Establishment of Foreign Entity in India
Foreign Company according to the Companies Act 2013 is defined as any company or body corporate incorporated outside India, which has a place of business in India whether by itself or through an agent, physically or by electronic medium; and, conducts any business activity in India in any other manner. However there is a slight change in the definition of a foreign company for the purpose of Merger, i.e. Foreign Company means any company or body corporate incorporated outside India having a place of business in India or not.
India being the fastest growing economy in the world provides many opportunities to foreign companies to grow and develop their business. The foreign investments in India are governed by the rules and policies of FDI, FEMA, RBI and Companies Act 2013. In order to establish its business any foreign entity has the following options:
- Joint Venture with an Indian Company
- Wholly owned subsidiary company
- Liaison Office
- Project Office
- Branch Office
- Limited Liability Partnerships (LLPs)
Joint Venture: Joint ventures are the most preferred practice of foreign corporate entities to undertake business in India. A joint venture can be done with any of the business units available in India. A joint venture is a new enterprise where two or more units come together to achieve a commercial objective. The joint venture is done for a specific business purpose and for a limited time period. To undertake business activities in India, a foreign company can invest equity in Indian company through a joint venture agreement. In a joint venture both the parties exercise control over the new enterprise and share revenues, expenses and assets. Joint venture is considered best medium to enter sectors where 100 percent FDI is not allowed in India.
A joint venture offers a low risk option for companies wanting to enter into Indian market. There are no separate laws for joint venture in India, laws governing Indian company applies equally to joint venture. The main advantages for any foreign entity to invest in India is that they get an established distribution/marketing setup of the Indian partner, available financial resource of Indian partner and established contacts of the Indian partner which helps to smoothen up the process of setting up their operations. Some of the famous joint ventures that took place were between Hero and Honda, TVS and Suzuki.
Wholly Owned Subsidiary Company: wholly owned subsidiary is a company in which a foreign entity makes 100 percent FDI in India through automatic route. This is considered as the easiest and the preferred route by the foreign entities for establishment of their business in India. A wholly owned subsidiary company can be formed as a private limited or public limited company. A wholly owned company has more flexibility to conduct business in India as compared to liaison office or branch office. In these companies funding can be done via equity, debt and internal accruals. Indian transfer pricing regulations apply on such companies. They are governed by the companies act, 2013. They are treated as domestic company and are eligible for all exemptions, deductions benefits as applicable to any other Indian company.
Liaison Office: Liaison office means a business office which acts as a channel of communication between the head office (outside India) and parties in India. A liaison office can not undertake any commercial activities and cannot earn any income in India. The expenses of this office is entirely met by its parent company outside India through inward remittances received in convertible foreign exchanges. The main role of such offices is limited to collecting information about possible market opportunities and providing information about the company and its products to the Indian customers, promoting import export from/to India. The liaison offices are setup under the jurisdiction of RBI. The companies seeking to establish liaison office in India are not allowed to acquire immovable property in India however they can take any property on lease for a period not exceeding five years. The permission for establishment of a liaison office is given for Three years initially and it can be renewed thereafter. These offices are not permitted to involve into activities such as entering into any contracts with Indian residents, borrowing funds, trading, etc.
Project Office: Project offices are temporary project or site offices which are setup by foreign companies to execute specific projects in India. Project offices can be setup by the foreign companies which are awarded any contract by an Indian company. They are setup by the permission of RBI on specified conditions. Project offices are not allowed to undertake any work other than the work related to the project for which they are established. There are certain conditions prescribed by RBI which are required to be fulfilled for setting up of project offices. These are:
- The project should be funded directly by inward remittance from abroad.
- The project is funded by bilateral or multilateral international financing agency.
- The project should be cleared by appropriate authority.
- The company in India awarding the contract has been granted a term loan by a Public Financial Institution or a bank in India for the project.
If any of the above conditions are not met, then in such case the foreign company has to approach RBI for approval. The project office can repatriate profits earned by it after completing the project once it clears all the payment of taxes in India and fulfils all other conditions. A project office is treated as an extension of a foreign company in India and taxed at the rate applicable to foreign companies.
Branch Office: Branch office is an extension of a foreign company involved in business of trading or manufacturing. Any company incorporated outside India engaged in business of trading or manufacturing is permitted to open a branch office in India on basis of specific approval from RBI. The functions of branch office is much wider as compared to those of a liaison office. There are several activities which a branch office is permitted to do, they are:
- Export or Import of goods.
- Providing professional or consultancy services.
- Researching in the areas in which its parent company is engaged.
- Promoting technical and financial collaborations between Indian companies and its parent company or overseas group company.
- Acting as buying/selling agent of its parent company in India.
- Providing technical support for the products supplied by its foreign company.
- Rendering services in developing software and information technology in India.
There are some activities which branch offices are not allowed to undertake like, retail trading activities of any nature, manufacturing activities whether directly or indirectly. However foreign companies are given permission by RBI to undertake manufacturing and service activities through branch offices in India’s Special Economic Zones (SEZs). A branch office is considered suitable for foreign companies which are interested in setup of temporary office in India and do not have long term plans for operation in India.
Limited Liability Partnerships (LLPs): Limited Liability Partnerships have been allowed 100 percent FDI through automatic route in the recent reforms of FDI making it easier for foreign entities to develop their business in India. Prior to changes in FDI policies the investment in LLPs required government approval which made LLP incorporation by foreign entities a long, difficult & expensive process which therefore was not considered as a good option for establishing business in India but after the latest relaxations in the FDI rules any foreign national or entity can easily register and establish a small business in India.
Based on above description of all the forms in which any foreign entity can establish its business we can conclude that joint ventures, wholly owned subsidiaries & LLPs are the forms of creating a new entity in India through which any foreign company can invest and setup its business here whereas the liaison, branch and project offices are the means through which an already setup brand on the foreign lands can establish it in India also. As the recent policies have been changed by RBI and reforms have been brought up in the FDI policies by allowing more foreign investments through automatic route instead of government route where time and energy of the investors was wasted it is surely going to give a boost to developing Indian economy luring more foreign entities to establish their business in India creating more employments and enhancing their incomes.