Entry Strategies For Foreign Companies Setting Up Business In India
India is one of the fastest growing markets in the world and is an attractive destination for a lot of overseas investors because of the availability of a skilled workforce in addition to a competitive tax structure. The methods which can be used by foreign companies for setting up business in India, knowledge of which is essential for framing important strategies such as corporate tax planning are being listed here for the benefit of non resident entrepreneurs.
Since the liberalization of the economy in 1991, various governments have worked to either alter existing laws or introduce new ones to improve the ease of doing business. The outlook of the bureaucracy at the centre as well as state level is also changing with regards to economic growth by promoting foreign investment. The country has entered various regional trade agreements or is party to similar arrangements with various other nations leading to an extensive trade network. Apart from this, a vibrant financial system and an efficient judiciary are other factors that make the country an ideal choice for any foreign corporate organization which can enter Indian markets in following two ways:
1. Enter As An Indian Company
The Companies Act, 1956 allows the registration of an Indian company through the following routes :
- Joint Venture : The overseas entity can collaborate with a domestic company by entering into a strategic partnership in the form of a joint venture agreement with it in areas where the mode of investment is permitted.
- Wholly Owned Subsidiary : Another route through which the Indian market can be accessed is by forming a wholly owned subsidiary in those business sectors where the Foreign Direct Investment (FDI) policy allows 100% investment.
iii. Limited Liability Partnership (LLP) : LLPs are a very beneficial form of company formation that limit the liability of the partners and provide protection to their personal assets while letting them enjoy flexible control over the management of the entity. Foreign companies can also use this method for accessing the local market.
The new corporate organization has to be incorporated by the Registrar of Companies (RoC) of the jurisdiction where the company is located. All laws and regulations that govern the existence and functioning of Indian companies are applicable to these entities and must be followed by them. Hiring agencies such as tax consultancy services for fulfilment of necessary compliance requirements will be beneficial for any new organization.
2. Enter As A Foreign Company
In case the company with the intention of setting up business in India does not want to form an Indian entity, there are three other ways through which it can gain a foothold in the local market :
- Liaison or Representative Office : Such an office can be created for the purpose of representing the overseas organization in the country with a condition that it cannot indulge in any commercial activities that result in any earnings. The office can only promote technical collaborations between the parent group and Indian businesses and import/export in the country. The organization must have earned profits in the home country for the preceding 3 years with the net value not falling below US$ 50,000 in order to be eligible for opening the office and is also subject to approval by RBI.
- Project Office : RBI guidelines stipulate that an office for overseeing the execution of a project awarded by an Indian company can be opened without any prior approval from the central bank provided the funding is done by inward remittances from overseas or through a international financing agency or by a term loan to the Indian company given by a financial institution in India. In absence of the fulfillment of any of the above terms, the investor has to approach RBI for approval.
iii. Branch Office : The government permits the opening of branch offices in Special Economic Zones (SEZs) provided the company is involved in manufacturing or trading and has been in profit in the preceding 5 financial years with a net worth above US$ 100,000 in the home country. Any entity fulfilling these and any other stipulated conditions does not need to get a prior approval from RBI for opening such an office.
Routes Under Which FDI Is Allowed
The inflow of funds from other countries to India for investment purposes is regulated by the FDI policy of the nation and any entrepreneur from abroad hoping to start a new venture here must be aware about the salient features of the policy. FDI is allowed through two routes :
- Automatic Route : 100% investment is permitted without the prior approval of the government or the RBI in all sectors specified in Regulation 16 of FEMA 20 (R). The required documentation must be filed through form FC-GPR at the regional RBI branch in the jurisdiction where the new company is located. The process must be commenced within 30 days of issuance of shares of the entity to the overseas investors.
- i Government Approval Route : Some sectors require the prior approval of the government before investment and in the following conditions –
– The owner of the company being set up with foreign funds is not a resident entity of the country.
– The company in question is not controlled by the Indian entity.
– The ownership of an existing Indian company being owned and controlled by domestic entities is passing to a non- resident entity as result of transfer or issuance of shares through merger, acquisition, amalgamation etc.
– The control of an existing Indian company is being transferred to a non- resident group because of transfer or issuance of shares through merger, acquisition or any similar activity.
Applications for obtaining permission under this format must be forwarded to the Secretariat of Industrial Assistance (SIA) either directly at the office in New Delhi or through Indian consulates abroad. The status of the application can be checked at the website of Department of Industrial Policy and Promotion (DIPP) which is the nodal agency for formulation of the government’s FDI policy and is also responsible for the maintenance of the data about the inflow of foreign funds.
India is among one of the foremost locations in the world with a conducive environment for business and any individual or organization with plans of setting up business in India will benefit immensely from all the information provided .