How to Set up business in India?
A foreign investor may directly set up its operations in India through a branch office or a representative office or liaison office or project office. It may do so through an Indian arm i.e. through a subsidiary company set - up in India under Indian laws.
The following are the entry strategies for a foreign enterprise in case the Indian operations are to be run directly by a foreign company through a branch office or a representative office or liaison office or project office of the foreign company.
Liaison/ Representative Office
What: Liaison office can undertake only liaison and related activities on behalf of its parent company, Like:
- Representing the parent group company in India.
- To act as a channel of communication with Indian clients.
- Collecting and providing business information.
- Promoting Export/ Import from/to India.
- Promoting financial/ technical collaboration between parent/ group companies and Indian companies.
When: It can enter with much greater investment later if results of such test matches with their expectation.
How: Companies incorporated outside India may establish liaison offices in India after obtaining prior approval from the reserve bank of India. Normally initial permission was granted for three years and can be subsequently extended.
There are certain standard conditions imposed for operation of such offices:
- Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office abroad.
- Such offices should not undertake any trading or commercial activities and their activities.
- Such offices should not charge any commission or receive other income from Indian customers for providing liaison services.
- Promoting financial/ technical collaboration between parent/ group companies and Indian companies.
Compliance
Branch offices also have to file regular returns comprising of Annual Audited Accounts, an annual activity report on the activities of the office and some other documents with RBI. Transactions between the Branch and the parent/associated entities are subject to transfer pricing (TP) Regulations. Branch office needs to be register itself with Registrar of Companies and to comply with certain procedural formalities under the provisions of Companies Act 1956. Branch Office can transfer the available profit after paying taxes and compliance with IT Act'1962.
Wholly Owned Subsidiary Company/ Joint Venture
A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956. Foreign equity in such Indian companies can be up to 100% depending on the business plan of the foreign investor, prevailing investment policies of the Government and receipt of requisite approvals. For registration as an Indian company and its incorporation, an application has to be filed with the Registrar of Companies (ROC). Once a company has been duly registered and incorporated as an Indian company, it will be subject to same Indian laws and regulations as applicable to other domestic Indian companies.
Foreign companies can set up their operations in India by forging strategic alliances with Indian partners. Setting up of operations through a joint venture may entail the following advantages for a foreign investor:
- Established distribution/marketing set up of the Indian partners.
- Available financial resources of the Indian partner.
- Established contacts of the Indian partner, which help, smoothen the process of setting up of operations.
Foreign investments are approved through two routes.
Automatic Route
Approvals for foreign equity up to 50%, 51% and 74% are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government.. The Reserve Bank of India, accords automatic approval to all such cases.
Government Approval
Approvals in all other cases where the proposed foreign equity exceeds 50% or 51% or 74% in the specified industries or if the industry is not in the specified list require prior specific approval from the Foreign Investment Promotion Board.
