Given India’s rapidly growing market, the country’s potential has enticed a slew of foreign companies to establish their presence in India. Over the last few years, initiatives have been taken to ensure that establishing a business in India becomes easier and foreign companies are encouraged to invest in the country.
Under the Companies Act, 2013 (hereinafter referred to as “Act”) a “foreign company” is defined as any company or body corporate incorporated outside India which: (i) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (ii) conducts business activities in India in any other manner.
A foreign company can begin to establish a business in India by incorporating/registering or by establishing a liaison, project or branch office in India. To have a permanent establishment in India, a foreign company or national can either form a private limited company in accordance with the Act or form a limited liability partnership as per the provisions of the Limited Liability Act, 2008.
Following are the entry strategies for foreign companies to establish a legal presence in India:
As an Indian Company
As a Foreign Company
Foreign companies can establish a business by forming a strategic partnership with business entities in India. International joint ventures have become essential wherein two business entities join forces to achieve a commercial objective. Joint ventures are emerging to be the ideal way to enter industries where 100% (One Hundred Percent) Foreign Direct Investment (“FDI”) is not permitted in India.
Joint ventures are relatively a low-risk route opted for by foreign companies desirous of entering the Indian market, provided these companies conduct appropriate due diligence on the Indian partners prior to forming an alliance. It allows the foreign investor to benefit from the Indian partner’s established market and consumers, distribution channels, local know-how and management.
Wholly Owned Subsidiary
By allowing foreign companies to establish wholly-owned subsidiary companies in India, the Indian market provides a convenient and beneficial business environment for these foreign entities. Foreign companies can set up wholly-owned subsidiaries by making 100% (One Hundred Percent) FDI in India through an automatic route (as defined below) subject to the provisions of the Reserve Bank of India (“RBI”), Foreign Exchange Management Act, 1999 and the Act.
Foreign companies can invest in permitted sectors through the following entry routes:
(a) Automatic route
Under the automatic route, the foreign company or foreign national does not require any approval from the RBI or the Government of India for the investment. This route is less restricted and more liberalized.
(b) Government/ Approval route
Where the principal business of the foreign holding company falls under the sectors where 100% FDI is not permissible under the automatic route, applications from companies in this category must be approved by the government and must be considered by the Foreign Investment Promotion Board (“FIPB”), Ministry of Finance.
Requirements for establishing a Company in India
Forming a new company provides flexibility and freedom as it can be structured in accordance with the requirements, objectives and obligations of both parties. A private limited company must have at least 2 (two) shareholders, while a public company should have at least 7 (seven) shareholders. Under the Act, it is a mandate that at least one director of every company is a resident of India [any person who has lived in India for more than 186 (one eighty-six) days is considered an Indian resident]. For a company to be registered, it must have an address in India. The legal jurisdiction applicable to the company will be determined by the city in which the company’s registered office is located.
Foreign companies can choose to establish a company with 3 (three) directors, two being foreign nationals from the parent company and as a legal mandate, 1 (one) being an Indian citizen. Further, as there is no requirement for minimum shareholding by the Indian director, foreign companies or nationals have the freedom to hold 100% of the shares of the Indian company.
For a foreign company to establish a temporary presence in India, a branch office is an effective strategy. The branch office is an extension of a foreign company and can engage in commercial business as a representative of the parent company.
Businesses keen on setting up a branch office should meet the following criterion as prescribed by RBI:
- Applicant must be a body corporate incorporated outside India;
- The net worth of the branch office must not be less than USD 100,000 or its equivalent;
- The parent company should have a profit-making record during the immediately preceding five financial years in the home country.
Once established with the prior approval of RBI, a branch office may remit profits of the branch outside India, subject to RBI guidelines and applicable taxes. Companies incorporated outside India that are involved in manufacturing or trading are permitted to set up branch offices in India with the prior approval of the RBI. These branch offices are allowed to represent the parent company in India and carry out activities including, but not limited to, the following:
- Export/import of goods
- Rendering professional or consultancy services
- Promoting technical or financial collaborations between Indian companies and parent companies
- Representing the parent company in India and acting as buying/selling agent in India
A liaison office serves as a communication link between the parent company, principal place of business or head office and entities in India, but it does not engage in any commercial, trading, or industrial activity, either directly or indirectly, and is restricted to gathering and providing information to potential Indian consumers.
Businesses desirous of setting up a liaison office should meet the following criterion as prescribed by RBI:
- Applicant must be a body corporate incorporated outside India;
- The net worth of the branch office must not be less than USD 50,000 or its equivalent;
- The parent company should have a profit-making record during the immediately preceding three financial years in the home country.
Liaison offices are not allowed to undertake any business activity or to earn any income in India. The expenses of liaison offices are covered through inward remittances of foreign exchange from the head office outside India.
As the name suggests, project offices are established by foreign companies to execute specific projects as per contracts to represent the parent company’s interests in India.
RBI has granted general permission to foreign companies to establish project offices only if it has secured a contract, to execute a project in India, from an Indian company and subject to the following conditions:
- 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 a term loan by a public financial institution or a bank in India for the project.
RBI has given general permission for setting up project offices in India if the above-listed criterion is met. However, if the listed conditions are not met, the foreign company must approach the RBI for approval.
The application for registering a project office of a foreign company is filed and automatically approved by an AD Bank (Authorised Dealer). Within 30 (thirty) days of the approval from RBI, the foreign company shall apply to the RoC for registration of the project office.
Project offices are prohibited from engaging in any activity other than that which is related and incidental to the project’s execution. Further, RBI has granted general approval for project offices to remit the surplus of the project outside India as and once the said project is completed.
Various factors are to be considered before choosing the trajectory for establishing a business in India including, but not limited to, the due diligence of the Indian partners, exit strategies, Indian laws and regulations and operational issues such as connectivity, employment, state-wise regulations etc. Additionally, the preferred path for a foreign company to establish a presence in the Indian market will also depend on the company’s specific requirements such as the size of its operations, expansion, and commercial goals.