1.
THE
GREAT INDIAN POTENTIAL
India is a country with tremendous growth potential and among the
emerging economies. India is an amalgam of the old and new. Its biggest
strength and weakness are its multi-party democracy, diversity of opinions ('The Argumentative Indian' as the Nobel laureate And
Economist Mr Amartya Sen has put it), population of over 1.2
billion and of course is diversity in terms of culture, religion, language,
caste and creed. Political corruption is being taken by its horn. Yet India
remains to be one of the biggest markets attracting foreign interests. India
remains to be one of the countries which remained largely less affected by the
economic upheavals recently suffered by the world.
2.
CHOOSING
A SETUP
Choosing an appropriate set up is an important aspect of doing business
in India. Such selection of an
appropriate set-up will make both economic and commercial sense by helping the
investor to optimize its exposure and minimize risks.
It is important that the country’s legal and regulatory stipulations
and requirements are followed with utmost care. This will require the
assistance of qualified and experienced legal professionals.
The following are the types of set-ups, which are presently available:
- Liaison office/ Representative Office ("LO")
- Branch office ("BO")
- Project office("PO")
- Branch Office On “Stand Alone Basis”
- Incorporated entities (WOS/JV/LLP)
A body corporate incorporated outside India (including a firm or other association
of individuals), desirous of opening a LO/ BO in India have to obtain
permission from the Reserve Bank of India ("RBI") under provisions of
the Foreign Exchange Regulation Act, 1999, the rules and regulations made there
under (collectively "FEMA") .
The application from such foreign entity along with supporting
documents, should be submitted in the prescribed form, which will be considered
by RBI to ensure that they meet the stipulated criteria.
Depending on the activities/sectors in which the proposed offices will
function, the application will be considered under the RBI route or Government
Route"
·
RBI Route — Where
principal business of the foreign entity falls under sectors where 100 per cent
Foreign Direct Investment (FDI) is permissible under the automatic route.
·
Government Route — Where principal business of the foreign entity falls
under the sectors where 100 per cent FDI is not permissible under the automatic
route, or if the applicant is Non - Government Organisations / Non - Profit Organisations
/ Government Bodies / Departments they will be considered by the RBI in
consultation with the Ministry of Finance, Government of India.
In the
event of winding-up of business and for remittance of proceeds, the branch
shall approach an AD Category – I bank with the documents as mentioned under
the Regulations.
2.1
LO
A LO (also known as Representative Office) can undertake only liaison
activities, i.e. it can act as a channel of communication between Head Office
abroad and parties in India. LO is not allowed to undertake any business
activity in India and cannot earn any income in India. Expenses of such offices
are to be met entirely through inward remittances of foreign exchange from the
Head Office outside India. The role of such offices is, therefore, limited to
collecting information about possible market opportunities and providing
information about the company and its products to the prospective Indian
customers. Permission to set up such offices is initially granted for a period
of 3 years and this may be extended from time to time.
The role of the liaison office is specifically limited to those
stipulated by the RBI, namely:
i. Representing
in India the parent company / group companies.
ii. Promoting
export / import from / to India.
iii Promoting technical/financial
collaborations between parent/group companies and companies in India.
iv. Acting as a communication channel between
the parent company and Indian companies.
The approval for LO is accorded by the
RBI on a case-to-case basis. While granting permission certain additional
criteria, such as profit-making track record during a period of three years in
the home country, and Net Worth parameters are also assessed and looked into by
the reserve bank of India.
Permissions from other specific agencies for certain LO activities:
· Foreign insurance
companies can establish LO, after obtaining approval from the Insurance
Regulatory and Development Authority (“IRDA”).
· Foreign banks can
establish LO in India only after obtaining approval from the Department of
Banking Operations and Development, RBI.
Permission to set up a LO is initially granted for a period of three
years and can be extended subject to certain conditions.
2.2
PO
Foreign Companies planning to execute specific projects in India can
set up temporary project/ site offices in India. RBI has now granted general
permission to foreign entities to establish Project Offices subject to specific
conditions. Such offices cannot undertake or carry on any activity other than
the activity relating and incidental to execution of the project. Project Offices may remit outside India any
surplus of the project on its completion net of taxes, general permission for
which has been granted by the RBI.
2.3
BO
Companies incorporated outside India and engaged in
manufacturing or trading activities are allowed to set up BO in India with
specific approval of the RBI. Normally, the BO should be engaged in the
activity in which the parent company is engaged. Such BO are permitted to
represent the parent / group companies and undertake the following activities
in India:
i. Export / Import of
goods. Procurement of goods for export and sale of goods after import are
subject to the extent government policies.
ii. Rendering professional
or consultancy services.
iii. Carrying out research
work, in areas in which the parent company is engaged.
iv. Promoting technical or
financial collaborations between Indian companies and parent or overseas group
company.
v. Representing the parent
company in India and acting as buying / selling agent in India.
vi. Rendering services in
information technology and development of software in India.
vii. Rendering technical
support to the products supplied by parent/group companies.
viii. Foreign airline /
shipping company.
A BO is not allowed to carry out manufacturing activities on its own
but is permitted to subcontract these to an Indian manufacturer.
BO established with the approval of RBI may remit outside India the profits, net of applicable Indian taxes and subject to RBI guidelines.
It may be noted that all the foreign companies, which have set-up a
place of business in India, whether LO, PO or BO have to comply with certain
specific provisions of the Indian Companies Act, 1956. However, no such
compliance is required for a foreign partnership entering into such activities.
2.4
Branch Office On “Stand Alone
Basis” In Special Economic Zone
RBI has given general permission to foreign companies for
establishing BO in Special Economic Zones ("SEZs") to undertake
manufacturing and service activities, hence no specific
approval shall be necessary from RBI . The general
permission is subject to the following conditions:
a) such
units are functioning in those sectors where 100 per cent FDI is permitted;
b) such
units comply with part XI of the Companies Act,1956
c) such
units function on a stand-alone basis.
Such Branch Offices are restricted to Special Economic Zone (“SEZ”)
alone and no business activity/ transaction is allowed outside the SEZs in
India, which include branches/subsidiaries of its parent office in India.
In the event of winding
up of business and for remittance of winding-up proceeds, the branch shall approach
an authorized dealer in foreign exchange with the documents required, as per
FEMA.
2.5
Incorporated entities
(JV/WOS/LLP)
2.5.1 Companies
An investor wishing to invest or commence business in India has the
option to set-up their business operations in India either in the form of incorporated
entities or unincorporated
entities. A foreign company opting for the
incorporation route for setting up its operations in India is
required to incorporate a company in India through either (i) a Joint Venture
("JV") or (ii) a Wholly Owned Subsidiary ("WOS") or (iii)
Limited Liability Partnership ("LLP").
JV and WOS, which are generally private companies, are incorporated
under the provisions of Companies Act, 1956. The Companies Act also has
provisions for incorporating public companies, both listed/closely held and
unlisted in stock exchanges. Companies can be formed and registered under the Companies Act, in
one of the following two ways:
(a) Public Company (listed or
unlisted) is a company which is (i) not
a private company; (ii) a company
with a minimum paid up capital of INR 500,000 or higher; and (iii) a private
company, which is a subsidiary of a public company; or
(b) Private Company (WOS/JV)
is a company with:
(i) a minimum of two shareholders and two
directors;
(ii) a minimum paid up capital
of INR100,000 or higher;
(iii) by its articles
restricts the right to transfer its shares,
(iv) limits the
number of its members to
fifty;
(v) prohibits invitation
to the public to subscribe for any shares in or debentures of the
company;
(vi) prohibits any
invitation or acceptance of deposits from persons other than its members,
directors or their relatives.
The Companies Act prescribes specific requirements for incorporation
depending on the type of entity established. Once incorporated, a company set
up by the foreign entity is required to carry on business in India in
accordance with Indian law.A foreign company not opting to be incorporated in India
is permitted to conduct its business
operations in India through any of the following offices:
2.5.2 LLP
Foreign investment in LLP will be allowed only through the Government
approval route, subject to various conditions stipulated in the Foreign Direct
Investment Policy of India, has modified from time to time.
LLP is also an incorporated entity, which is set up under the
provisions of the Limited Liability Partnerships Act. LLP is intended as an
alternative business organisation for small-scale industries and service
sector enterprises, such as lawyers, chartered accountants etc, which at
present, are primarily constituted as partnership firms in India.
LLP is essentially a partnership constituted in corporate form, which
has a separate legal identity distinct from its partners. Its primary advantage
is the benefit of limited liability, a feature not prevalent in general
partnerships. Liability of an LLP’s partners is restricted to the extent of
their individual contributions to the LLP. A Partner would not be
held responsible for loss caused because of fraud of other partners, of which
is that innocent partner had no knowledge.
