India is one of the world’s most attractive destinations for international investors. India, being the world’s seventh- largest economy, has everything to attract the international investors. This articles is a brief introductory guide for the overseas enterprises considering the expansion of their activities in India and the structure by which they can enter India.

Foreign Investment

Foreign direct investment (FDI) is a major source of non debt financial resource for the economic development of India. FDI is governed by the FDI Policy, provisions of Foreign Exchange Management Act 1999 and various regulations made there under and is regulated by Reserve Bank of India.

Prohibited Sectors

Historically, foreign investment was restricted in India. The economic reforms initiated in 1991 and stimulated FDI into India. Further liberalization policy continued and currently FDI in India is allowed in almost all sectors excepting a few sectors of strategic importance. Further it is permitted in most of the sectors under the automatic route where no government approval is required. However Government of India has prohibited following sectors in which FDI cannot be received:

  • Lottery Business
  • Gambling and Betting
  • Chit funds
  • Nidhi company
  • Trading in Transferable Development Rights (TDRs)
  • Real Estate Business or Construction of Farm Houses (excluding development of townships, construction of residential /commercial premises, roads or bridges)
  • Manufacturing of cigars, cigarettes, tobacco or of tobacco substitutes
  • Activities not open to private sectors

Routes

Investment can be made through following two routes:

  • Automatic route
  • Government route

Under the automatic route, it is not required to take any prior approval from the Government of India and investment can be made freely whereas in Government route prior approval of Government is required for investment. Government has specified the sectors/activities under the automatic route. FDI in activities not covered under the automatic route require prior government approval.

Remittance and Repatriation

Indian Laws allow 100% free reparability of the funds invested into India in the form of capital. This means there are no restrictions in terms of terminating an investment or taking back funds that are already invested in India. Sale proceeds of shares and securities (held on repatriation basis) and winding up proceeds of the companies in India are allowed to remit outside India subject to payment of applicable taxes. Tax clearance certificate from Income Tax Department will be submitted for the said remittance. Profits of business, Dividends and interest can be repatriated freely without any restriction subject to payment of taxes.

Business Opportunities 

The non-resident individual or corporation who intend to expand their commercial activity in India can choose from a wide range of legal entities depending on their objectives and priorities.

Investment can be made in the Indian companies, LLPs, partnership firm/proprietary concern. However only non -resident Indian (NRI) /Person of Indian Origin (PIO) resident outside India can invest in partnership firm/proprietary concern in India. Foreign investment in trust (other than venture capital fund) is not allowed. Venture capital fund should be registered and regulated by SEBI. Generally investment are made in Indian Companies.

The Government of India has allowed foreign entities to set up their business operations in India. Business can be set up in the following ways: 

  • Incorporating a Wholly Owned Subsidiary Company (WOS)
  • Establishing a Joint Venture
  • Incorporating a Limited Liability Partnership (LLP) under the Limited Liability Partnership Act, 2008
  • Setting up

> Liaison Office / Representative Office

> Branch Office

> Project Office

  • Third party arrangement for maintenance and servicing of products
  • Appointing an agent or distributor

Wholly Owned Subsidiary (WOS)

Wholly Owned Subsidiary (WOS)  can be set up in sectors where 100% foreign direct investment is permitted under the FDI policy. It can be set up by the Foreign Companies only.

It is an Indian company with 100% shareholding of foreign company. It is subject to the Indian acts and rules. It can be set up by incorporating a new company or by acquiring the entire shareholding of existing Indian company. It can be in form of private company or public company. It carries out the business activities as a separate legal entity however controlling interest vest with the foreign parent Company. This company is allowed to do all the commercial activities. Profits can be taken out of India, net of Indian taxes, in the form of dividend.

Joint Venture

Foreign Entity can commence operations in India through Joint venture. Joint venture  may be defined as any arrangement whereby two or more parties co-operate in order to run a business or to achieve a commercial objective. It can be in the form of companies, partnerships or joint working agreements/ strategic alliances.

The most preferred form of joint ventures is Indian Companies. It is a partnership company promoted in collaboration with an Indian entity to carry on the business activities. It can be set up by incorporating a new company or through an existing company expanding its activities. The Company can do all the activities as mutually agreed between the parties. Recently permission has been granted for foreign investment in Limited Liability Partnership (LLP), therefore there is significant interest in LLPs. The profits are shared in agreed proportion net of Indian taxes and are freely allowed to be taken out of India.

Establishing a Joint Venture may entail the following advantages:

  • Established distribution/ marketing set up of the Indian partner
  • Available financial resource of the Indian partners
  • Established contacts of the Indian partners

Limited Liability Partnership (LLP)

To allow the foreign nationals to freely invest in India, the Government has now allowed the FDI in LLP under the Automatic route. Earlier it was done by Government approval. Now 100% Foreign Direct Investment in LLP is allowed for the sectors/activities where 100% FDI is allowed under the automatic route and there are no FDI- linked performance conditions. LLPs can also make downstream investment in another company or LLP in sectors where 100% FDI is allowed under automatic route.

LLP Firms are partnership firms with limited liability of partners. It is a combination of partnership and a Company. LLP needs minimum two partners. There is no requirement of minimum capital contribution to incorporate an LLP Firm. It  has independent status and subject to the Indian acts and rules.

Foreign entities can set up their operations in India without incorporating a company/LLP in India. It can be through Liaison Office/Representative Office, Project Office, Branch Office. Such offices can undertake any permitted activities. Entities have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.

Liaison Office/Representative Office

Liaison office acts as a channel of communication between the parent company outside India and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and cannot earn any income in India. It can promote import/export and also facilitate collaborations between parent company and companies in India. All the expenses for running and maintaining the liaison office are met out of foreign exchange remitted from abroad. Some foreign companies establish a liaison office as an intermediate step before entering into a Joint Venture (JV) or setting up a Wholly Owned Subsidiary (WOS) in India.

Liaison office can be established in India with the permission of Reserve Bank of India (RBI). RBI considers the track record of profit and net worth criteria of foreign company before granting the permission. Branch Office is required to file an annual activity certificate from a Chartered Accountant along with audited Financial Statement to the Authorized Dealer as well as Director General of Income Tax.

Branch Office

Foreign Companies engaged in manufacturing and trading activities outside India can set up Branch Offices in India for specific purposes. Branch offices can perform almost all activities that a parent company could perform in India. However these offices are not allowed to carry out manufacturing activities/ retail trading on its own. They can subcontract these to an Indian manufacturer. Branch Offices may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines.

Permission for setting up branch offices is granted by the Reserve Bank of India (RBI). RBI considers the track record of profit and net worth criteria of foreign company before granting the permission The Branch Office is required to file an annual activity certificate from a Chartered Accountant along with audited Financial Statement to the Authorized Dealer as well as Director General of Income Tax.

Project Office

Foreign Companies planning to execute specific projects in India can set up temporary project office in India. RBI has granted general permission to foreign entities to establish Project Offices subject to specified conditions. If conditions are not fulfilled then prior approval of RBI will be taken. Such offices can not undertake any other activity other than the activity relating to execution of the project. Project offices may remit outside India the surplus of the project on its completion. The Project office shall submit an Annual Activity Certificate from a Chartered Accountant to the Authorized Dealer.

Appointing an Agent or Distributor

‘Agent or Distributor’ means a legal entity formally appointed by a Foreign company as agents or distributors to market its products or services in India.

Foreign companies can enter Indian market through appointment of agents or distributors. It is least expensive and flexible arrangement. Company can appoint as many agents or distributors as it desires. The distribution or agency arrangements can be modified or terminated easily. This arrangement could also be in form of franchise. Foreign companies can appoint agent, distributor or franchisee through formal contract or letter of appointment.

Third party arrangement for maintenance and servicing of products

As some high value goods (offered by foreign companies) need maintenance and servicing on regular basis, therefore to deal with such cases foreign companies appoint the Indian technical firms as service engineers to render local services rather than deputing overseas engineers. Foreign company can train technical staff on regular basis and the service centre is certified to offer support services.

There is no restriction on setting up service centre contracts with the Indian entities. This arrangement is flexible and can be modified or terminated easily. Indian entities are being paid in terms of money remitted in India by a foreign company. Alternatively Indian Entities are authorized to contracts with Indian clients and charge maintenance fees.

Taxation in India

India is moving towards reforming its tax policies and systems so as to facilitate globalization of economic activities. There has been a recent tax cut announced for the domestic companies in India.

Tax rate for Domestic Companies is 30%. However, tax rate will be 25% (approx), if turnover or gross receipt of the company does not exceed Rs. 250 crores.

India has also double tax avoidance agreements with most of the countries and territories that helps in avoiding the burden of being taxed twice in two different taxable countries/territories. This makes India a tax neutral investment destination from the investor’s point of view.

Various forms of business in India

Particulars Liaison Office (LO) Project Office (PO) /Branch Office (BO) Subsidiary Company/ Joint Venture Limited Liability Partnership (LLP)
1. Legal status Represents the parent company Extended arm of the parent company PO is generally set-up for specific projects BO is set-up for carrying activities in the course of business Independent Status Independent status
2. Approval for commencement Requires specific  approval from the RBI Requires specific approval from the RBI Company can be set-up subject to FDI guidelines LLP can be set up subject to FDI guidelines
3. Permitted activities Liaison activities (No commercial/ Business activities are permitted) Restricted activities (Activities listed by the RBI are only allowed to be  undertaken) Activities specified in Memorandum of Association of the company  (subject to FDI guidelines) LLP is required to be engaged in sectors for which 100% FDI is allowed through automatic route.
4.Key compliance requirements  under FEMA Required to file Annual Activity Certificate with RBI (by auditors in India) Required to file Annual Activity  Certificate with RBI (by auditors in India) Required to file periodic and Annual filing  relating to foreign liabilities and assets, receipt of capital and issuance/ transfer of shares to foreign  investors Required to file periodic and Annual filing  relating to foreign liabilities and assets, receipt of capital contribution and profit shares and Disinvestment/ transfer of Capital Contribution to foreign investors
5. Repatriation LO is not permitted to undertake any business activity therefore no repatriations from LO. Does not require any approval for remittance of post-tax profits to  outside India. Does not require any approval for remittance of post-tax profits. Does not require any approval for remittance of post-tax profits.
6. Ease of exit Prior approval of RBI, ROC and income tax authorities Prior approval of RBI, ROC and income tax authorities Complex depending upon the strategy adopted (Exit can be through sale of shares or liquidation) Complex depending upon the strategy adopted (Exit can be through sale of interest or dissolution)

Disclaimer: This article has been prepared in good faith on the basis of information available on the date of publication without any independent verification. The Author does not guarantee or warrant the accuracy, reliability, completeness or currency of the information in this publication nor its usefulness in achieving any purpose. The Author will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person using or relying on information in this publication. Readers are requested to consult a professional before taking any action.

(Author – Sonika Bharati, FCS, LLB, is a Company Secretary in Practice from Delhi and can be contacted at sonika@akgadvisory.com)

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Qualification: CS
Company: AKG Advisory LLP
Location: Delhi, New Delhi, IN
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