The investment climate in India has improved considerably in the last five years. This is mainly attributed to ease in FDI norms across sectors of the economy. India, today is a part of the top 100 club on Ease of Doing Business (EoDB). India received the record FDI of $ 61.96 bn in 2017-18 which rose to to $64.375 billion in 2018-19, a 6% healthy growth.
In such environment, a lot of foreign entities want to enter India. And all such international investors thinking of having their own set up in India have a lot of questions regarding the investment climate in India, regulatory approvals, ways or entry strategies into India, legal entity or ownership structure, tax rates etc.
This article attempts to answer all preliminary questions in the minds of investors planning Foreign Direct Investment into India. This article contains:
1. Entry routes for investment through FDI
2. What are the permissible modes/instruments of Investment?
3. Difference between Automatic and Government route (Approval route)
4. What are the different legal forms in which a foreign entity can establish its presence in India?
5. What is a Liaison Office, Branch office, Project Office?
6. What is a FDI Company?
Question 1 : What are the entry routes for investment through FDI?
Investments can be made by non-residents depending on the sector / area of investment through
Recommended Read–An Introduction to the Foreign Direct Investment Policy
Question 2: What is the difference between the Automatic Route and the Government Route?
An Indian company may, subject to the prescribed FDI caps, sectoral regulations and licensing requirements applicable for various sectors/activities (if any), issue capital instruments to persons resident outside India without any prior approval from the Government of India for the investment. Sector-wise list where automatic entry is permissible can be referred to. Some of these are the Plantation sector, Roads & Highways, thermal Power, Tourism & Hospitality, Electronic Systems, Gems & Jewellery(manufacturing).
Government Approval Route
Under the Government Route, prior to investment, approval from the Government of India is required. Proposals for foreign investment under Government route, are considered by respective Administrative Ministry/ Department. The company in which such foreign investment is sought to be made would have to make an application on the Foreign Investment Facilitation Portal(FIFP) for approval. The approval is granted on a case to case basis at the discretion of the concerned ministry/department, and in approving an investment proposal, the concerned department/ministry ordinarily considers factors such as inflow and outflow of foreign exchange, general benefit to the Indian economy, induction of technology, export potential, potential for large-scale employment, etc.
Question 3: What are the permissible modes of Investment or permissible instruments for investing in India through the Automatic or Approval route?
Investments can be made by non-residents in the following modes/instruments:
1. Equity shares of an Indian company
2. fully, compulsorily and mandatorily convertible debentures of an Indian company
3. fully, compulsorily and mandatorily convertible preference shares of an Indian company
Question 4: What are the different legal forms in which a foreign entity can establish its presence in India?
Depending on the proposed activities of such foreign entity, a foreign entity can establish its presence in India, either through
a) Operating as a foreign entity:
(i) Liaison office
(ii) Project office
b) Operating as an Indian entity
(i) By incorporating an Indian company (FDI Company / Wholly owned subsidiary)
(iii) Joint venture with an Indian Company
Question 5: What is a liaison office, branch office and project office?
Liaison office is a place of business which acts as a channel of communication between the principal place of business or head office, by whatever name called, and entities in India but which does not undertake any commercial/ trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channels.
It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of a Liaison Office should be met entirely through the foreign exchange from your Head Office outside India. Therefore, the role of a Liaison Office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers
Branch office means any establishment described as such by the company. to carry out its branch activities. Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank. Normally, the Branch Office should be engaged in the activity in which the parent company is engaged like Export / Import of goods, carrying out research work, in areas in which the parent company is engaged, rendering technical support to the products supplied by parent/group companies. Etc.
Project office means a place of business in India, which represents the interests of the foreign company executing a project in India but excludes a liaison office. 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 by bilateral or multilateral International Financing Agency or directly by inward remittance from abroad or 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.
Question 6: What is FDI Company / Wholly owned subsidiary of a foreign company / or FDI in a Private Limited company?
FDI is allowed for non-resident entities, subject to the FDI Policy and sectoral caps. FDI in a Private Limited Company falls under two routes:
The routes are discussed above in detail in Question 2.
FDI can be made by incorporating a Private Limited Company in India as a subsidiary of the foreign company abroad. Indian companies can issue equity shares, preference shares and convertible debentures, subject to the norms and guidelines as prescribed by the Authorities.