BACKGROUND
In 2014, the Government of India launched 'Make in India', a campaign aimed at transforming India into a manufacturing hub and promoting innovation. In line with this objective, the Government has taken various measures to minimize bureaucratic hurdles to improve the ease of doing business in India. These measures have led to a significant improvement in India's rankings in the ease of doing business index published by the World Bank. In 2014, India was ranked at 143 among 193 countries. Currently, India ranks at the 63rd position in the index. Last year, the Union Budget 2023-24 highlighted that to simplify the legal and regulatory framework for businesses, more than 39,000 compliances have been reduced and more than 3,400 legal provisions have been decriminalized. This is supplemented by various initiatives such as the 'Start-up India' campaigns launched by the Government to promote entrepreneurship.
Given the efforts by the Indian Government to increase participation of global companies in India, it is relevant to understand the construct and framework of establishing a presence in India. In this note, we have provided an overview of the forms of business enterprises, funding routes, regulatory framework for doing business in India, foreign exchange laws and applicable tax regimes in India. You will appreciate that the structures / routes mentioned in the note are only illustrative to provide a high-level understanding of theregulatory regime in India.
CONDUCTING BUSINESS IN INDIA
Setting up presence in India
Operating as a Foreign company
- Liaison Office or Representative
Office: A liaison office is a place of business which
acts as a channel of communication between the head office of the
foreign company and its Indian entities. Typically, a liaison
office is set up to understand the business environment, promote
awareness of the products of the parent entity and explore
opportunities for business and investment.
Key considerations: (i) Liaison office cannot undertake any commercial, trading, or industrial activity either directly or indirectly in India; (ii) it cannot earn any income in India; and (iii) the expenses of a liaison office are mandatorily required to be met out of inward remittance from the head office of the foreign company.
- Branch Office: Branch office is an
extension of a foreign enterprise in India. The purpose of a branch
office is to engage in the same activity as the parent company. A
branch office may undertake the following permissible activities:
(a) export / import of goods; (b) render professional or
consultancy services; (c) carry out research work, in the areas in
which the parent company is engaged; (d) promote technical and
financial collaborations between the Indian companies and the
parent or overseas group company;
(e) represent the parent company in India and act as a buying / selling agent in India; and (f) render services.
- Project Office: Foreign enterprises that have secured a contract in India and are planning to execute specific projects through temporary sites/ offices are permitted to set up a project office. The validity period depends on the tenure of the project. A general permission is granted for setting up a project office subject to one of the following conditions: (a) project is funded directly by inward remittance from outside India; (b) project is funded by a bilateral or multilateral international financing agency; (c) the company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project; or (d) project has been granted the necessary regulatory clearance.
Operating as an Indian company
- Subsidiary Company: Setting up a
company in India (through incorporation or acquisition) is
preferred for businesses having a long-term approach and for
various legal, tax and regulatory reasons. Such companies
(generally incorporated as a subsidiary of the overseas parent) are
treated as 'person resident in India' for the purpose of
Indian laws, despite being 100% foreign owned.
- Limited Liability Partnership (LLP): LLP is a body corporate, which is considered a separate legal entity, distinct from its partners. While an LLP provides benefits like that of a company, LLPs are comparatively easier to operate with fewer compliance requirements. In an LLP, liability of partners is restricted to their contribution to the LLP.
Key requirements under the Indian Companies Act, 2013 for incorporating a company are:
- Making an application for reservation of name
- Obtaining a Director Identification Number
- Filing an application for registration of the company
- Filing incorporation documents of the company such as articles of association and memorandum of association
- Filing of declarations for compliance with the requirements under Companies Act, 2013 Typically the time frame for incorporating a company in India is 8 to 12 weeks.
Types of Financing
Post identifying the manner of establishing a presence in India, the next step is to determine the manner in which the Indian entity will be initially funded for set-up/ business operations. Foreign investment in an Indian company is regulated by the Reserve Bank of India (RBI) under Foreign Exchange Management Act, 1999 ("FEMA") and related regulations. These regulations provide for pricing guidelines, modes of investment and remittance, and the manner of receipt of funds.
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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.