In this article, Pratyusha Kar pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, discusses the structuring advice will you give to an entrepreneur from the Middle East who wants to expand his business to India.
Introduction
India considers the Middle East as an influential source of investment in manufacturing, service and infrastructure development. In April 2016 during his visit to Riyadh Prime Minister Narendra Modi persuaded Saudi Companies to invest in infrastructure sector of India and to take part in developing smart cities and industrial corridors. India procures 58% of crude oil from Middle East countries[1] with highest supply from Saudi Arabia followed by Iraq and Iran was the sixth highest in the period April 2015 to January 2016. World Bank data of 2015 reported that India received payment of US$ 12.57 billion from UAE, US$ 10.51 billion from Saudi and in the range of US$ 3 to US$ 5 billion from Kwait, Oman and Katar. Similarly more than 88% of liquefied natural gas also comes from Middle East States[2]. UAE is our one of the most important trading partner and several important UAE base companies like Dubai Ports World, RAK Ceramics, Emaar MGF, TECOM Investment etc. are having business relationship with India. Correspondingly, India’s fourth largest trade partner is Saudi Arabia. 2014 data showed that India is the 5th largest export market of Saudi Arabia[3].
A vast middle class base with growing domestic consumption makes Indian market one of the most appealing consumer markets in the world. Moreover, cost-competitiveness, well-trained educated manpower and parliamentary democracy make India a perfect destination for investment.
Under these circumstances, it is very much needed to provide guidance to the entrepreneurs from Middle East to expand their business in India pertaining to entry options for business in India, entry procedures, investment routes, repatriation of investment and several restrictions.
Entry Options
A Middle East company willing to do business in India may have a non-corporate entity or corporate entity.[4]
To Set Up Non-corporate Entity
Liaison Office
Liaison office or an office representing the foreign company can be opened after getting permission from the Reserve Bank of India. The liaison office works in place of the principal and undertake the following activities apart from general liaison work.
- To represent principal company or group of companies
- To develop import/export in India
- To build up technical and financial collaborations on behalf of parent as well as group companies.
- To coordinate intercommunication among parent company, group companies and Indian companies.
Branch Office
A Middle East investor can operate in India by opening branch offices after taking specific approval from the Reserve Bank of India. A Branch Office is responsible for following activities.
- Commodity import and export.
- Delivering of consultancy services.
- Building up of technical and financial collaborations for parent company and overseas group companies.
- Representing principal and group of companies as buying and selling agent in India.
- Promotion of software development and IT services.
- Contributing technical support for the commodities, goods and products received from the principal company or group.
Branch offices may be on Stand Alone Basis where they are located in the Special Economic Zone (SEZ) alone and are not permitted to do any business outside the SEZ including the branches, subsidiaries or other offices of the principal Middle East Company. In order to set up branch office in the SEZ no permission from the RBI is required provided the branch office is located in the 100% FDI permitted SEZ, part XI of the Companies Act (Section 592 to 602) is obeyed by the unit, the unit acts on stand-alone basis and at the time of winding up process the branch approached an authorized foreign exchange dealer with supporting documents to transfer the revenues from wrap up as per FEMA.
Project Office
A Middle East company doing business in India may set up a Project Office in India without taking any permission from the Reserve Bank of India but the company must comply with some reporting formalities. Like branch offices the project office is also considered as an extension of the parent company and is taxed in line with the principal overseas company.
To Set Up Corporate Entity
Wholly owned subsidiary
Middle East overseas companies can establish wholly owned subsidiary companies in areas where 100% foreign direct investment is permitted under FDI policy. In order to register the company applications are to be submitted to the Registrar of Companies (ROC) as well as RBI. As soon as the company is registered under ROC and approval from RBI is obtained the company will be guided by the Indian laws and regulations like any other domestic Indian company.
The benefits of such companies are dissemination risk minimisation, powerful control over the subsidiaries and reduction in transaction costs, cost of negotiation, cost of transferring information, and cost of training.
Joint Venture (JV)
Investors of Middle East may set up joint venture companies with the Indian Companies or with the foreign companies in India. The laws controlling the domestic joint venture companies are also applicable for Middle East joint venture companies.
Benefits of JV companies are they can avail the existing marketing and distribution network of the Indian partner; they can get the financial support from its Indian companions, manipulate the tested contacts of the Indian partner, more flexibility to fulfil the demands under competitive environment. In all, it lowers the cost of entry in a foreign market.
The demerits of JVs are two companies are of different backgrounds, nationalities, experiences and ability and may cause problems in day to day activities and to ascertain long term goals. Chances of leakage of technical secrets bringing about future loss of the Middle East Company can occur.
Foreign Institutional Investor
Foreign Institutional Investors of the Middle East or their power of attorney holders can contribute in Indian financial markets covering the areas of mutual funds, pension funds, asset management companies and investment trusts. They can invest in the primary and secondary market securities which includes the company equities and other instruments of the companies that are already enlisted in the Stock Exchanges of India or to be listed.
Entry Procedure
As mentioned earlier that Middle East companies can set up their Liaison Office, Branch office and Project offices in India but their set up processes are as follows:[5]
Liaison Office
Permission for setting up of a liaison office of the Middle East business house is granted by the Reserve Bank of India initially for three years and thereafter the approval can be renewed further.
Branch Office
Branch Offices of the Middle East companies are set up taking approval from the RBI. No manufacturing activities are allowed in the branch office but are permitted to sub-contract with an Indian production unit. They may remit branch office profit to Middle East after paying Indian taxes as per RBI guidelines.
Project Office
Normally a project office is set up under automatic route without taking prior approval from the Government of India (GOI) or RBI. But they are required to inform regional office of the RBI and file the documents asked within 30 days of receipt of inbound remittances.
The Branch offices / Liaison offices / Project offices must obtain a certificate from the Registrar of Companies. Moreover, the Branch / liaison offices set up taking approval from the RBI are allotted a Unique Identification Number (UIN). These offices must have Permanent Account Number (PAN).
Company Incorporation
For incorporation of a Middle East company in India an application is to be submitted to the ROC for registration and once the company is registered it must abide by the rules and regulations like domestic companies. There may be two types of companies
- Private Company
There must be at least two members in the company with minimum paid up capital of one lakh.
- Public Company
A public company is a company which is not a private company. It may be subsidiary of a public company. There must be minimum seven members and three directors with minimum paid up capital of 5 lakh. Maximum number of directors can be extended to twelve ore more provided approval is accorded by the Government.
Process of Incorporation
Acquiring Director Identification Number(DIN) à To apply for name availability à Drafting of Memorandum of Understanding (MOU) and Articles of Association (AOA) à Court stamping of AOA and MOU à MOU and AOA signing à Filing with ROC à Vetting by ROC à Collection of Certificate of incorporation.
Subsequent Business Compliances
Depending on the business nature registrations for permanent account number (PAN), tax deduction account number (TAN), service tax, value added tax (VAT), excise, foreigners regional registration office (FERO) registration and obtaining import export code (IEC) are required.
Investment Routes
Foreigners are allowed to invest in India directly or through JV with some limitations related to investment amount and investment sector. Sectors where Govt. approvals are required[7] are (i) Mining and mineral separation of titanium bearing minerals and ores (100% Govt. approval), Food Product retail Trading (up to 100% Govt. approval), Defence (beyond 49%), Publishing/printing of scientific and technical magazines/specialty journals/ periodicals (up to 100 %), Publication of facsimile edition of foreign newspapers (up to 100%), Print Media – Publishing of newspaper and periodicals dealing with news and current affairs (up to 26%), Print Media – Publication of Indian editions of foreign magazines dealing with news and current affairs (up to 26%), Air Transport Service – Scheduled, and Regional Air Transport Service (beyond 26%), Investment by Foreign Airlines (up to 49%), Satellites- establishment and operation (up to 100%), Telecom Services (beyond 49%), Trading SBRT (beyond 49%), Pharma – brownfield (beyond 74%, Banking – Private sector (beyond 49%), Banking – Public Sector (up to 20%), Private Security agencies (beyond 49%), Broadcasting Content Service a) FM Radio b) Up-linking of ‘News & Current Affairs’ TV Channels (up to 49%) and Trading MBRT (up to 51%).[6]
Sectors with automatic routes with conditions[8] are Agriculture, Plantation Sector, Mining of metal and non-metal ores Mining – Coal & Lignite, Manufacturing, Broadcasting Carriage Services (Teleports, DTH, Cable Networks, Mobile TV, HITS), Broadcasting Content Service – Up-linking of Non-‘News & Current Affairs’ TV Channels/ Down-linking of TV Channel, Airports – Greenfield, Airports – Brownfield, Air Transport Service – Non-Scheduled, Air Transport Service – Helicopter Services/ Seaplane Services, Ground Handling Services, Maintenance and Repair organizations; flying training institutes; and technical training institutions, Construction Development, Industrial Parks -new and existing, Trading – Wholesale, Trading – B2B E-commerce, Duty Free Shops, Railway Infrastructure, Asset Reconstruction Companies, Credit Information Companies, White Label ATM Operations, Non-Banking Finance Companies, Pharma – Greenfield, Petroleum & Natural Gas – Exploration activities of oil and natural gas fields, Petroleum refining by PSUs, Infrastructure Company in the Securities Market, Commodity Exchanges, Insurance, Pension and Power Exchanges.
Investments which are not under automatic approval, the proposal is considered by FIPB. Technology collaborations with Middle East companies are allowed provided there are agreements on technical knowhow fees, payment for design and drawings, for engineering services and other royalty payments.
Repatriation of investment and several restrictions
Middle East investments are freely repatriable with some sectorial policies. Shares of non-residents can be sold without RBI approval. For selling of shares through own arrangements and not through authorised dealers permission is needed from RBI as per Regulation 10B of Notification No. FEMA. 20/2000 RB dated May 2000.
Restrictions
Locational restrictions are there in India and environmental clearances are needed before setting up of a unit.
Conclusion
An entrepreneur from Middle East having desire to expand his business in India has decide first whether he or she would go for non-corporate entity or corporate entity. Setting up of Non-corporate entity may require liaison office, branch offices and project office whereas setting up of corporate entity may be of Wholly Owned Subsidiary or Joint Venture Company or Foreign Institutional Investor. Although it is easy to set up non-corporate entities in comparison to corporate entities it is better to set up corporate entities because of operational clarity and greater control over the company.
References
[1] http://internationalrelations.org/india-middle-east-relations.
[2] http://wwwcnbc.com/2016/05/19modi-news-trade-inveatment-diaspora-and-seccurity-factors-in-indias-middle-east-push.html
[3] http://www.indianembassy.org.sa/Content.aspx?ID=867
[4] http://investindia.gov.in/entry-options/
[5] http://investindia.gov.in/entry-procedures/
[6] http://investindia.gov.in/entry-and-investment-routes/
[7] http://dipp.nic.in/English/Policies/Sectors_Where_Government_Approval_Is_Required.pdf
[8] http://dipp.nic.in/English/Policies/Sectors_Under_Automatic_Route_With_Conditions.pdf
