Choosing an appropriate set up is an important aspect of doing business in India. Such selection of an appropriate set-up will make both economic and commercial sense by helping the investor to optimise his exposure and minimise risks.
It is important that the country’s legal and regulatory stipulations and requirements are followed with utmost care. Any violation can lead to serious complications with the RBI, other statutory authorities and the federal tax authorities. This necessitates assistance from qualified and experienced legal professionals.
Foreign investors can enter into business in India, either as a ‘foreign company’ in the form of a liaison office/representative office; as a project office or a branch office or as an incorporated Indian incorporated entity.
A foreign company establishing a place of business in India has to register with Registrar of Companies (ROC) within a specified period and manner.
The following are the types of set-ups available for a ‘foreign company’:
- Liaison office/ Representative Office
- Project office
- Branch office
- Branch Office On ’Stand Alone Basis’
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. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. The liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Approval for establishing a liaison office in India is granted by the Reserve Bank of India (RBI).
Foreign Companies planning to execute specific projects in India can set up temporary project / site offices in India. RBI has granted general permission to foreign entities to establish Project Offices subject to specific conditions. Such offices cannot undertake or carry on any activity other than the activity relating or incidental to the execution of the project. However, Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for certain specified purposes approved by the RBI.
Branch Offices established with the approval of RBI may remit outside India the profits of the branch, net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up branch offices is granted by the RBI.
Such Branch Offices are restricted to Special Economic Zone (SEZ) alone and no business activity/ transaction is allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
Since options and activities through liaison office/representative office, project office and branch office have limitations; investors looking for broader activities need to go in for incorporating entities as an Indian company in the form of a Joint Venture or a wholly owned subsidiary.
The Indian Companies Act, 1956 (which is proposed to be re-enacted by incorporating recent developments) deals with the legal and procedural aspects of the formation, registration, administration, operation and winding up of companies.
Depending on the sectoral caps, as per the FDI Policy, a foreign investor may have the following options:
- Establishing a Wholly Owned Subsidiary
- Joint Venture company; or
- Acquiring an existing company.
If under the FDI Policy, foreign equity in a target sector is allowed up to 100%, then depending on the requirements of the investor, the foreign investor can opt for a Wholly Owned Subsidiary.
Joint venture companies are made possible by joining the strengths of two or more investors. It can be used in sectors in which 100% FDI is permitted and/or in a sector which limits the FDI sectoral caps. The joint venture partner can be an Indian or a foreigner, provided that the total FDI cannot exceed the sectoral cap if any fixed.
It may be noted that as per the Indian Companies Act at least two shareholders are necessary to form a private company with limited liability, even though the second shareholder can be a nominee of the first shareholder and can hold as low as one share. On the other hand, in a public company a minimum of 5 share holders are necessary.
A listed public company in addition to the Companies Act shall also be required to comply with the rules and regulations issued by the Securities and Exchange Board of India (SEBI), a statutory body, which has put in place various Regulations including a takeover code. In addition to this, the listing agreements between the company and the stock exchanges can provide for issues like corporate governance, delisting norms etc.
The ideal and most favoured vehicle for FDI is a Private Limited Company. It can be a closely held company with appropriate restrictions on the right to transfer shares (unlike a listed/unlisted public company, where no such restriction is legally permitted) and less statutory restrictions and compliance requirements
Acquiring an existing Indian company wholly or partly, operating in collaboration with the existing shareholders is a popular way of entering into India. However, in such ventures, carrying out of legal, financial and technical due diligence to avoid any unforeseen liability to either party is of critical importance.
Limited Liability Partnership (LLP) is a recently introduced legal entity. It partners have limited liability. It is expected that LLPs may soon become a popular vehicle for FDI.
Other ordinary partnerships have unlimited liability and are therefore generally not considered as a vehicle for foreign investment.
Investment in LLPs, unlimited Liability Partnerships, proprietorship concerns or any association of persons can be made only with the prior approval of the RBI.