PREFACE:

Kachwaha & Partners are pleased to present the guide on doing business in India. This aims to be an easy to read, yet comprehensive overview of legal issues involved in doing business in India. It has been written primarily with the foreign investor in mind. The information contained herein (as may be expected from a work of this type) is general in nature. Also laws and policies governing business and investment are prone to frequent changes. Thus it is advisable to seek legal advice wherever warranted.

I hope you enjoy going through this and that it gives you a flavour of India; its main business laws and policies.

I may mention that through the text we refer to the masculine gender alone. This is for ease of drafting only (and it includes the feminine and neutral gender as well).

Please feel free to send us your comments or feedback and we would indeed look forward to hearing from you.

Yours truly,

Sumeet Kachwaha
Partner
New Delhi

INDIA – AN INTRODUCTION

Indian civilization dates back to over 5000 years. It's long history has witnessed many cycles of progress and decline. Of late, the country is seen as emerging from a long spell of poverty and deprivation. The spotlight is back on India.

The most striking thing about India is its diversity. It is diverse in terms of race, customs, language, geography, religion and wealth. There are 18 official languages (recognized by the Constitution of India). However English is the language of business and commerce and of the higher judiciary.

Politically, India has a quasi-federal structure with 28 States and 7 centrally administered regions (called "Union Territories"). The demarcation of legislative competence between the Centre and States is governed by the Constitution which lists out the subjects on which the Centre or States may legislate. For instance, "law and order" is a State subject and "Import and Export" is a Central subject. The Constitution has a pro - Centre leaning.

India has adapted the Westminster model with a Prime Minister elected by and responsible to the Parliament. National elections are held once every 5 years. In recent times no single political party has been able to gather an absolute majority and the governments are being formed through coalitions of various political parties. This means that sometimes diverse and heterogeneous interests have to be taken together in the decision making process.

State Of The Economy:

Post independence, India decided to trod the socialist path which encouraged Government sponsored commercial activities and discouraged private wealth. This period was characterised by Government control, high taxation and retrograde financial policies. All this culminated in a financial crisis by the early 1990's. Finally the Government was goaded into liberalising and embracing economic reforms. This has brought about a dramatic change in the fortunes of the country. Within a very short period India has emerged from the shadows of poverty and has become a super power in the making. Some economic indicators are as follows:

  • India's GDP is growing at 9% per annum – the second fastest in the world.
  • According to Goldman Sachs, Indian economy is set to overtake that of Western Europe by 2030 and by 2050 it is set to overtake the US economy to become the second largest economy in the world, (next only to China). In terms of Purchasing Power Parity (PPP) India is already the third largest economy in the world.
  • The forex reserves of India currently stand at US$ 230 billion. In March 1991 when India was in the throes of its financial crisis it stood at merely US$ 5.8 billion.
  • According to US Department of Commerce, India has amongst the highest returns on Foreign Investment and as per the FDI Confidence Index, India is amongst the three most attractive FDI destinations in the world.
  • In the first quarter of 2007, there were 72 foreign takeovers by Indian companies worth nearly US$ 25 billion.
  • India's capital markets have soared six times in five years.
  • 26% of the US technology companies founded by immigrants in the last decade have an Indian founder, which is more than those from the U.K., China, Taiwan and Japan combined.
  • 1/5th of the Fortune 500 companies have set up R&D centres in India. Some like, Microsoft have their only R & D centre outside their home country in India. IBM has its largest non – US workforce in India.

However at the same time India is far from shaking off its shackles of poverty. There are extremes in wealth disparity. On the one hand India is home to 36 dollar billionaires; on the other hand one out of four persons survives at a dollar or less a day.

LEGAL ENVIRONMENT

The Courts:



Though India has a quasi-federal structure, the judiciary is unified. Broadly, there is a three tier structure. First, each administrative district (there are over 600 districts) is headed by a District Court. Then each State has a High Court. Since some States share the same High Court, there are 21 High Courts in India. At the apex is the Supreme Court of India situated at New Delhi. The various High Courts can have very diverse characteristics. For instance, the High Court for the small State of Sikkim has a strength of only two Judges, whereas the High Court for the State of Uttar Pradesh has about 100 Judges. The Supreme Court of India has about 25 Judges who sit in several divisions of varying strengths. Matters of fundamental significance are decided by a bench comprising of 5 Judges.

Besides the broad three tier structure there are various specialized tribunals – the more prominent ones being the Company Law Board; Monopolies and Restrictive Trade Practices Commission; Consumer Protection Forum; Debts Recovery Tribunal; Tax Tribunal. These Tribunals function under the supervisory jurisdiction of the High Court where they may be situated, though many of them (like the Monopolies Commission) allow an appeal directly to the Supreme Court.

Judiciary:

The Indian judiciary is known for its independence and extensive powers. The High Court or the Supreme Court in exercise of their Constitutionally conferred writ jurisdiction are empowered strike down legislation on the ground of unconstitutionality. They can and fairly routinely intervene with executive action as well on the ground of unreasonableness or unfairness or arbitrariness in State action. Indeed Courts can even strike down an amendment to the Constitution on the ground that it violates the basic structure of the Constitution. Besides, the High Courts and the Supreme Court have adapted an activist mantle, which goes under the name of Public Interest Litigation, whereunder they can intervene with governmental policies if it may adversely impact the public at large or the public interest is such that it requires Court intervention.

The Bar:

India has a unified all India Bar which means that an advocate enrolled with any State Bar can practice and appear in any court in the length and breadth of the country, including the Supreme Court of India. Foreign lawyers are not permitted to appear in courts and the entry of foreign law firms into India (for non - court matters) has not yet been permitted though it is currently being debated and considered. However, they can appear in arbitrations.

Court Practice And Procedure:

The influence of the British Judicial System which India imbibed, continues in significant aspects. The official language for court proceedings in the High Court & the Supreme Court is English. Lawyers don a gown and a band as part of their uniform and address Judges as – "My Lord".

The procedural law of the land as well as most commercial and corporate laws are modeled on English laws. English case law is regularly referred to and relied upon in courts.

There is great emphasis on oral arguments. Almost all matters are heard extensively in open Court. Advocates are seldom restrained in oral arguments and complex hearings may well take days of arguments to conclude. Specialisation is relatively a new phenomenon and most lawyers have a wide-ranging practice.

INVESTMENT AND TRADE

The India story changed dramatically from 1991 when Government announced its new industrial policy, basically de-licensing industry and introducing fiscal and regulatory reforms. This vastly encouraged foreign investment. The cumulative Foreign Direct Investment (FDI) from 1991 to 2007 has exceeded US$ 54,628 million (in 2006 – 2007, alone it was US$ 15,726 million - a 184% increase from the previous year). The top investing countries are Mauritius, USA, Japan, Netherlands, U.K., Germany, Singapore, France, Republic of Korea and Switzerland. The top sectors attracting highest FDI are telecommunications, services (financial and non-financial), transportation industry, fuels, chemicals, food processing, electrical equipments, drugs and pharmaceuticals, cement and gypsum products and metallurgical industries.

Government Policy:

Government policy as to FDI can be classified under three categories. First; sectors where it is prohibited (for instance, it is not permitted in retail trading; atomic energy and agricultural). Second; sectors where it is subject to a cap e.g. in telecommunication FDI upto 49 percent is permitted - with Government permission it can go up to 74 percent – (but not beyond). The third is the residuary category where no Government permission is required. In other words, unless a sector is prohibited or investment is sought beyond the sectoral cap specified, FDI does not require prior Government approval. It only requires a post facto intimation to the Reserve Bank of India (RBI).

For sectors where FDI is prohibited or for specific sectoral caps and the guidelines pertaining thereto please see the Government websites: www.dipp.nic.in or www.rbi.org.in

Government approval is further required in the following cases:

  1. Proposals in which the foreign investor has an existing financial/technical collaboration in India in the same field.
  2. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 is attracted.
  3. Activities/items that require an industrial license. An industrial license is required inter alia for industries of social or environmental importance such as alcoholic drinks, cigars and cigarettes, electronic aerospace and defence equipment.

Foreign Investment Promotion Board (FIPB)

Foreign Investment Promotion Board (FIPB) is the competent body to consider and recommend foreign direct investment (FDI), which do not come under the automatic route. The FIPB consists of:

- Secretary, Department of Economic Affairs

Chairman

- Secretary, Department of Industrial Policy & Promotion

Member

- Secretary, Department of Commerce

Member

- Secretary, (Economic Relation), Ministry of External Affairs

Member

The FIPB normally takes up to 30 days to grant approval.

Foreign Portfolio Investments:

Only Foreign Institutional Investors (FIIs) registered with the Securities & Exchange Board of India (SEBI) or Non-resident Indians may invest in shares through the stock exchange.

Foreign pension funds, mutual funds, investment trusts, asset management companies, nominee companies are allowed in this category. Each investor can invest up to 10% of the total paid up capital issued by the Indian company. Total investment by foreign investors in an Indian company should not exceed 24% of the paid up capital or paid up value of each series of convertible debentures issued by the Indian company. However, this limit of 24% can be increased to the sectoral limit with the shareholder's approval.

Repatriation Of Funds:

The Government has allowed repatriation of funds arising out of sale proceeds or dividends without any restriction. For repatriation, the following is necessary:

  1. The investor has not chosen to invest on a non – repatriable basis nor is the security subject to non – repatriation.
  2. The sale of security has been made in accordance with the prescribed guidelines.
  3. Tax clearance certificate has been obtained from the tax authorities.

OFF SHORE BORROWINGS:

As a matter of fiscal policy, Government regulates External Commercial Borrowings (ECBs). The guiding principle of the ECB policy is to keep borrowing maturities long, costs low, and encourage infrastructure and export sector financing which are crucial for overall growth of the economy. Government has been streamlining and liberalising ECB procedures in order to enable Indian corporates, to have greater access to international finances.

ECB can be accessed under two routes, namely, the "automatic route" and "approval route".

Automatic route: ECB for investment in the real sector, industrial sector, especially infrastructure sector in India, falls under the automatic route, i.e. will not require RBI / Government approval. The maximum amount of ECB which can be raised by an eligible borrower under the automatic route is US$ 500 million during a financial year. However, NGOs engaged in micro-finance activities can raise ECB only upto US$ 5 million in a financial year for permitted end use.

Approval route: All cases which fall outside the purview of the automatic route, will be decided by an Empowered Committee set up by Reserve Bank of India.

For further information on ECB policies please see www.finmin.nic.in

FOREIGN TRADE POLICY:

In the year 2006 India imported goods worth US$ 131.22 billion and exported goods worth US$ 89.48 billion. The principal imports were capital goods, crude petroleum and petroleum products, gold, precious and semi-precious stones, chemicals, edible oils, electronic goods and coal. The principal exports during this period were cotton yarn and textiles, readymade garments, gems and jewellery, agricultural products, IT services, engineering products, chemicals, pharmaceuticals and petroleum products. Major countries from which imports were made were the USA, U.K. Japan, Germany, Belgium, Switzerland, UAE, Saudi Arabia, South Africa, China, Malaysia, South Korea, Singapore, Indonesia and Australia and the major markets where goods were exported to from India were the USA, U.K., Germany, Japan, Italy, France, Netherlands, Belgium, UAE, China, Hong Kong, Singapore and Bangladesh.

The import and export laws of India are mostly through policy announcements by the Government. This is under the provisions of the Foreign Trade (Development and Regulation) Act, 1992. Currently the Policy for the period 2004-2009 is in force. However it is fairly common for amendments to be made in the Import Policy from time to time by Public Notice.

The broad approach of the Government is to treat imports and exports under three categories - items which are prohibited, items which are restricted and items which can be feely imported. Items which can be freely imported or exported do not need any Government license. Items which are restricted require a license. This is issued by the office of the Director General of Foreign Trade which functions under the Ministry of Commerce. As per India's WTO commitment, only a small number of items fall in the category of prohibited / restricted goods and these restrictions are usually on the ground of national security, health and environment, protection of small scale or tiny enterprises etc. Certain items are declared to be canalized i.e. only a designated public sector undertaking may import or export it.

Significant Schemes:

The Foreign Trade Policy has in place a scheme known as the Export Promotion Capital Goods Scheme which allows for the import of capital goods for pre-production, production and post-production stage at a concessional rate of customs duty of 5%, subject to an export obligation.

The Foreign Trade Policy also provides for schemes for setting up of undertakings to export their entire production of goods and services under the Export Oriented Unit Scheme, Electronic Hardware Technology Park Scheme, Software Technology Park Scheme and the Buyer-Technology Park Scheme for manufacture of goods, including repair, remaking, reconditioning, re-engineering and rendering of services. Information on these (and other) schemes can be obtained from the Government website: www.dgft.delhi.nic.in.

SPECIAL ECONOMIC ZONES:

Special Economic Zones (SEZ) are getting recognized as fast growth engines which can boost manufacturing and create new job opportunities at an unprecedented scale. India has taken a major policy initiate to encourage SEZs. With a view to simplify the procedures it has enacted a Special Economic Zone Act, 2005 and notified the Rules thereunder in the year 2006. There is a great rush to set up SEZs all over India and almost every major Indian business house has got into the act.

Incentives offered to develop SEZs include:

  • Exemption from customs/excise duties for development of SEZs.
  • Income Tax exemption on export income for a block of 10 years in a 15 year period.
  • Exemption from minimum alternate tax under the Income Tax Act.
  • Exemption from dividend distribution tax under the Income Tax Act.
  • Exemption from Central Sales Tax and Service Tax.

Incentives and facilities available to persons setting up units in SEZ include:

  • Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ units.
  • 100% Income Tax exemption on export income for SEZ units for first 5 years; 50% for the next 5 years and 50% of the ploughed back export profits for next 5 years.
  • Exemption from minimum alternate tax under the Income Tax Act.
  • External commercial borrowing by SEZ units upto US $ 500 million in a year without any maturity restriction through recognized banking channels.
  • Exemption from Central Sales Tax and Service Tax.
  • Single window clearance for Central and State level approvals.
  • Exemption from State sales tax and other levies as extended by the respective State Governments.  

FDI up to 100% is allowed through the automatic route for all manufacturing activities in SEZs, except for the following: (i) arms and ammunition, explosives and allied items of defence equipment, defence aircraft and warships (ii) atomic substances (iii) narcotics and psychotropic substances and hazardous chemicals (iv) distillation or brewing of alcoholic drinks (v) cigarettes/cigars and manufactured tobacco substitutes (vi) Sectoral norm as notified by Government shall apply to foreign investment in services.

TRANSFER OF TECHNOLOGY

Transfer of technology (or technical support) is a common feature of joint venture agreements or turn - key projects. It is also usual in the franchising and hotel industry.

Payment Incidents:

Transfer of technology usually entails payment under the following heads:

  1. Royalty
  2. Payment for designs and drawings
  3. Payment for engineering services
  4. Technical know how fees

Government Permissions:

Government permission for remittance of funds for transfer of technology is required where it does not fall under the "automatic route". The following payments fall under the automatic route (and hence do not require Government approval):

  1. Lump sum payment, up to US$ 2 million.
  2. Royalty payment can be made up to 5% of domestic sales and 8% of exports without any restriction on duration of such payments. These payments are net of taxes. Royalty is calculated on the basis of net ex-factory sale price exclusive of excise duties, less the cost of the standard bought out components and the landed cost of imported materials including ocean freight insurance, custom duties etc.
  3. Royalty payment up to 2% for exports and 1% for domestic sales on the use of trade mark and brand name of a collaborator without any transfer of technology is also allowed under the automatic route.
  4. In relation to the hotel industry, automatic permission is available, subject to the following conditions:
    1. Technical and Consultancy services: Lump sum fee does not exceed US$ 2,00,000
    2. Franchising and Marketing support: Up to 3% of gross room sales.
    3. Management Fees: Up to 10% of the gross operating profits.

CORPORATIONS

The law of corporations in India is governed by the Companies Act, 1956. Broadly, there are two types of companies – Public Limited Companies and Private Limited Companies. While Public Limited Companies describe themselves merely as "Limited Companies", Private Limited Companies are obliged to indicate clearly the fact that they are a Private Company by adding after their name "Pvt. Ltd."

Private Limited Companies:

A Private Limited Company can be formed with a minimum of two persons as shareholders and a minimum of two directors. The minimum paid up capital for a Private Company is about US$ 2500 (approximately). A private company has the following features:

  1. The right to transfer shares is restricted as per its Articles of Association.
  2. The maximum number of its shareholders is limited to 50.
  3. No offer can be made to the public to subscribe to its shares and debentures.
  4. No invitation or acceptance of deposits from persons other than members, directors or their relatives is allowed.
  5. Lesser number of compliance requirements.

Thus generally, where there is no requirement for raising finances through the public and the ownership is intended to be closely held, a Private Limited model is followed.

Public Company:

A company which does not contain restrictive provisions in its Articles is a Public company. Unlike Private companies, Public companies can be formed with a minimum of seven members. There is no maximum limit on shareholders for Public companies. The minimum paid-up capital required for a Public company is about US$ 12500 (approximately) and the minimum number of directors is three.

Incorporation Formalities:

There is no need to appoint an Indian director or Indian shareholder to incorporate a company.

Incorporation is through registration with the Registrar of Companies (ROC). The ROC is a statutory authority formed under Companies Act and has numerous offices all over India.

For incorporation, the following steps are involved:

  1. Selection of name of the company and getting it approved from the ROC. Upon scrutiny and satisfaction, the ROC issues a name availability letter.
  2. After the name is approved, Memorandum and Articles of Association (MoA) are drafted.
  3. MoA along with other necessary documents are filed with the ROC. The filing fees is dependent on the authorised share capital of the Company.
  4. After scrutinising the documents, the ROC issues a Certificate of Incorporation.

Whereas Private companies can commence their business from the date of Certificate of Incorporation, Public companies are required to file certain additional documents and obtain a Certificate of Commencement of Business.

A company can normally be incorporated within a period of 15 to 20 days. The Government has recently introduced e-filing through which Company incorporation (including subsequent statutory documents) can be filed in electronic form. Details of e-filing procedure are available at the website of Ministry of Company Affairs at www.mca.gov.in.

WINDING UP:



There are three ways to wind up a company:

  1. Voluntary winding up,
  2. Winding up under orders of the court,
  3. Declaration of the company as defunct

(i) Voluntary Winding Up:

This is permitted when the company has no debt or is in a position to meet its liability in full within a maximum period of three years. The consent of all the creditors have to be taken. Upon approval of the Registrar of Companies, a private liquidator is appointed to dispose off the assets and prepare a preliminary report. This is subject to scrutiny by the Official Liquidator and upon his satisfaction of legal compliances. The final order of winding up is subject to orders of the High Court.

(ii) Winding Up Under Orders Of The Court:

This can happen under a variety of circumstances. Mostly it happens where the company is unable to pay its debts and the Court is satisfied that it would be just and equitable to wind up the company. This route involves an elaborate and time consuming exercise whereunder the High Court appoints a liquidator and the directors of the company are required to file a statement of assets and liabilities of the company with the liquidator upon which the liquidator takes up the task of disposing off assets and satisfying the debts of the company from the proceeds. Once the debts are satisfied (to the extent they can be) and all monies which can be recovered are recovered, the court passes a final order for winding up. The debts of the company are paid out as per a schedule of priority. The top most priority goes to the workmen and the secured creditors. Next in terms of priority are Government taxes. Only thereafter the debts of unsecured creditors are payable.

(iii) Declaration As A Defunct Company:

This option can be resorted to without any recourse to a court. This route is available through a simple letter to the Registrar of Companies stating that the company is not carrying on any business for a year or more. Upon being so satisfied, the Registrar can strike off the name of the company from the Register of Companies on the ground that it is a defunct company. However notwithstanding that the name of the company is struck off, the company and its directors shall continue to be responsible for any undischarged obligation of the company as if it had not been dissolved. Further the directors of the company are required to furnish an affidavit to the Registrar to the effect that the company has no assets or liabilities and has not been carrying on any business during the last year or more. Further any one director is required to furnish an indemnity bond to the effect that he would satisfy the liabilities of the company if any after the name of the company has been struck off from the Register.

Usually these proceedings conclude within three months or so.

TAKEOVER OF LISTED COMPANIES:

In order to protect the interest of small investors and to promote fairness in the capital market, the Securities & Exchange Board of India (SEBI) has framed Regulations providing for acquisition and takeover of shares (commonly called the Takeover Code). The Code has the following significant features:

No person can acquire shares in a listed company which would take his holding upto 15% or beyond without first making a public announcement to the shareholders of the company and an open offer to them, to acquire their shares to the extent of 20% of voting rights at the "offer price" (as finally approved by SEBI). In other words, a person wishing to acquire upto 15% or more shares of the company must make a public offer for upto a minimum of 20 percent of the voting rights in the Target Company.

Once the acquirer has obtained upto 15% or more shares in the company, the acquirer may resort to "creeping acquisition" of upto 5 percent of the voting rights in the Company per financial year, without making any public offer. This way the acquirer can consolidate his shareholding in the Company upto a total of 55%. Beyond 55%, the requirement of making an open offer again comes into play.

However any inter se transfer of shares amongst the promoters / joint venture partners in the company would not attract the provisions of the Code.

Failure to comply with the Code entails negation of the transaction and also penal liability.

CORPORATE GOVERNANCE:

Corporate governance assumed greater significance in India post liberalization. Following a few instances of malpractices, it was felt necessary to lay greater emphasis on corporate governance to ensure transparency and encourage corporate growth. Earlier Corporate Governance was ensured through some fairly standard provisions under the Companies Act providing for inter alia minimum number of board meetings, shareholders meetings, rotation of directors etc. In 2005 the Securities Exchange Board of India (the market regulator) introduced Clause 49 in the Listing Agreement of all Public companies, wishing to list their shares in any stock exchange. Clause 49 essentially provides for the following measures:

  1. Constitution Of Board Of Directors:
  • The Board should have a combination of executive and non-executive directors. Not less than fifty percent of the Board should comprise of non-executive directors.
  • One-third of the Board should comprise of independent directors where the Chairman of the Board is a non-executive director and half of the Board should comprise of independent directors where the Chairman is an executive director. Independent director shall mean a non-executive director who apart from receiving director's remuneration does not have any material pecuniary relationships or transactions with the company, its promoters or directors.
  1. Audit Committee:

     It is necessary for all listed companies to have an Audit Committee. This committee shall review the financial statements in consultation with the management.
  2. Summary Of Related Party Transactions:

     Where the transactions are entered with parties related to promoters, directors etc. a summary of the same is to be placed periodically before the audit committee.
  1. Disclosures:

     Every company is required to give a Corporate Governance report along with its annual accounts stating inter alia its strengths, opportunities, risks and concerns.

STRUCTURING OF CROSS-BORDER BUSINESS

Foreign investors have the following structuring options for entry into India:

  • Liaison Office/Representative Office
  • Branch Office
  • Project office
  • Incorporation of Company
  • Franchising

a. Liaison Office:

Liaison office basically acts as a representative and cannot carry out any commercial or industrial activity on its own. Setting up a liaison office needs prior permission of the Reserve Bank of India (RBI). A liaison office typically undertakes the following:

  • Representing the parent / group company and acting as a communication channel.
  • Marketing for the parent Company - without actually entering into any contract itself.

All expenses for establishing and running the liaison office have to be met through inward remittances. No income can be generated locally. As the liaison office is not permitted to be engaged in any commercial activity, it earns no income and is therefore not liable to pay any income tax.

b. Branch Office:

Prior approval from the RBI is required for setting up a branch office. However, Government has granted general permission to foreign companies for setting up branch offices in designated Special Economic Zones for undertaking manufacturing and service activities. Branch office can perform almost all the activities that a parent company can perform in India without the hassle of going for incorporation. Typically, the branch office carries out the following activities:

  • Entering into contracts for export / import of goods.
  • Rendering professional or consultancy services.
  • R & D
  • Promoting technical or financial collaboration.
  • Acting as buying / selling agents.
  • Rendering services or technical support.

The major advantage of a branch office is the ease of setting up and exiting. However, profits from the branch office is taxable in India and the tax is higher than that for an Indian Company. A branch office is taxed at the rate of 41.86%, whereas an Indian Company (incorporated in India) is taxed at the rate of 33%. Profits (post tax) are fully repatriable out of India.

c. Project Office:

Foreign companies can set up a Project Office for carrying out a specific project in India. Prior approval from the RBI is not required. Project offices however cannot carry out any activity other than the activity relating to the project. Like branch office, a project office is also subject to income tax at the rate of 41.86%. A foreign company may open a Project Office in India provided it has secured a contract from an Indian company to set up a project in India and the following conditions are fulfilled:

  1. the project is funded by inward remittances from abroad, or
  2. the project is funded by a bilateral or multilateral International Financing Agency, or
  3. the project has been cleared by an appropriate authority, or
  4. Indian company awarding the contract has been granted term loan through a Public Financial Institution or bank in India.

d. Incorporation Of Indian Company:

A foreigner can incorporate a wholly or partly owned company in India.

While this option affords greater freedom in operation and lesser tax liability, it entails expense in complying with the administrative procedures under the Companies Act. Also winding up (if necessary) becomes a long and cumbersome exercise. This option is advisable if the operations planned in India are large enough to justify the additional administrative burden.

A company incorporated in India (by foreigners) is liable to pay tax at the rate applicable to any other domestic company (currently 33.66%).

e. Franchising:

A foreign company can open a franchise in India. Many companies such as Mc Donald's, Pizza Hut, Subway, Kentucky Fried Chicken have entered India through the franchising route. Franchising is contract driven i.e. through an agreement with the Indian counterpart. Prior approval of the RBI is required by the Indian partner for remitting money for acquisition of franchise in India.

Reserve Bank of India has allowed royalty payment up to 2% for exports and 1% for domestic sales on the use of foreign trade mark and brand name without any transfer of technology. Further, for use of trade mark, a company is required to obtain licence from the trade mark authorities. There is no fixed term for the grant of license and the same is dependent on the terms of license agreement entered into between the would be licensor and the licensee.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.