First published in September 2015
Doing business in India is not easy. There are many complexities involved – especially when you set up your business. This article explains the options that are available to you, to set up your business, during your India market entry.
India has opened itself up to foreign companies in recent years and the GDP growth projections of 8 to 8.5% make India an attractive market for international investment. Many foreign firms, who are already working with distributors, are looking at establishing their own presence in the country, and need to plan their entry carefully. For some firms, either a Joint Venture, Merger or Acquisition will be the right approach, but for more and more companies, the best approach is to establish their own company in India. This has become easier as foreign direct investment has become easier in many sectors of the economy.
Foreign Companies are allowed India market entry, as entities, in the following ways:
- Incorporation of a Pvt. Ltd. Company
- Setting up of a Branch office
- Setting up of a Project office
- Setting up of a Liaison office
- Limited Liability Partnership
- Incorporation of a Private Limited Company in India is a popular way for foreign companies to begin business in India. Automatic approval to enter into the Indian market is available for most industry sectors – although, a few require approval from the Foreign Investment and Promotion Board (FIPB). A newly incorporated company (subsidiary) can do any legal business in India including trading, service, consulting or manufacturing. For income tax purpose, subsidiaries are treated at par with domestic companies.
2. Foreign companies can also set up a Branch office in India with the approval of the Reserve Bank of India (RBI) and by registering with the Registrar of Companies (ROC). A branch office can perform all the tasks that are permissible for a Liaison office, and in addition they can provide consultancy or technical assistance on their products or services in India. They can import and export goods as well as act as a buying or selling agent in India. But, the Branch office cannot carry out production or processing of products in India either directly or indirectly; and while a foreign company’s branch office can buy property in India, it cannot lease or rent that property out. The Indian Tax Authority treats a branch office as a foreign company and imposes a higher tax on the income than that for an Incorporated Company.
3. The RBI has granted general permission for foreign companies to establish a Project office in India, subject to the condition that they have secured a contract from an Indian company /entity and
- Project is funded directly by inward remittance from abroad or
- Project is funded by a bilateral/multilateral financing agency or
- Project has been cleared by an appropriate authority or
- Company awarding the contract has been granted a term loan by a public financial institution or bank for the project
If any of the above conditions are not met, then the specific approval of the RBI is required. This entity is also treated as a foreign company and the tax imposed is higher than on the incorporated company. This entity requires registration with ROC. After closure of the project, this is required to be closed.
4. A Liaison office (LO) is also called Representative office and can be set up in India with the approval of the RBI and requires registration with the ROC. The initial approval is given for three years only and is subject to further extension. This entity is not allowed to render any kind of commercial activities and earn money in India. This can be considered as a window to do market research in India and to the represent the parent company for import, export and business collaboration.
5. The Limited Liability Partnership (LLP) is a new concept in India. This is a partnership firm with limited liability. Foreign investment is not allowed in the form of LLP under the automatic route but approval is required under Foreign Investment and Promotion Board (FIPB). This requires incorporation with the ROC. There must be minimum one Resident Indian partner for LLP. The LLP model does not allow External Commercial Borrowing (ECB), and therefore, this is not suitable for a business that requires overseas loans.