A Foreign Company planning to set up business operation in India has the options to establish its both direct as well as indirect presence in India.
Foreign equity in Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
Mode of Direct Presence –As an Indian Company (Incorporated Entity):
1. Joint Venture Company;
2. Wholly Owned Subsidiary Company
Mode of Indirect Presence –As an Foreign Company (Unincorporated Entity):
3. Liaison/Representative Office
4. Project Office
5. Branch Office
Joint Venture companies are the most preferred form of corporate entities for investment in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office.
The foreign equity participation in such Indian companies can be upto 100% in terms of both shareholding percentage and foreign capital investment; depending on the equity caps and sectoral limits as prescribed under the FDI Policy on the business activity to be carried out by such company in India and depending upon the requirements of the investor.
India allows, in many sectors, setting up of subsidiaries in India which are wholly owned by foreign investor, including foreign companies.
There are two ways to form subsidiaries in India:
- Automatic route; and
- Special Permission Route
In certain sectors such as information technology, development of integrated townships, mass rapid transport services, export oriented manufacturing, 100% ownership by foreign investors is allowed, subject to certain terms and conditions. However, they have to apply for and obtain permission from government authorities. In certain other sectors FDI up to a specified percentage is permitted under the automatic route.
In certain other sectors FDI up to 100 is permitted with prior approval of the Foreign Investment Promotion Board (“FIPB”)/Secretariat of Industrial Approvals (“SIA).
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India.
Liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.
The approval for establishing a liaison office in India is granted by the Reserve Bank of India (RBI).
A Foreign company can set up temporary project/site offices in India to execute specific projects and for carrying out activities relating to that project only. The Government of India has granted general permission to foreign entities to establish project offices subject to specified conditions. On the completion of the Project, the Project office may remit outside India the surplus of the project, after meeting the tax liabilities.
The establishment of a branch office in India requires two fold approval cum registration requirement, first is the approval from the Foreign Exchange Department, Reserve Bank of India and thereafter registration of the approved branch office with Registrar of Companies, Ministry of Corporate Affairs as Foreign Company under Section 592 of the Companies Act, 1956. Branch office of a foreign company in India in comparison to a liaison office is allowed to carry out more activities and is subject to Transfer Pricing regulations with respect to transactions with the parent company and other associated enterprises outside India. Branch Offices established with the approval of RBI may remit outside India profit of the branch, net of applicable taxes and subject to the RBI guidelines.
Such Branch Offices are restricted to Special Economic Zone (SEZ / Tax Heaven Zone) alone and are not allowed to undertake any business transaction outside the SEZs in India. No approval is required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to the following conditions:
Such activity falls in sectors where 100% FDI is permitted;
Complied with the provisions of Section 592 to 602 of the Companies Act,1956;
Functions on a stands alone basis;
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.
SEZ is a specifically delineated Tax Heaven / Duty Free Enclave and is deemed to be foreign territory for purposes to trade operations, duties and tariffs. Goods and services going into the SEZ area from DTA are treated as exports and goods coming from the SEZ area to DTA are to be treated as if these are being imported.
100% FDI is permitted under automatic route for setting up SEZs and Free Trade Warehousing Zones (FTWZ) subject to the SEZ Act, 2005 and the Foreign Trade Policy. Press Note No. 2 (2005) does not restrict FDI in setting up of SEZ & units in SEZ.