A physical existence in India is basic to break
into the country’s developing business sector. However, starting the right kind
of presence can make a difference between success and wasted efforts. Foreign
companies, before entering the Indian market should consider the main points
like, assessment of the total market, their potential buyers and target market,
knowing about your competition, Pricing & product mix, Entry options,
regulatory environment, choosing impactful business model and then most
important part to consider is implementation of the business strategy.
India is one of the most progressive countries across the globe, which has larger potential and an enormous market for including 1.3 billion individuals. According to world bank’s data, India’s GDP in 2017 was recorded around USD 2.60 Trillion.
Looking at huge market potential
in India, trends reveal that every year the FDI inflow in India is growing due
to the numerous foreign businesses starting their operations in the country.
Foreign companies invest in India
to take advantage of relatively lower wages, special investment privileges such
as tax exemptions, etc. For a nation where, foreign investments are being made,
it also means achieving technical know-how and generating employment.
Major Requirements for
incorporation of company in India:
To start a company in India, a
minimum of two persons and an address are required in India. A company at least
should have two directors and minimum of two shareholders. According to Indian
rules and regulations, one of the director’s should be both a citizen and as
well as resident of India. In this case, 100% of the shares of the Indian
company can be held by foreign nationals/ NRI. The address in India is served
as the registered office of the company. Foreign companies establish their
offices in metro cities like Delhi, Bangalore, Mumbai and Chennai etc.
But why India? What are the main
advantages of doing business in India?
- Wholly owned subsidiary-
permits 100% Foreign Direct Investment under the FDI policy. 100% foreign
equity, subject to equity caps prescribed in the FDI policy.
- Joint Venture-with an Indian partner, for example, strategic
partnerships with Indian partner organizations
Limited Liability Partnership (LLP)- a new arrangement of business
structure in India, that combines the advantages of a company with the
benefits of organizational flexibility associated with a partnership. 
- Skilled Workforce: Highly-rated human capital base.
- Growth Potential: The world’s largest democracy and the 2nd
fastest-growing major economy.
- Healthy Legal System: Efficient legal and judicial system, improved
enforcement of laws.
- Work Ethics: Professional manner of working and willing to learn.
- Stability of Government: Political stability is vital to foreign
investments.
- Extensive Trade Network: Trade network backed by regional and
bilateral free trade agreements with numerous trading partners helps
leverage investor’s role.
- Competitive Tax System: Competitive tax regime and comprehensive
network of Tax Treaties, further modified by the introduction of Direct
Taxes Code and the Goods and Service Tax – single tax for the whole
nation.
- A Well Developed Financial System: Well-regulated financial system
with access to developed capital markets as an alternative source of
financing.
Foot-in-the-Door Strategy:
Making a local existence in India
is strongly advised, yet if your organization isn't prepared to set up a branch
office or an auxiliary, you can get this on-the-ground presence by appointing
an agent
or wholesaler. Remember that India is a huge and diverse country, with
more than 30 regional languages. It is strategically important to think about
adopting a regional approach. If your product/item, has a wide market appeal,
finding regional representatives and wholesalers is suggested.
What all options does the foreign
companies have to enter the Indian market?
A foreign company planning to set
up business operations in India has the following options:
- As an incorporated entity
- Liaison Office
- Branch Office
- Joint venture
- Wholly owned subsidiaries
- As an office of a foreign
entity through
A foreign company can begin
processes in India by incorporating a company under the companies Act, 1956
through registration of company or establishing a branch or liaison office.
Starting a private limited
company is the coolest and fastest way to set up in India. FDI of up to 100%
into a public limited or private limited is permitted under the FDI policy.
Other entry strategy is to open a
liaison office, branch office and Project Office. In this case, approval from
RBI or central government is mandatory. Therefore, the time required is must
more than setting up a private limited company.
What is the procedure for opening
Branch/Project/Liaison Office in India?
Foreign company can set up
Liaison/Branch Offices in India after obtaining approval from Reserve Bank of
India. Reserve Bank of India has given general permission to foreign companies
to establish Project Offices in India subject to certain conditions.
What are the types of business entities that can be set up in
India? What is the process, time and cost for setting up each?
Automatic Route
Under the automatic route, FDI up
to 100% is allowed in all activities/sectors, except in some of the cases which
requires prior approval of the government.
Let’s have a look at the
subdivisions where FDI is not allowed in India, under the Automatic Route as
well as Government Route?
FDI is forbidden under Government
as well as Automatic Route for the following sectors:
- Lottery Business
- Retail Trading (except
single brand product retailing)
- Atomic Energy
- Agricultural or plantation
activities
- Housing and real estate
business (except development of townships, construction of
residential/commercial premises, roads or bridges to the extent specified
in Notification No. FEMA 136/2005-RB dated July 19, 2005)
- Gambling and Betting
- Business of Chit Fund
- Trading in Transferable
Development Rights (TDRs).
Government Route
FDI in activities not covered
under the automatic route requires prior Government approval and are considered
by the Foreign Investment Promotion Board (FIPB), Ministry of Finance. Request
can be made in Form FC-IL, which can be copied from www.dipp.gov.in.
What will be the next step, once
the investment is made under the Automatic Route or with Government approval?
A two-stage reporting procedure
has been introduced for this purpose.
On receipt of money for investment:
- Within 30 days of receipt of
money from the non-resident investor, the Indian company will report to
the regional office of the Reserve Bank of India, containing details such
as:
- Name and address of the
foreign investor or investors
- Date of receipt of funds
- Name and address of the
authorised dealer
- Details of the Government
approval, if any.
Upon issue of shares to non-resident investors:
Within 30 days from the date of
issue of shares, a report in Form FC-GPR, PART A together with the following
documents should be filed with the concerned regional office of the Reserve
Bank of India.
- Certificate from the company
secretary of the company
- The proposal is within the
sectoral policy under the automatic route of RBI and it fulfils all the
conditions laid down for investments under the Automatic approval route.
What is the procedure to be
followed for obtaining Reserve Bank's approval for opening Liaison Office?
- A Liaison office can carry
on only liaison activities. It is not allowed to undertake any business
activity in India and cannot earn any income in India. Expenses of such
offices are to be met completely through inward payments of foreign
exchange from the Head Office abroad.
- The companies eager of
opening a liaison office in India may make an application in form FNC-1
along with the documents mentioned therein to Foreign Investment Division,
Reserve Bank of India, Central Office, Mumbai.
- Permission to set up such
offices is initially granted for a period of 3 years and this may be
extended from time to time by the Regional Office.
What is the procedure for setting
up Project Office?
- Foreign companies have
settled projects in India by Indian entities. General Permission has been
granted by Reserve Bank of India
- The projects are cleared by
an appropriate authority
- However, if the above
criteria are not met, such applications are forwarded to Central Office of
the Foreign Exchange Department of the Reserve Bank at Mumbai for
approval.
What is the procedure for setting
up branch office?
Reserve Bank permits companies engaged
in manufacturing and trading activities abroad to set up Branch Offices in
India for the following purposes:
- A branch office is not
allowed to carry out manufacturing, processing activities
directly/indirectly. A Branch Office is also not allowed to undertake
Retail Trading activities of any nature in India.
- To represent the parent
company in different issues in India e.g. acting as buying/selling agents
in India.
- To direct research work in
the region in which the parent organization is locked in
- Rendering professional or
consultancy services
- Rendering administrations in
Information technology and development of programming in India
- To undertake export and
import exercises and exchanging on discount premise
- To advance possible
specialized and financial collaborations joint efforts between the Indian
organizations and overseas companies.
- Rendering technical support
to the items provided by the parent/Group organizations.
- Branch Offices must submit
Activity Certificate from a Chartered Accountant on an annual basis to the
Central Office of FED.
- Permission for setting up
branch offices is granted by the Reserve Bank of India. Reserve Bank of
India considers the track record of the Applicant Company, existing trade
relations with India, the activity of the company proposing to set up
office in India as well as the financial position of the company while
scrutinising the application.
Can a foreigner invest through
Preference Shares? What are the regulations applicable in case of such
investments?
Foreign investment through
preference shares is treated as foreign direct investment. Foreign investment
in preference share is considered as part of share capital.
Preference shares to be treated
as foreign direct equity for purpose of sectoral caps on foreign equity, where
such caps are prescribed, provided they carry a conversion option. If the
preference shares are structured without such conversion option, they would
fall outside the foreign direct equity cap.
Can a foreigner set up a
partnership/proprietorship concern in India?
No, only NRIs/PIOs can set up
partnership/proprietorship concerns in India. Even for NRIs/PIOs (Non-resident
of Indian/Person of Indian Origin) investment is allowed only on
non-repatriation basis.
What are the key businesses
related legislations in India ?
- the Companies 2013 Act- this
act governs the incorporation management, restructuring and dissolution of
companies
- the Competition Act (which
regulates combinations (merger control) and anti-competitive behaviour)
- the Income Tax Act (which
prescribes the tax treatment of dividend, capital gains, mergers,
demergers and slump sales).
- the Indian Contracts Act-
this act basically lays down the general principles relating to the
formation and enforceability of contracts
- the FEMA - Foreign Exchange
Management Act, 1999, it regulates the inflow and outflow of foreign
exchange and investment into/from, India including sector-specific
requirements
- the SEBI Act, Securities and
Exchange Board of India, SEBI has consistently tried to lay down market
rules in line with the best market practices. It enjoys vast powers of
imposing penalties on market participants, in case of a breach
- the SCRA, Securities
Contracts Regulation Act, 1956, it governs listing and trading of
securities on stock exchanges in India and the Listing Agreement with
stock exchanges
What are the regulations
regarding Portfolio Investments by NRIs/PIOs?
NRIs and Persons of Indian Origin
can purchase or sell shares of Indian companies on stock exchanges under
Portfolio Investment Scheme. For this purpose, the NRI or PIO apply to a
designated branch of a bank. All sale or purchase transactions are to be directed
through the chosen branch.
The sale proceeds of the
repatriable investments can be credited to the NRE/NRO etc. accounts of the
NRI/PIO whereas the sale proceeds of non-repatriable investment can be credited
only to NRO accounts.
The sale of shares will be
subject to payment of applicable taxes.
NRIs and Persons of Indian Origin
can buy or offer offers of Indian organizations on stock trades under Portfolio
Investment Scheme. For this reason, the NRI or PIO apply to an assigned part of
a bank. All deal or buy exchanges are to be coordinated through the picked
branch.
The deal continues of the
repatriable ventures can be credited to the NRE/NRO and so forth records of the
NRI/PIO while the deal continues of non-repatriable speculation can be
attributed just to NRO accounts.
The offer of offers will be
liable to instalment of appropriate expenses.
What are the regulations for Foreign
Venture Capital Investment?
A SEBI registered Foreign Venture
Capital Investor with general consent from the Reserve Bank of India can put
resources into a Venture Capital Fund or an Indian Venture Capital Undertaking,
in the way and subject to the terms and conditions determined in Schedule 6 of
RBI Notification No. FEMA 20/2000-RB dated May 3, 2000 as altered every now and
then.
100% FDI in E-commerce in
India –
Foreign companies can sell their
goods and services to other businesses since 2015 (with 100% FDI permitted
under automatic route for B2B (Business to Business) e–commerce in India).
However, there are some restrictions on B2C
with a few limited exceptions like:
- Manufacturers offering items
produced in India can offer through e-commerce retail
- Indian makers offering their
own single brand items through e-commerce retail
- Single brand trading
entities who are operating through brick and mortar stores
- business retail
Key Take-away:
- The most important point is
that all Indian and foreign companies should comprehend that the
organizations set up in India are consolidated under the companies act
1956.
- All foreign companies must
consent to specific standards shaped by the companies act, 1956.
- A foreign company which
intends to set up business in India has two noteworthy alternatives: Joint
ventures and wholly owned subsidiaries. A foreign company can set up their
activities in India by getting into a joint endeavour with an Indian
organization or wholly owned subsidiary in sectors where 100% foreign
direct investment.
- FDI is not permitted in
certain sector such as real estate, lottery, gambling, atomic energy, etc.
- A foreign investor can
either incorporate a private limited company or a public limited company. Regardless
of whether an organization is public or private, only the registrar of
companies (ROC) has jurisdiction. Each state in India has its own ROC.