Establishing a business in India by foreign entities is governed by regulations under the Foreign Exchange Management Act (FEMA) and overseen by the Ministry of Corporate Affairs (MCA) and the Reserve Bank of India (RBI). Foreign entities can enter the Indian market and establish their presence through various business structures, each suited to different operational and strategic goals. Below are the common options and steps:
- Private Limited Company
A foreign entity can establish a private company in India through Foreign Direct Investment (FDI), governed by the Companies Act, 2013 and FDI policies. FDI is allowed in most sectors under the automatic route, meaning no prior government approval is needed, except for restricted sectors like defense, real estate, and media, where government approval is mandatory.
To form a private company, the foreign entity must appoint at least two directors (one must be a resident of India) and a minimum of two shareholders. The company must be registered with the Ministry of Corporate Affairs (MCA), and essential documents such as the Memorandum of Association (MoA) and Articles of Association (AoA) must be submitted.
Private companies can engage in a broad range of business activities such as manufacturing, trading, and services. After registration, the company must comply with regulatory requirements, including filing annual returns, maintaining proper books of accounts, and meeting tax obligations.
- Wholly Owned Subsidiary
A wholly owned subsidiary (WOS) in India is a private limited company where a foreign entity holds 100% of the equity. This is permitted under the Foreign Direct Investment (FDI) policy, with investments allowed under the **automatic route** in sectors like IT, manufacturing, and retail, while restricted sectors require government approval.
To establish a WOS, the foreign parent company must register the subsidiary under the Companies Act, 2013, by submitting key documents like the Memorandum of Association (MoA) and Articles of Association (AoA). At least two directors are required, one of whom must be an Indian resident.
A WOS offers full control to the parent company and can engage in a wide range of activities such as manufacturing, trading, and services. The subsidiary operates as a separate legal entity, limiting the parent company’s liability. Compliance with local laws, including tax obligations, annual filings, and reporting to regulators like the Reserve Bank of India (RBI), is mandatory.
Foreign Direct Investment (FDI) in India is generally open under the automatic route in most sectors, but there are specific sectors where FDI is restricted or prohibited. In these sectors, either government approval is required or FDI is completely barred. Here are some key sectors where FDI is restricted:
- Limited Liability Partnership
A foreign entity can establish a Limited Liability Partnership (LLP) in India under the LLP Act, 2008. FDI in LLPs is permitted under the automatic route in sectors where 100% FDI is allowed without government approval, except in sectors such as agriculture, real estate, and gambling, where restrictions apply. Foreign entities can hold equity in Indian LLPs and participate in management, but they must appoint at least one resident Indian partner.
LLPs offer flexibility, limited liability for partners, and a simpler regulatory framework compared to traditional companies. They can engage in activities such as consultancy, professional services, manufacturing, and wholesale trading, provided these sectors allow FDI under the automatic route.
To establish an LLP, foreign entities must comply with FDI policies, register the LLP with the Ministry of Corporate Affairs (MCA), obtain a Digital Signature Certificate (DSC) for partners, and secure approvals like Permanent Account Numbers (PAN) and Tax Deduction Numbers (TAN).
- Branch Office:
A branch office is an extension of a foreign company in another country, allowing it to conduct a broader range of business activities compared to a liaison office.
Typically, a branch office can perform the following activities:
- Export/Import of Goods: A branch office can engage in trading activities such as importing or exporting goods for the foreign company.
- Provision of Professional or Consultancy Services: It can offer professional or consultancy services like IT, engineering, or financial services on behalf of the parent company.
- Research and Development: A branch office can undertake R&D activities related to the company’s business.
- Promoting and Selling Products: It can promote and market the products of the parent company and generate revenue through sales.
- Representing the Parent Company: The branch office can act as a representative in contracts, negotiations, and dealings with local businesses or authorities.
- Financial Services: In specific sectors like banking, insurance, or financial services (subject to regulatory approval), a branch office may provide these services.
Branch offices are allowed to generate income but must comply with local laws and tax regulations.
- Liaison Office
A liaison office, also known as a representative office, is a communication channel between a foreign company and businesses in India. Liaison offices are limited to certain activities and cannot earn income or conduct business in India.
Here are some of the activities that a liaison office can perform:
- Represent the parent company: The liaison office can represent the parent company in India.
- Promote trade: The liaison office can promote exports from India and imports to India.
- Encourage collaboration: The liaison office can encourage technical and financial collaboration between the parent company and Indian companies.
- Gather information: The liaison office can gather information about potential market opportunities and sources of supply.
- Provide information: The liaison office can provide information about the parent company and its products to potential Indian customers.
The Reserve Bank of India (RBI) regulates liaison offices and grants initial permission for a period of three years. The RBI may extend this permission from time to time.
- Project Office
A project office is a temporary establishment set up by a foreign company in India to execute specific projects. It allows the foreign entity to establish a presence in India for a limited duration to carry out activities directly related to a particular project. The activities that a project office can perform include:
- Execution of Specific Projects: A project office is set up primarily to execute contracts or specific projects that the foreign company has undertaken in India, often related to infrastructure, engineering, or construction.
- Coordination and Management: It can coordinate with local contractors, suppliers, and authorities to ensure smooth project execution.
- Supervision of Project Activities: The office is responsible for overseeing the project’s progress, ensuring it meets deadlines, quality standards, and other contractual obligations.
- Financial Management: A project office can manage funds related to the project, handle expenses, and remit profits abroad after project completion.
However, a project office cannot engage in commercial activities unrelated to the project or any business beyond its scope.
Sectors Where FDI Is Restricted
Under FDI policy, certain sectors in India face restrictions or require government approval. Key restricted sectors include:
- Défense: FDI beyond 74% needs government approval.
- Media: Print media (26% FDI cap), digital media (26% with approval).
- Telecom: FDI above 49% requires government consent.
- Insurance: FDI up to 74%, with government approval beyond 49%.
- Real Estate: Prohibited in land buying and selling; restricted in real estate business.
- Gambling and Betting: FDI is not allowed.
- Atomic Energy: FDI is banned.
These restrictions ensure alignment with national security and economic policies.
Conclusion:
Establishing a business in India as a foreign entity involves choosing the right structure, understanding FDI policies, and adhering to compliance requirements under FEMA, RBI, and MCA regulations. India’s liberalized FDI policies in many sectors, coupled with growing opportunities in its large market, make it an attractive destination for foreign investments.