This article is written by Mayank Jain, pursuing Diploma in US Contract Drafting and Paralegal Studies from LawSikho and Shreya Singh pursuing B.A.LL.B from Gitarattan International Business School, GGSIPU. The article has been edited by Smriti Katiyar (Associate, LawSikho).
India has always been open to new jobs and more opportunities, and in no way has neglected Foreign Direct Investment(FDIs) which in turn have provided an overall boost in the targeted economies. The Indian market offers the best trouble-free and fitting business environment to foreign companies who are willing to establish a business in India. According to the UNCTAD World investment report inflow in FDI was at an all-time high at USD 51 billion in the year 2019. India has also been ranked 12th among the top 20 countries for FDI.
According to UNCTAD’s ‘Global investment, trends monitor 2020’ India is the largest FDI recipient in South Asia. Under Ease of Doing Business Report 2020 published by the World Bank, India has been ranked 63rd out of 190 countries and has been in the 10 most improved economies for the third year in a row. India, as we can witness, is surely an investment-friendly country for people seeking to invest here. It has not only attracted major companies but also small-medium sized enterprises, a major attraction we can see is MNCs such as Amazon, Unilever, Adidas, Coca-Cola, etc.
Having to start a business, one must have a clear picture of every aspect as to what possible alternatives are available. In this article, we will be talking about the best business structure for foreign companies looking to enter into the Indian market along with their incorporation procedure and much more.
Structure in which foreign company can make an entry in India
A company can enter the Indian market in the following ways:
- Incorporation of company,
- Joint venture,
- Limited liability partnership,
- Branch office,
- Licence office,
- Project office.
Incorporation of company
It is one of the most common and widely appreciated structures. The encyclopedia legislation makes it more attractive and easier to understand. It is a legal entity that is formed by a voluntary association of people. It is an “artificial person”, invisible, intangible, created by or under the law, and is also known as corporate personhood i.e., an entity is separate from individuals who own it. It can be a hybrid of both natural and legal persons as well.
It is a corporate body and is incorporated with the sole motive of profit generation. A company may be incorporated as a private or public structure.
This locution says that a financial liability of an investor in a business is limited. Putting it in layman’s language we can say that the investor is not personally liable for the debts and liability of the limited company.
In the case of a sole proprietorship, the liability is unlimited.
It requires a minimum of two directors to establish a private company in India. For such incorporation, one of the directors of a private company must be both an Indian citizen and an Indian resident. Whereas three directors in the case of a public company are required, two being foreign nationals and one a local Indian citizen.
Incorporation and registration
When it comes to company registration, the promoter of the company must contact a government organization namely ROC (Register of Company) which is present in every state and is formed by the government particularly for handling the affairs of Companies. The promoter will be required to fill a form that is INC-32 along with some attachments which particularly include:
- The company’s crucial documents are the memorandums of association and articles of association duly signed by all members,
- A declaration stating that the requirement of the Act is complied with,
- And address for correspondence till its registered office is established.
Now once the form has been filled and approved by our ROC, a certificate of incorporation will be issued which includes the CIN corporation identification number, which is the only official document that gives the company a legal existence.
Joint venture with Indian partners
It is one of the preferred forms of business structure for already established firms. A JV is a partnership where two or more people or companies come together to form a new entity separate from its parent firm for the conduct of commercial projects.
It’s a relationship that is built between the exporter and an entrepreneur in the importing country. In sectors where 100% FDI is not allowed a joint venture can be the best option for entering into a market with low-risk options for companies.
For example, the joint venture of Pepsi consists of Voltas and Punjab Agro industries corporation.
In the case of JV companies’ incorporation, the Companies Act, 2013 requires that they must submit a Memorandum of Association (MOA) and Article of Association (AOA) which will act as a charter document of the company. It should be noted that the agreement between the partners should be well versed and it must be included in the AOA of the JV company to protect any future conflict.
These do not require any such official paperwork with the state or federal government and are the result of a contractual obligation entered upon by the entities for a purpose.
Here, in India, the structure is such that it allows free of charge repatriation of profit once the entire domestic and federal tax and liabilities are met.
What is a Limited Liability Partnership (LLP)?
The LLP is viewed as an alternative to a corporate business vehicle. This structure provides partners with the flexibility of organizing their internal structure. Owing to its flexible nature it is most suitable for small enterprises and investment by venture capital start-ups.
It’s a separate legal entity from its partners and therefore, is itself liable for the full extent of its assets keeping the liability of partners limited.
The name of the company must end with the word “limited liability partnership “or its abbreviation.
The LLP act requires that one of the partners in it must be in India.
Every LLP shall have at least two designated partners, who are individual’s and at least one of them shall be a resident of India (182 days’ time period is required to be qualified as a resident).
If at any time the number of partners of an LLP is reduced below two and the LLP carries on business for more than six months while the number is so reduced, the person, who is the only partner of the LLP during the time that it so carries on business after six months and has the knowledge is the fact that it is carrying on business with him alone, shall be liable personally for the obligation of the LLP incurred during that period.
To incorporate LLP, one must begin by filing documents online attested with a digital signature (DSC). So, the promoter of the company must obtain the DSC certificate in the first place. After that, one must apply for the DD and the same is needed to be signed by directors. For a company to get its DIN (director identification number) and name approved is of foremost importance therefore, an application for allotment of DIN under form DIR-3 and LLP-RUN (reserve unique name – limited liability partnership) is filed. Resubmission of the form shall be allowed to be made within 15 days.
Form FiLLiP (form for incorporation of limited liability partnership) needs to be filed with the registrar of the state along with the fees involved, which will provide the company with a legal existence.
Finally, you have to file an LLP agreement.
When getting to know about foreign exchange operations one must have a clear picture as to what FEMA provision says;
The formation of branch office/ liaison office/project office or any other place of business in India by foreign organizations is regulated under Section 6(6) of the Foreign Exchange Management Act, 1999, and from time to time these rules are amended to embody the changes in the regulatory framework and published through amendment notifications.
Section 6(6) of FEMA, 1999 can be read as:
“Without prejudice to the provisions of this section, the Reserve Bank may, by regulation (the Foreign Exchange Management (Establishment in India of a Branch Office or a Liaison Office or a Project Office or any Other Place of Business) Regulations, 2016), prohibit, restrict, or regulate establishment in India of a branch, office or other places of business by a person resident outside India, for carrying on any activity relating to such branch, office or other places of business.”
Registration of a foreign company
Rule 3 (3) of Companies Rules, 2014 says that:
A foreign organization shall, within 30 days of the establishment of its business in India, file with the Form FC1 with such fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and with the documents required to be delivered for registration by a foreign company in accordance with the provisions of sub-section (1) of section 380 and the application shall also be supported with an attested copy of approval from the Reserve Bank of India under Foreign Exchange Management Act and also from other regulators, if any, compliance is need by such foreign organizations to institute a place of business in India or a declaration from the authorised representative of such foreign organizations that no such compliances are required.
It is a method whereby a company incorporated outside a country by extension can enter into the market of India. It is not a separate legal entity and is suitable for those foreign companies who want to set up a temporary office in India.
The name of the branch office shall be the same as that of the foreign parent company and for each new office of such a branch, a fresh approval is required from RBI with justification.
Who can enter?
The foreign parent company to enter into the Indian market must have a profitable track record of five years in a row with a net worth of more than $1,00,000/- duly supported by the financial statement.
Taxation in India
The branch office is an extension of its overseas branch. Talking about taxation it is basically a surcharge function. The income tax on the profits of the branch office of foreign entities in India is 40% plus surcharges as applicable.
A dividend that is paid to its parent company is not taxed in India.
Is repatriation allowed?
There is an easy way out for the repatriation of funds to the parent company.
The profits of the branch office are freely allowed to be remitted from India to its parent company after payment of applicable taxes in India.
Procedure for incorporation
All the required documents are to be filed along with FNC Form, which must be submitted to the designated Authorised Dealer Category–1 bank (the banks with an RBI license to buy and sell foreign exchange for specified purposes). Authorised Dealer category-1 bank after due diligence and looking into all aspects of the promoter, if thinks that everything is in compliance with what is required, will forward a copy of Form FNC to RBI who will allot a UIN (Unique Identification Number) to a branch office. An applicant after receiving permission for setting Branch Office shall inform the Authorised Dealer category-1 bank as to date Branch Office has been set up, this information is further transferred to RBI by the Authorised Dealer bank.
After approval, the Branch Office needs an application for registration of the branch office of the foreign company which can be done by filing Form FC-1 within 30 days of such approval. In case there are Indian directors the DIN number of such directors is needed, and the digital signature of the authorised signatory is required to e-file statutory forms with the ROC (Register of Company) for their approval.
Finally, the branch office requires to register it with the state police
It can be termed as representative of the parent company.
It was mainly introduced when people per se do not have commercial activity and tried to have their communication. A liaison office is basically provided to someone who wants to understand or set up communication with various stakeholders in India and overseas.
It is a fundamental means of building relationships among places of business or head office and entities in India.
These are not involved in any commercial or industrial activity but rather in marketing and promotional stuff and therefore, liaison officers are expected to do the same.
The liaison office is only a cost centre and outward remittance is not allowed except upon closure of the liaison office, as it is assumed that there is no activity, and no activity means no income.
No tax as such is required. Since those are not meant to earn income, the Indian government does not add them.
- A profit-making record during the previous three financial years in the home country.
- The net worth of not less than USD 50000 or its equivalent.
- Memorandum Of Association (MOA),
- Article Of Association (AOA),
- Last year’s audited financial statement.
Procedure for incorporation
Firstly, designate a Bank and branch where your account will be opened that will be an Authorized Dealer Bank (Authorised Dealer Bank) for your Liaison Office in India. Then an application with all necessary documents with RBI through Authorised Dealer Bank needs to be submitted. After obtaining approval from RBI and UIN number, one can apply to ROC for:
- Certificate of Establishment of Place of Business in India,
- Registration for PAN with Income Tax Authority,
- Registration for TAN with Income Tax Authority,
- Opening an account with the Bank and obtaining account numbers, etc.
The funds can be repatriated only on the closure of the liaison office.
- Liaison officer can represent the overseas head office in India,
- It can promote import and export between countries,
- Promoting collaborations between an Indian company and overseas parent company,
- Acting as a communication channel between the parent company and the Indian company.
A project office is for specific or mandated purposes.
Few permissions need to be obtained before you establish a project office in India:
- A foreign company may open a project office in India subject to a secured contract with an Indian company to execute a project in India and that it fulfils specified criteria.
- It should be funded by overseas remittances i.e., it should be, fund a project in India.
- An entity in India, who has awarded the contract, has been granted a term loan by a Financial Institution or bank in India for the Project.
- The project should have approval from the appropriate authority.
Project officers are permitted to make intermittent remittances subject to the production of prescribed documents.
Project office by its definition has clearly stated what a project office can do.
As an overall conclusion, I will say that growing a business internationally is no easy feat, for a large organization or small business that are looking to enter a new market. India is an attractive investment market when it comes to the question of where to invest. There is enormous potential in the Indian market and the relaxed FDI norms act as a cherry on the cake for the foreign companies making their way to India. These articles help you to explore the various alternatives available and make a decision for your business. A company making its entry into the Indian market can do so by registering itself as a completely Indian legal entity or as a foreign company. Being aware of the intricacies involved in structuring an entity in a different country, one must have a very clear picture before finalizing and taking any step.
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