What to know about investing in India: Types of businesses that foreign investors can set up in India
Invested by Liu Xia India
A foreign investor or company can set up an unincorporated entity or a legal entity in India. Unincorporated entities include liaison offices, branches, project offices or trusts. Legal entities (such as limited liability partnerships, joint ventures or wholly owned subsidiaries) are considered as separate legal entities with a more structured setup.
Liaison Office (LO)
Foreign companies can open liaison offices to carry out market research activities and interact with potential Indian customers. A liaison office, also known as a representative office, is not allowed to carry out any revenue generating business activities. Since they cannot engage in commercial, trading or industrial activities, their operating costs must be sustained by remittances received by their foreign parent company. Foreign companies often use LOs to raise awareness about their services and products, promote business activities, network and explore market potential. LOs are established under the guidance of RBI under the Foreign Exchange Management Act (1999).
Read more: Reserve Bank of India RBI
Establishment time: 6-8 weeks
Characteristics of a liaison office
Representing the foreign parent company;
Liaison activities only;
Conducted market research on behalf of the parent company;
It can provide information about potential market opportunities;
It can provide Indian customers with information about the products manufactured by the company and its parent company;
Promoting imports and exports between the two countries.
Requirements for the establishment of liaison offices
The foreign company should have a track record of profitability in its home country for the previous three financial years;
The net worth of the foreign company should be at least US$ 50,000;
Foreign applicants should have an up-to-date audited balance sheet;
An up-to-date balance sheet must be certified by a certified public accountant or any registered accounting practitioner;
The foreign applicant should have the Certificate of Incorporation/Registration or the English version of the Memorandum and Articles of Association;
COI/MOA and AOA should be certified by the Indian embassy/notary public in the country of registration; and
The banker's report of the bank in the applicant's home country should show the number of years the applicant has maintained a banking relationship with that bank.
Procedures for the establishment of liaison offices
A liaison office may be established by submitting an application to the Reserve Bank of India;
The foreign applicant has to submit the application in FNC form to the Reserve Bank of India through a designated AD Category I bank;
Upon approval, the foreign applicant will receive a Unique Identification Number (UIN);
Foreign applicants must also obtain a Permanent Account Number (PAN) in order to establish an office;
If the foreign applicant is unable to meet the required criteria, the parent company may submit a letter of comfort in accordance with Annex B;
The Reserve Bank of India normally approves a liaison office for a period of 3 years. The request for extension must state the reason for which the extension is required.
Suggested Read: What is PAN card in India?
branch offices
A foreign company can set up a branch to carry out branch activities of its business. The branch must meet all expenses through remittances from the foreign head office or income generated from its Indian operations - as permitted by the Reserve Bank of India. Unless the branch office is located in a Special Economic Zone (SEZ), the branch office is not allowed to engage in export manufacturing activities. To establish these offices, it is necessary to comply with the provisions of the Reserve Bank of India and the Companies Act, 2013.
The following activities can be carried out at the branch:
Export/import of goods;
Provide professional or counselling services;
Carrying out research work undertaken by the parent company;
Promote technical or financial co-operation between Indian companies and their parent companies or overseas group companies;
Represented the parent company in India and acted as a sourcing/sales agent in India;
Provides information technology and software development services in India;
Provide technical support for products supplied by parent/group companies; and
Represented foreign airlines/shipping companies.
The following activities are prohibited in the branch:
Any form of retail trading activity;
Any direct or indirect manufacturing or processing activity in India.
All profits are freely remitted out of India, subject to relevant taxes.
Set-up time: 6-8 weeks if all documents are in order.
General characteristics of a branch include:
The name of the Indian branch should be the same as that of the parent company;
The regulatory authority for branch licences is the Reserve Bank of India;
Suitable for foreign companies looking for a temporary office;
If the branch does not derive income from its Indian operations, all expenses of the branch are borne by the head office;
The customer base of a foreign company can be increased by expanding its operations to different locations (but not more than 4 offices), spread across different parts of India. Additional offices require approval from RBI.
Prerequisites for the establishment of a branch
In order to approve a branch of a foreign company, the Reserve Bank of India considers the following additional criteria:
Record of profitability within the first five fiscal years in the home country;
Net assets must not be less than $100,000 or its equivalent, based on a current audited balance sheet verified by a certified public accountant.
Requirements for setting up a branch
The branch must apply for approval from the Reserve Bank of India as per FEMA regulations. A copy of the Certificate of Incorporation or MOA and AOA must be submitted along with audited balance sheets of the parent company for the last three years. A PAN must also be obtained and registered with RoC through the Ministry of Corporate Affairs website.
The Reserve Bank of India will track the financial status of the applicant company and its proposed scope of activities. Applications will be submitted through the FNC form (Annexure 1) and will be considered through two routes:
Reserve Bank Route - If the foreign entity's principal business is in an industry in which 100% foreign direct investment (FDI) is permitted under the automatic route.
Government Pathway - If the parent company's business does not fall under the automatic pathway under the FDI policy.
To get approval from RBI, the applicant company needs to submit its application through an authorised dealer. Authorised dealers are various institutions that have a banking licence.
Documents required to set up a branch
Three copies of the FNC form;
Letter from the Principal Officer of the Parent Company to RBI;
Power of attorney from the parent company authorising the local representative;
Power of attorney/resolution from the parent company;
The parent company intends to support condolence letters for operations in India;
Two copies of the Certificate of Incorporation, Memorandum and Articles of Association (chartered documents) of the parent company in English duly authenticated by the Indian Embassy or Notary Public in the country of incorporation;
Translated, notarised and certified by the Indian Consulate Certificate of Incorporation;
Audited balance sheets and annual accounts of the parent company for the last three years, translated and notarised and certified by the Indian Consulate;
Name, address, email ID and telephone number of the national authorised person;
Details of the organisation's banker and country of origin and bank account number;
The organisation undertakes to accept the reports/comments made by the Government of India/Reserve Bank of India to its bankers;
Expected level of funding for doing business in India;
Detailed information on the address of the proposed local office, the number of persons likely to be employed, the number of foreigners among such employees, and the address of the head of the local office, if decided;
Brief information on the activities and products and services provided by the applicant organisation in the country;
Bank certificates;
Up-to-date identification of all directors, certified by the consulates and banks in their home countries;
Up-to-date proof of address for all directors, certified by the consulate and bank of their home country;
Details of individuals/companies holding more than 10% shares;
Organisational structure and shareholding patterns;
Complete KYC for shareholders holding more than 10% shares in the applicant company;
Resolution to open a bank account at a bank;
Duly signed Bank of India bank account opening form.
Project Office
A project office may be set up if a foreign company has been awarded a contract from an Indian company to execute a project in India. The project office can be established for a limited period. For example, if a foreign company has been awarded a contract to execute an infrastructure or installation project in India through a project office duly registered with the Reserve Bank of India and the Registrar of Companies (ROC).
eligibility criteria
A foreign company can set up a project office to execute a project in India only if it has been awarded a contract from an Indian company and the following conditions are fulfilled:
The project is directly funded by overseas remittances;
The project has been approved by the relevant authorities;
The project is funded by international financial institutions;
The Indian company to which the contract is awarded has obtained a loan from an Indian bank or other public financial institution.
Exceptions:
The Reserve Bank of India, in consultation with the Government of India, approves the opening of offices in Jammu and Kashmir, the North Eastern States or the Andaman and Nicobar Islands by entities resident in Pakistan, Bangladesh, Sri Lanka, Iran, Afghanistan, China, Macau or Hong Kong. In all other cases, authorised primary dealer banks may grant approval;
If the contract entered into by the project office has been awarded by the Ministry of Defence, its proposal relating to the defence sector will not require any other approval from the Government of India.
Requirements for the establishment of a project office
The project office can maintain an interest-free foreign currency account in India for expenses and credits. The office can maintain both foreign currency and Indian rupee accounts while operating in India. Upon completion of the project, the project office can repatriate any capital surplus after payment of all taxes and completion of the final audit of the accounts.
Procedures for the establishment of a project office
Submit an FNC form request;
Submit a copy of the company's certificate of incorporation;
(b) Submit an updated audited balance sheet for the country; and
Submit a bank report from a bank in the applicant's home country.
Establishment time: 4 weeks.
Limited Liability Partnership (LLP)
Limited Liability Partnership (LLP) is the preferred company formation strategy for many SMEs in India.LLP is a hybrid of a partnership and a company (private or public).The liability of LLP to its partners is as limited as that of a company and it receives tax incentives like a partnership. The liability of the partners is limited to their agreed capital contribution and it provides flexibility without imposing detailed legal requirements.
FDI from LLP under the automatic route is subject to the following conditions:
LLPs should be in industries that do not have performance conditions linked to FDI, which refers to industry-specific conditions for firms receiving foreign investment;
LLP should be among the sectors where 100% FDI is permitted;
Satisfies the conditions of the LLP Act 2008.
Eligible forms of FDI received from foreign entities include their investments in the form of capital contributions or transfers of profit shares in the LLP capital structure.
Establishment timeline: 4-6 weeks if all documents are complete
Eligible investors include all foreign individuals/entities, with the following exceptions:
Foreign portfolio investors;
Foreign institutional investors;
Foreign Venture Capital Investors registered under the guidelines of the Securities and Exchange Board of India (SEBI).
Advantages of LLP
The process is simpler and less costly than that of a public or private limited company. The minimum government fee for setting up an LLP is INR 500 (USD 7) and the maximum fee is INR 5,000 (USD 70) depending on the capital contribution;
No audit of the accounts is required unless the annual turnover exceeds INR 4 million (USD 55,750) or the contribution to LLP exceeds INR 2.5 million (USD 34,900);
There is no minimum capital requirement to register an LLP;
Partners are not required to use their personal assets to pay off the firm's debts;
A partner can enter into any legal contract outside India.
Requirements for setting up an Indian LLP
It takes two people to register an LLP, but there is no limit to the number of partners;
Obtain a Designated Partner Identification Number (DPIN) by submitting electronic form DIR-3 through the Department's online portal;
Obtain the partner's Digital Signature Certificate (DSC);
Fill in Form 1 to apply for registration of the name of the LLP;
Once the name (which must be unique) is approved, complete Form 2 (Incorporation Documents and Declaration) online;
The initial LLP agreement must be filed within 30 days of the formation of the LLP.
After submitting the required forms and documents, the Registrar will register the LLP within 14 days of the submission of Form 2. The LLP must be registered with the RoC. There is no limit to the maximum number of partners, but a minimum of two partners are required to form an LLP, at least one of whom must be resident in India.
Convert to LLP
Existing partnerships as well as existing private or public companies can be converted into LLPs.LLPs are also required to obtain a Permanent Account Number (PAN).The tax on LLPs is 30% on their gross income.If the gross income of an LLP exceeds INR 10 million (USD 140,000), an additional surtax of 12% will be levied. In addition, a surtax of 4% on health and education will be added to the income tax and applicable surtax.
Wholly Owned Subsidiary (WOS)
A Wholly Owned Subsidiary (WOS) operates as a separate legal entity with 100% ordinary shares owned by another company, the parent company. Since WoS requires a minimum of 2 shareholders, the foreign holding company may nominate a person or another company to hold 1 share and the remaining shares may be held by itself.
WOS allows the foreign investor to control business operations with limited responsibilities and fewer restrictions on business activities than a branch, liaison office or project office. However, the activities must be in line with the FDI policy. Foreign companies can enter into joint ventures with Indian partners in sectors where 100% FDI is not permitted.
Establishment time: 4-8 weeks if all documents are in order.
Requirements for the establishment of WOS
At least 2 shareholders.
No minimum share capital is required.
A minimum of two directors (one of whom has resided in India for at least 182 days in the previous financial year) must be appointed and registered through the Director Identification Number (DIN) electronic filing system in India.
No minimum capital is required.
The following forms along with necessary documents must be submitted to the Ministry of Corporate Affairs for setting up a WOS in India:
SPICe+ for company formation
Upon submission of the documents, the Registrar of Companies will issue a Certificate of Incorporation and a Company Identification Number. It takes approximately four to five weeks to complete the process. Form INC 20A must be filed with the Registrar of Companies within 180 days of incorporation to obtain a Certificate of Commencement of Business.
WOS will be subject to Indian taxes and laws like any other domestic company and will have to pay Corporate Income Tax (CIT).
Joint Venture (JV)
A joint venture is a partnership in which two or more companies or individuals agree to pool their capital or goods in a single unified project. In India, joint ventures are most popular in non-100% FDI sectors.
Joint ventures allow foreign companies to utilise the existing networks of their Indian partners and, once taxes are paid, these companies can repatriate their profits in India.
Joint ventures can be formed with any existing business entity in India.
The corporate joint venture will also be subject to the country's tax laws, the Federal Emergency Management Agency (FEMA), labour laws (e.g., the Wages Code 2019, the Industrial Disputes Act 1947, and state-specific shop and establishment legislation), the Competition Act 2002, and various industry-specific laws.
Establishment time: 4-8 weeks.
Requirements for the establishment of a joint venture
Once a partner/associate is selected, a Memorandum of Understanding (MoU) or Letter of Intent (LOI) will be signed by both parties.
The MOU and JV agreement/shareholders agreement must be signed in consultation with a firm of Chartered Accountants who are well versed with FEMA, Indian Income Tax Act, 1961, Companies Act, 2013, international laws and applicable Indian rules, regulations and procedures.
Terms and conditions should be properly assessed before entering into a contract.
Foreign companies no longer require a No Objection Certificate (NOC) from the Indian Associate to invest in the sector in which the JV operates. As a result, foreign companies in existing joint ventures can operate independently in the same line of business. Previously, they needed to obtain prior approval from the Indian partner.
Before entering into a joint venture contract, the following points must be properly assessed:
Applicable law;
Shareholding structure;
Composition of the Board of Directors;
Management Committee;
Frequency of Board meetings and their location;
General Meeting of Shareholders and its venue;
Quorum composition for important decisions at board meetings;
Transfer of shares;
Dividend Policy;
Use of cash or in-kind funds;
Change of control;
Restrictions/prohibitions on transfers;
Non-competitive parameters;
Confidentiality;
Compensation;
Breaking the deadlock;
Jurisdiction to settle disputes;
Termination criteria and notification.
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