In this article, Debarati Tripathi pursuing M.A, in Business Law from NUJS, Kolkata discusses legal framework and procedure for establishing a foreign company in India.
Introduction
The economic development of a country can be catalyzed by the influx of Foreign Direct Investment (FDI) as it can fuel growth in GDP by investing capital through FDI in various resources like infrastructure, manufacturing, technology, transport, services, productivity. India is an attractive hub for foreign investments in the manufacturing sector. With impetus on developing industrial corridors and smart cities, the government plans enormous development of the nation.
Key Advantages of Doing Business in India
Here are some key advantages of doing business in India,
- Growth Potential: The world’s largest democracy and the 2nd fastest-growing major economy.
- Stability of Government and Pro-Business: Political stability is vital to foreign investments. A pro-business work culture of the Government machinery with the business sector to promote economic growth.
- Extensive Trade Network: Trade network backed by regional and bilateral free trade agreements with numerous trading partners helps leverage investor’s RoI.
- Competitive Tax System: Competitive tax regime and comprehensive network of Tax Treaties, further modified by the introduction of Direct Taxes Code and the Goods and Service Tax – single tax for the whole nation.
- Skilled Workforce: Highly-rated human capital base sought globally for – talent, knowledge and skills.
- A Well – Developed Financial System: Well regulated financial system with access to developed capital markets as an alternative source of financing.
- Robust Legal System: Efficient legal and judicial system, improved enforcement of laws.
- Great Work Ethics: Professional manner of working and willing to learn.
Business Ventures in India
To set up a business venture in India, a foreign company has the following choices :
Form an Indian Company
To Form an Indian company, incorporation of a company under the Companies Act, 1956 through
- Joint Venture with an Indian partner, for example, strategic collaborations with Indian partner organizations
- Wholly owned subsidiary, set up a wholly-owned subsidiary in sectors which permit 100% Foreign Direct Investment [FDI] under the FDI policy. 100% foreign equity in such Indian companies is permissible, subject to equity caps prescribed in the FDI policy concerning the various areas of activity and depending on the investor’s decision.
- Limited Liability Partnership (LLP), a new form of business structure in India, that combines the advantages of a company (a separate legal entity having perpetual succession) with the benefits of organizational flexibility associated with a partnership. The FDI policy for LLPs has been notified recently making this a possible viable entity form for Indian business operations of foreign investors.
For registration and incorporation, one has to file an application with the Registrar of Companies (ROC). Once such a company has been incorporated and duly registered as an Indian company, it is subject to Indian law and regulations as applicable to all other domestic Indian companies.
As a Foreign Company
The entry into India for a business venture via the mode of Registration of Liaison Office, Branch Office or Project Office requires RBI and/or Government approval. Hence, the cost and time taken for registration of liaison office, branch office or project office for a foreign company are higher as compared with the incorporation of a private limited company. Also, to open a branch office, liaison office or project office, one has to be an Indian, foreign nationals cannot do so, thus limiting the scope for foreign nationals.
Liaison Office/Representative Office
A Representative office acts as a communication channel or liaises between the headquarters or the principal place of business and offshore entities in India. Collecting information about business opportunities in the present market and providing information about the parent company and its products to prospective clients in the region, ie,. India is the main function of this office. The office can not undertake any commercial activity directly or indirectly and therefore cannot have any income/earnings in India. Examples of permitted activities are the promotion of export/import from/to India and also facilitation of technical/financial collaboration between the parent company and companies in India.
The Reserve Bank of India (RBI) is the body that approves establishing a liaison office in India.
Project Office
Temporary project/site offices are frequently set up by foreign companies when they expect to execute specific projects in India. Project offices cannot take up or initiate on any activity other than those relating to the execution of the project. A general permission to foreign entities to establish Project Offices is granted by the RBI, subject to specified conditions. The offices may remit any surplus funds outside India once the project gets completed, general consent for which has been granted by the RBI.
Branch Office
Typically Branch offices of a foreign company carrying out manufacturing and trading activities abroad are set up in the region/market of manufacture for the following purposes:
- Import/Export of goods/merchandise – raw material and finished product.
- To bring about better technical/financial collaborations between Indian companies and the parent or overseas group company.
- Providing consultancy, advisory or professional services.
- Supplementing research work and experimentation, in which the parent company is engaged – more economical.
- Catering to software development and Information Technology services.
- Authorized buying/selling agents in India for the parent company.
- Providing technical support to the products coming from the parent/ group companies and troubleshooting any local issues.
The Reserve Bank of India (RBI) is the authority responsible for approving Branch office permissions.
Manufacturing activities have certain restrictions. A branch office is not permitted to carry out manufacturing activities by itself but are prescribed to subcontract these to an Indian manufacturer. The profit of the branch may be remitted outside India for Branch Offices subject to the approval from RBI. The remittance is net of applicable Indian taxes and subject to RBI guidelines.
Branch Office on “Stand Alone Basis”
Standalone Branch offices are those that are isolated and set up in the Special Economic Zone (SEZ) or Export Oriented Unit (EoU). Due to the specific nature and purpose of setting up and demarcation of the EoU/SEZ, approval from RBI shall not be necessary for a company to establish a branch/unit in the SEZs for manufacturing and service activities, subject to specified conditions. No business activity/transaction will be allowed outside the EoU or SEZs in India, including with branches/subsidiaries of its parent office in India.
Foreign Direct Investment (FDI)
The entry of FDI by non-residents into India is controlled by the Government through two routes –the automatic route and approval route. The automatic route is less restricted and more liberal and aimed for prescribed sectors and levels of investment. While in the case of approval route, FDI is allowable in all sectors and activities specified in the consolidated FDI policy of the government, however, requires prior approval from the RBI/Government and is scrutinised depending on the sector and the nature of the investment.
New Ventures
FDI investment up to 100% is possible in new ventures, under the automatic route, except
- Proposals outside the purview of notified sectoral policy
- Foreign partner having a previous venture in India
- Proposals under a sector in which FDI is prohibited
- Proposals that require Industrial License namely;
- Distillation and brewing of alcoholic drinks.
- Cigars and cigarettes of tobacco and manufactured tobacco substitutes.
- Electronic Aerospace and defence equipment of all types.
- Industrial explosives including detonating fuses, safety fuses, gunpowder, nitrocellulose and matches; Hazardous chemicals.
- Drugs & Pharmaceuticals (according to modified drug policy issued in September ‘Foreign Investment in Existing Companies for Expansion Plans
- If they are engaged in industries under the automatic route.
- If the increase in equity level is for expansion of equity base.
- If the foreign equity is in foreign currency.
FDI in Small Scale Industries (SSI) Sector
The current FDI norms restrict a ceiling of 24 percent FDI for companies in the small scale industries sector (SSI) having capital investment in plant and machinery not exceeding Rs. 50,000,000 (USD 1,250,000). Further, SSI units with foreign investment exceeding the notified sectoral cap are liable to lose their status as SSI units, but there is no bar on higher foreign equity holding as such. Under the relaxed norms, SSI units are eligible to raise foreign equity in accordance with the caps/limits governing the sectors in which they operate, thereby improving their access to technology and capital and assisting in the growth and modernization of the sector.
If SSI manufactures items reserved for SSI, foreign investment beyond 24% would require an industrial license with a 50% mandatory export obligation.
Foreign Direct Investment (FDI) Procedure
Automatic Route
- FDI under automatic route is now allowed in quite a few sectors, including the services sector, except a few where the existing and notified sectoral policy prohibits FDI beyond a ceiling limit for Indian companies to accept investment without prior approval of RBI.
- To file required document and report in Form FC-GPR with concerned Regional Office of RBI within 30 days after the issue of shares to foreign investors.
- The facility is available to NRI/OCB investments also.
Government Approval
All FDI proposals other than those under automatic route are considered for Government Approval on the recommendations of the Foreign Investment Promotion Board (FIPB)
- The prescribed application is to be submitted to the Secretariat of Industrial Approvals (SIA), in New Delhi.
- Applications can also be submitted to Indian Mission abroad who in turn forward them to SIA.
- The Proposal received by SIA is placed before FIPB within 20-30 days.
- The FIPB has the flexibility of purposeful negotiations with the investors.
- RBI has granted a general permission under FEMA(Foreign Exchange Management Act) with regard to proposals approved by Government.
- Indian companies do not require separate clearance from RBI for receiving inward remittance and issue of shares once FIPB approval is available.
- An Indian company, issuing shares as prescribed in the Regulations should submit the details of advance remittance to the RBI, no later than 30 days from the date of receipt of the amount of consideration, giving the following details
- Name and address of the foreign investors
- Date of receipt of funds and their equivalent in Indian rupee
- Name and address of the Authorized Dealer(Authorized Banks) through whom the funds have been received, and
- Details of the Government approval, if any.
- Once the shares are issued, the company is required to file a report in Form FC-GPR no later than 30 days from the date of issue of shares with the Regional Office of RBI in the place where the registered office of the company is situated.
Documents and Information Required for FIPB Application
The FIPB application requires a comprehensive project report – executive summary (ES) to be submitted. The contents of the ES and further information may follow later,
- The ES should be accompanied by the copy of the Annual Report (Balance Sheet and Profit and Loss Account) of the Foreign company.
- Copy of the foreign company’s profile, product/service profile also required.
- Board resolution of the Board of the foreign company agreeing to the sale of shares and consideration thereof.
- Declaration by the foreign company that it has no other collaboration, financial or trade agreement or technical assistance agreement in India with another company under the same or allied subject.
- This declaration should be replaced with no objection from the Indian Company, expressing it has no objection to the shares being acquired by the overseas company.
- An authority Letter, to apply, follow up and obtain the FIPB approval from the foreign company.
- These documents should be filed under the Cover letter of the acquirer company requesting approval of the Secretary (Chairman) Foreign Investment Promotion Board.
Process & Documentation required for Incorporation of a Company, to open a Branch Office/Liaison Office in India
The Process of Incorporation of a Company in India
- An application in Form 1A of the Companies (Central Government’s) General Policy Forms, 1956 setting out the names of the company in order in preference, is to be filled with the Registrar of Companies along with the prescribed fee. (Rs 500/- presently).
- The Memorandum and Articles of Association of the proposed company is required to be drafted.
- There should be at least two subscribers to the Memorandum and Articles of Association in case of a private limited company and minimum of seven subscribers in case of public limited company. As per the Indian laws at present foreign nationals and foreign companies, through authorized representatives, can subscribe to the Memorandum and Articles of Association of a company without the prior approval of the Reserve Bank of India.
- If the name of the Parent Companies is proposed to be part of the name of the company, then a No Objection Certificate addressed to the Registrar of Companies is required to be submitted, by way of Board resolution.
- The subscribers shall obtain the name approval and subscribe to its Memorandum and Articles of Association. The minimum capital to be subscribed by the Memorandum of Association is Rupees 100,000/- (Rs. One hundred thousand only)(US$ 2000 approx) in case of private limited company and Rupees 500,000/- (Rs. Five hundred thousand only)(US$ 10000 approx )in case of public limited company.
- Authorized Capital would be dependent on the Funds requirement of the new Company. Filing fees depend on the proposed Authorized Capital of new Company.
- The Memorandum and Articles of Association is required to be stamped as per the Indian Stamp Act, and signed by the subscribers at the relevant page in their own handwriting.
Following documents are required to be filed, signed and filed along with the Memorandum and Articles of Association of the proposed company :
- Declaration of compliance in Form 1.
- Notice of the location of the registered office of the company in Form 18.
- Particulars of Directors (name of the Directors, father’s name, address, age and nationality of the nominee directors) in Form 32.
- Consent of the Directors in Form 29 (in case of a public limited company).
- Power of Attorney to make corrections and submissions.
- Approval for Foreign Investment (if applicable).
All the documents referred to above are required to be filed for registration within six months from the date of availability of name along with registration fee, which is calculated on the basis of the authorized capital of the company. The Registrar of Companies after scrutinizing the documents registers the company and issues certificate of incorporation. Private Company is eligible to commence its business immediately after obtaining the certificate of incorporation. However, public companies are required to obtain a certificate of commencement of business before initiating any business activity.
Documents Required for the Incorporation of Indian Subsidiary of a Foreign Company
At the Time of Filing Application for “Availability” of Name
- No objection by way of Board Resolution from “FOREIGN COMPANY” for Incorporating the Joint Venture Company in India duly notarized and certified by Indian Embassy/Consulate in the Foreign Company.
- Memorandum and Articles of Association (Charter) of “FOREIGN COMPANY” duly translated into English.
- Name, address and father’s name of proposed Equity Shareholders and Directors of the Indian subsidiary.
Points to note – At the Time of Incorporation of a Company
- Authorization vide Board Resolution, for the signing the Memorandum and Articles of Association and other documents for Incorporation of the company in India, translated into English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.
- Memorandum and Articles of Association (charter) of “FOREIGN COMPANY” to be duly translated in English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.
- Authorization by the attorney/representative vide Board Resolution, for representing the Company before the Registrar of Companies and making corrections if any at the time of Vetting of Memorandum and Articles of Association and other documents for Incorporation of the company in India duly notarized and certified by Indian.
- Embassy/Consulate in Foreign Country.
- No objection vide Board Resolution, of “FOREIGN COMPANY” for Joint Venture Company in India, translated into English, duly notarized and certified by Indian Embassy/Consulate in Foreign Country.
Requirements to Open a Branch/Liaison Office of a Foreign Company in India
The Reserve Bank of India considers the track record profitability, existing business in India and Financial position of the applicant company while approving. It may sometime give conditional permission, so the Branch or Liaison Office shall have to operate in India subject to compliance with such conditions.
Documents Required to be Filed along with the Application
- English version of the Certificate of Incorporation / Registration or Memorandum & Articles of Association of the applicant company attested by Indian embassy and Notary public in the country of registration.
- Latest audited Balance Sheet of the applicant (preferably Last 3 years).
- Power of attorney /authorization in favour of Chartered Accountant/Consultant in India to follow up the approval matter and to represent the applicant company with the Reserve Bank of India.
- Board Resolution of the applicant company covering,
- Decision to open an office in India.
- Authorizing official /director of the applicant company to sign the application for approval and follow up /represent the applicant before the Reserve Bank of India.
- Details about the operation of proposed bank account in India.
Following Information would be Required
- Name and address of the applicant.
- Date and place of incorporation /registration of the applicant.
- Details of Capital of the company i.e paid up capital and free reserves as per the last audited balance sheet.
- Description of the activities of the applicant.
- Details of the activities /services proposed to be undertaken in India.
- Place where the office would be located in India.
- Details of Staff who will manage the office.
- Particulars of existing arrangements, if any, for representing the company in India.
- Further the Liaison office is required to file an undertaking to the fact that all expensed in India by such office shall be met out of inward remittance received from the parent company abroad.
Requirements to Open a Project Office of a Foreign Office in India
A foreign Company may open a Project Office/s in India provided.
- It has secured from an Indian company a contract to execute a project in India, and.
- % of the project is funded directly by inward remittance from abroad; or
- The project is funded by a bilateral or multilateral International Financing agency; or
- The project has been cleared by an appropriate authority ;or
- A company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
- Project office shall not undertake or carry on any other activity other than the activity relating and incidental to execution of the project.
Documents Required to be Filed
- English version of the certificate of incorporation/registration of Memorandum & Articles of Association attested by Indian Embassy/Notary Public in the country of registration.
- Latest Audited Balance Sheet of the applicant company/firm.
- Documentary evidence that the Project is funded by bilateral or multilateral International Financing Agencies OR the project has been cleared by the concerned regulatory authority, OR the Indian company has been granted term loan for the concerned Project by a Financing Institution or a Bank in India.
- Power of attorney /authorization in favour of Chartered Accountant/Consultant in India to follow up the approval matter and to represent the applicant company
- Board Resolution of the applicant company covering
- Regarding decision to open a Project office in India.
- Authorizing official /director of the applicant company to sign the documents and follow up / represent the applicant before the Reserve Bank of India.
- Details about the operation of proposed bank account in India.
Following Information would be Required
- Name and Address of the foreign company.
- Reference No. and date of letter awarding the contract referred to in clause (ii) of Regulation 5.
- Particulars of Authority awarding the Project/Contract.
- Total amount of contract.
- Address and tenure of Project Office.
- Nature of Project undertaken.
Conclusion
In conclusion, registration of a Company had been a major hassle for entrepreneurs looking to set up their businesses in India, was ranked 142nd on the Ease of Doing Business Index and 158th on Ease of Starting a Business. However, the introduction of INC-29, a five-in-one form introduced by the Ministry of Corporate Affairs (MCA) in May 2015, is an active step to address the ease of doing business matter.
The INC-29 significantly reduces interaction with the authorities through the clubbing of forms for DIN allotment, name reservation, incorporation, PAN & TAN, as well as ESIC registration. Supporting documents and information need to be submitted on the MCA’s e-biz (ebiz.gov.in) portal, as these are yet to be integrated electronically.
A report released by tax consultancy giant EY in October 2015, highlights that India is considered the most attractive market by international investors, ranking India as the premier choice for investors worldwide, with 32 percent of respondents ranking it the most attractive market. India’s outlook among investors has improved, that India would be among the top three economies by 2020, is the view of 37%, against 29 percent last year. Existing investor experience has been encouraging, with 70 percent of businesses, which already operate in India extending support to that idea.
References
https://www.iaccindia.com/userfiles/files/Doing_Business_in_India-%20A%20Business%20Guide.pdf
https://www.mea.gov.in/images/pdf/DoingBusinessinIndiaGuide.pdf
http://www.cgitoronto.ca/documents/Setting%20up%20Company%20in%20India.pdf
https://www.pwc.de/de/internationale-maerkte/assets/doing-business-in-india.pdf
http://www.iberglobal.com/files/2017/india_dezan_shira.pdf
http://www.indialegalhelp.com/files/doing_business_india.pdf
http://www.startupentity.com/pdf/procedure_for_Branch_office.pdf
