ENTRY OPTIONS FOR FOREIGN ENTITIES IN INDIA

Any person who is not a resident of India or a Foreign Company i.e. a company incorporated outside India[1] (“Foreign Companies”) can enter Indian markets for conducting business in the manner permitted by Government of India (“GOI”) and rules in this behalf by the Reserve Bank of India(“RBI”). Foreign companies desirous of carrying out any operations in India would need to work within the corners of the rules and regulations laid down by the RBI in line with the policy initiatives of the GOI.

A permissible foreign entity can commence business operations in India in the following manner:

Investment in India.png

Incorporation of an entity (Company / LLP)

Foreign Company may incorporate an Indian Company[2] (“Indian Company / Indian Companies”) under the Companies Act, 2013 (“Act”), in which it could hold 100% (hundred percent) shareholdings. For registration and incorporation of the company, an application has to be filed with Registrar of Companies (“ROC”) as specified in the Act. The Indian Company shall be incorporated under the Companies (Incorporation) Rule, 2014 (“Rules”) by filing up relevant forms and paying fees to that effect, as specified in the Rules and Section 3 to 22 of the Act. Incorporation process of a Company is generally a lengthy process as various statutory compliances are required to be strictly adhered to. Once a company has been duly registered and incorporated as an Indian Company, it is subject to Indian laws and            regulations as applicable to other domestic Indian Companies.

Additionally, a Foreign Company can have its existence in the Indian market through a joint venture. The  option of wholly owned subsidiary is restricted to only those sectors where automatic route of investment is permitted by RBI and sectors where 100% investment is permitted.

Automatic route means that the prior approval of the GOI or RBI is not required for investment in certain sectors as specified in the consolidated FDI policy issued from time to time. This is only possible when the sectoral caps for foreign direct investment in particular sector is permitted to 100% (hundred percent) by GOI or RBI. However, there are certain sectors wherein sectoral caps provided are less than 100% (hundred percent), thereby, limiting a Foreign Company’s participation to that extent only. The latest FDI policy of 7th June, 2016 mentions the sectors which shall be under the purview of automatic route.[3]

FDI in LLPs is permitted subject to the following conditions:

  • Under the Automatic Route where the LLP is operating in sectors where 100% FDI is allowed and where there is no FDI linked performance conditions;
  • Compliance of the LLP Act.

Liaison Office

Foreign Companies can establish liaison office in India with the specific approval of the RBI. Recently, the process of seeking approval for the establishment of Liaison Office has been diluted as the permission can be given by AD Category I Bank. Therefore, a Foreign Company may seek approval from AD Category I Bank upon complying with the procedure and on the filing of the relevant forms. This has made the procedure for seeking approval swift and simple. A liaison office (also known as representative office) can undertake only liaison activities, i.e. it can act as a channel of communication between head office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Permission to set up such offices is granted for a period of 3 (Three) years, except in the case of Non-Banking Finance Companies (NBFCs) and those entities engaged in construction and development sectors, for whom the validity period is two years only.

Upon the filing of the relevant forms, approval shall be granted by the AD Category I Bank. The approval is valid for a period of 6 months from the date thereof. If the circumstances were beyond the control of an individual, the AD Category-I bank may consider granting extension of time for a further period of 6 (Six) months for setting up the office. Any further extension of time shall require the prior approval of RBI in this regard

The role of such offices is limited and can carry only following activities:

  • Representing in India the parent company/group companies.
  • Promoting export or import from/to India.
  • Promoting technical/financial collaborations between parent/group companies and companies in India.
  • Acting as a communication channel between the parent company and Indian companies.

Further, to be eligible to open a Liaison Office in India, a Foreign Company needs to have a profit making track record during the immediately preceding 3 (Three) financial years in the home country and the net worth should not be less than USD 50,000/- (Dollars Fifty Thousand Only) or its equivalent.

The application for Liaison Office in India may be submitted by the non-resident entity in Form FNC to a designated AD Category – I Bank along with the prescribed documents mentioned in the Form and the Letter of Comfort, wherever applicable.

In case extension of time is required for Liaison Office, a request may be submitted before the expiry of the validity of the approval, to the AD Category-I bank concerned under whose jurisdiction the Liaison Office is located. The designated AD Category – I bank may extend the validity period of Liaison Office for a period of 3 (Three) years from the date of expiry of the original approval / extension granted.

Branch Office

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 RBI. Such branch offices are permitted to represent the parent/group companies and undertaking the following activities in India:

  • Export/import of goods.
  • Rendering professional or consultancy services.
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agent in India.
  • Rendering services in information technology and development of software in India.
  • Rendering technical support to the products supplied by parent/group companies.
  • Representing a foreign airline/shipping company.

Further, to be eligible to open a Branch Office in India, a Foreign Company needs to have a profit making track record during the immediately preceding 5 (Five) financial years in the home country and the net worth should not be less than USD 1,00,000/- (Dollars One Lakhs Only) or its equivalent.

The application for Branch Office in India may be submitted by the non-resident entity in Form FNC to a designated AD Category – I bank along with the prescribed documents mentioned in the Form and the Letter of Comfort, wherever applicable.

Project Office

Foreign Companies can establish project offices in India with the prior approval of RBI, provided they have secured a contract from an Indian Company to execute a project in India, and the project should be:

  • Funded directly by inward remittance from abroad; or
  • Funded by bilateral or multilateral International Financing Agency; or
  • Cleared by an appropriate authority; or
  • A 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.

The validity period of the project office is for the tenure of the project.

In Summary

A Foreign entity can invest in India through any of the aforementioned routes depending upon their nature of business, amount of investment, time for which investment is being made etc. and obtain approval of the GOI for investments beyond sectoral limits or certain sensitive sectors.

The table below contains in a nutshell the various options of entry into the Indian market without establishing or incorporating an entity and offers a comparison of the various modes:

Particulars Liaison Office Project/ Branch Office
  Legal Status Represents the parent company Extension of parent company
  Establishment Requirements Prior approval of AD Category I Bank, except in case of insurance companies Prior approval of RBI for branches other than in SEZs. Prior approval is not required for setting up the Project Office if certain conditions are fulfilled.
  Permitted Activities ·       Only liaison / representation / communication role permitted.

 

·       No commercial or business activities allowed to be undertaken.

·       Activities listed/ permitted by RBI allowed to be undertaken.

 

·       Manufacturing (except in SEZ units) not permitted.

  Limitation of Liability Unlimited Liability Unlimited Liability
  Compliance under FEMA Required to file an annual compliance certificate (from auditors in India) with RBI. Required to file an annual activity compliance certificate (from auditors in India) with RBI.
  Ease of Exit Easy Easy

The text of the master direction for establishment of Liaison Office, Branch Office and Project Office can be accessed at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/06MDE170516F633150EBCFE438084174F7DECCDC20C.PDF and at https://rbidocs.rbi.org.in/rdocs/notification/PDFs/22RNT04042016CCF68741715D47F887DE23B7B550A83A.PDF

[1] Section 2(42) of the Act: “foreign company” means any company or body corporate incorporated outside India which— (a) has a place of business in India whether by itself or through an agent, physically or through electronic mode; and (b) conducts any business activity in India in any other manner.

[2] Section 2(20) of the Act: “company” means a company incorporated under this Act or under any previous company law.

[3] http://dipp.gov.in/English/Policies/FDI_Circular_2016.pdf

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