It enjoys vast powers of imposing penalties on market participants, in case of a breach
• The SCRA (Securities Contracts Regulation Act, 1956): it governs listing and trading of securities on stock exchanges in India and the Listing Agreement with stock exchanges.

What are the regulations regarding Portfolio Investments by NRIs/PIOs?

NRIs and Persons of Indian Origin can purchase or sell shares of Indian companies on stock exchanges under Portfolio Investment Scheme. For this purpose, the NRI or PIO apply to a designated branch of a bank. All sale or purchase transactions are to be directed through the chosen branch.

The sale proceeds of the repatriable investments can be credited to the NRE/NRO accounts of the NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited only to NRO accounts.

The sale of shares will be subject to payment of applicable taxes.

NRIs and Persons of Indian Origin can buy or offer offers of Indian organizations on stock trades under Portfolio Investment Scheme. For this reason, the NRI or PIO apply to an assigned part of a bank. All deal or buy exchanges are to be coordinated through the picked branch.

The deal continues of the repatriable ventures can be credited to the NRE/NRO and so forth records of the NRI/PIO while the deal continues of non-repatriable speculation can be attributed just to NRO accounts.

The offer of offers will be liable to instalment of appropriate expenses.

What are the regulations for Foreign Venture Capital Investment?

A SEBI registered Foreign Venture Capital Investor with general consent from the Reserve Bank of India can put resources into a Venture Capital Fund or an Indian Venture Capital Undertaking, in the way and subject to the terms and conditions determined in Schedule 6 of RBI Notification No. FEMA 20/2000-RB dated May 3, 2000 as altered every now and then.

Key Take-away:

• The most important point is that all Indian and foreign companies should comprehend that the organizations set up in India are consolidated under the Companies Act 2013.
• All foreign companies must consent to specific standards shaped by the Companies Act, 2013.
• A foreign company which intends to set up business in India has two noteworthy alternatives: Joint ventures and wholly owned subsidiaries. A foreign company can set up their activities in India by getting into a joint endeavor with an Indian organization or wholly owned subsidiary in sectors where there is 100% foreign direct investment.
• FDI is not permitted in certain sector such as real estate, lottery, gambling, atomic energy, etc.
• A foreign investor can either incorporate a private limited company or a public limited company. Regardless of whether an organization is public or private, only the registrar of companies (ROC) has jurisdiction. Each state in India has its own ROC.