How a Foreign Company can start business in India
Starting a business in India is getting easier day by day due to the Government emphasis on Start Up India program. Foreign companies invest in fast growing Indian businesses to take benefits of cheaper wages and changing business environment of India. Economic liberalisation started in India in wake of the 1991 economic crisis and since then FDI has steadily increased in India, which subsequently generated more than one crore (10 million) jobs. According to the Financial Times, in 2015 India overtook China and the United States as the top destination for the Foreign Direct Investment. In first half of the 2015, India attracted investment of $31 billion compared to $28 billion and $27 billion of China and the US respectively.
The first step is to check the sectors in which the business is to be undertaken. Foreign direct investment is allowed in most sectors, and the sectoral lists for FDI falling under the prohibited list are revised on a regular basis by the Government. FDI in India is currently not permitted in the following sectors:
Lottery Business including Government /private lottery, online Lotteries, etc;
Gambling and Betting including casinos etc.;
Chit funds;
Nidhi company (borrowing from members and lending to members only);
Trading in Transferable Development Rights (TDRs);
Real Estate Business or Construction of Farm Houses;
Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;
Activities / sectors not open to private sector investment e.g. Atomic Energy.
There are two routes by which India gets FDI.
1. Automatic route: By this route FDI is allowed without prior approval by Government or Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India.
2. Government route: Prior approval by government is needed via this route. The application needs to be made through Foreign Investment Facilitation Portal, which will facilitate single window clearance of FDI application under Approval Route. The application will be forwarded to the respective ministries which will act on the application as per the standard operating procedure.
After checking the eligibility, one can decide which form of business will be suitable for doing business in India i.e. registering wholly owned subsidiary companies, Joint venture companies, Branch or Liaison office in India.
A WHOLLY OWNED SUBSIDIARY
A domestic company’s entire (100%) stock is owned by a foreign company which is an independent legal entity. Herein the wholly owned subsidiary is subjected to the control of the foreign company. The perks of having a wholly owned subsidiary is that the parent company has vast opportunities to diversify and manage their business in the global market. However, such diversification and management are subjected to the local laws. Such a subsidiary is treated as an Indian resident and an Indian company for all Indian regulations (including Income Tax, Foreign Exchange Management Act, 1999 and the Companies Act), despite being 100% foreign-owned. At least two shareholders, for a private limited company, and seven shareholders, for a public limited company, are mandatory.
JOINT VENTURE COMPANY
A Joint Venture (JV), is an arrangement where two or more parties / businesses come together and mutually agree to combine their resources to achieve a specific objective. A JV can take up various forms such as corporations, LLCs, Partnerships and Corporations. The JV Agreement is the most important document of a JV. It lists down the party’s rights and obligations toward one another.
Please Note: If you are a foreign partner or NRI who wants to form a JV or wants to be a part of an already existing JV, you will require a prior approval from the Reserve Bank of India and the Foreign Investment Promotion Board. The trend is to choose a partner who is in the same field/area of activity or who brings synergy to the foreign investor’s plans for India. Sometimes joint ventures are also necessitated due to restrictions on foreign ownership in certain sectors.
LIAISON OFFICE AND REGISTRATION
A Foreign Company can set up a Liaison Office (LO) in India with the prior approval of the RBI. Such LO’s primarily represent the foreign company in India and helps in understanding the domestic market. The expenses incurred by the liaison office is born by the foreign company. The role of such offices is limited to collecting information about the possible market and to providing information about the company and its products to prospective Indian customers. There is a condition which needs to be fulfilled by the applicant company that it should have a profit making track record during the immediately preceding three financial years in the home country and net worth of not less than $ 50,000 or its equivalent.
PROJECT OFFICE
When a Foreign Company has acquired a contract to carry out a project in India from an Indian company at such cases, the foreign company can set up a project office in India. Such offices are directly funded from abroad or through bilateral or multinational agencies. Prior approval from the RBI is not required. However, if the said funding is not acquired, the foreign company has to approach RBI for an approval.
A BRANCH OFFICE
Foreign companies engaged in manufacturing and trading activities ABROAD can set up branch offices in India for the following purposes, with the prior approval of RBI:
– Export/import of goods.
– Rendering professional or consultancy services.
– Carrying out research work in which the parent company is engaged that promotes technical or financial collaborations between Indian companies and a parent or overseas group company.
– Representing the parent company in India and acting as a buying/selling agent in India.
– Rendering services in information technology and development of software in India.
– Rendering technical support for the products supplied by parent companies.
– Acting as a foreign airline/shipping company.
Please note that manufacturing and retail trading activity cannot be undertaken through a branch office. Also, required is profit making track record during the immediately preceding five financial years in the home country and net worth of not less than $ 100,000 or its equivalent.