Today, India has become one of the most favorable and attractive markets among many nations for starting a business since the Indian markets have been offering many more opportunities for growth and profitability with the passage of time. Numerous proactive measures, cheap labor costs, and simplified foreign investment procedures/ guidelines brought up by the Government have certainly paved the way for investors to take a smart growth decision for their businesses. With more sectors being liberalized, it is also expected that India will continue to be an attractive destination for foreign businesses.
A Non-Resident individual or business is eligible to invest and start a business in India in accordance with the applicable Foreign Direct Investment (FDI) policy. General permissions have been accorded to many sectors subject to the participation norms under Automatic Route and in other cases, subject to certain restrictions, investment after going through the government approval is also allowed. A business requires proper India Entry Strategy and knows proper channels of entry before it can invest in India.
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There are several routes a foreign entity can choose for investing in India. A foreign company can start its office in India and enter the Indian market to sell its goods or services through any of the following ways:
(1) LIAISON OFFICE IN INDIA
Meaning of 'Liaison Office' in India:
'Liaison Office' generally means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called in respect of Foreign company and entities in India. It is also referred to as the Representative office of the Foreign Company; however, it cannot undertake any commercial /trading/ industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channels.
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A person resident outside India can establish a liaison office in India provided it meets the following criterion:
- A profit-making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
Provided that a person resident outside India that is not financially sound and are subsidiaries of other companies may also submit a Letter of Comfort with the concerned approval authority from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.
b. Permitted activities :
- Representing in India the parent company/group companies.
- Promoting export / import from / to India.
- Promoting technical/financial collaborations between parent/group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
c. Period of validity of Approval:
- Permission to set up such offices is initially granted for a period of 3 years.
d. Extension of Validity of the Approval of Liaison Offices:
The designated AD Category - I bank may extend the validity period of LO/s for a period of 3 years from the date of expiry of the original approval/extension granted by the Reserve Bank, if the applicant has complied with the conditions and the application is otherwise in order.
(2) BRANCH OFFICE IN INDIA
Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank of India (RBI). Normally, the Branch Office should be engaged in the activity in which the parent company is engaged.
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A person resident outside India can establish a liaison office in India provided it meets the following criterion:
- a profit-making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.
Provided that a person resident outside India that is not financially sound and are subsidiaries of other companies may submit a Letter of Comfort (Annex A) from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.
b. Permissible Activities:
Branch Offices are permitted to represent the parent/group companies and undertake the following activities in India:
- Export / Import of goods.
- Rendering professional or consultancy services.
- Carrying out research work, in areas in which the parent company is engaged.
- Promoting technical or financial collaborations between Indian companies and the parent or overseas group companies.
- Representing the parent company in India and acting as buying/selling agent in India.
- Rendering services in information technology and development of software in India.
- Rendering technical support to the products supplied by parent/group companies.
- Foreign airline/shipping company.
Retail trading activities of any nature are not allowed for a Branch Office in India. A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly. Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
c. Branch Office in Special Economic Zones (SEZs):
Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities subject to compliance of the conditions as may be directed in this regard. For eg. Units that are functioning in those sectors where 100 percent FDI is permitted.
In the event of winding-up of business and for remittance of winding-up proceeds, the branch shall approach an AD Category – I bank with the documents as mentioned under "Closure of Liaison / Branch Office" except the copy of the letter granting approval by the Reserve Bank.
d. Branches of Foreign Banks:
Foreign banks do not require separate approval under FEMA, for opening branch offices in India. Such banks are, however, required to obtain necessary approval under the provisions of the Banking Regulation Act, 1949, from the Department of Banking Regulation, Reserve Bank.
(3) PROJECT OFFICE IN INDIA
Meaning of 'Project Office' in India:
'Project Office' means a place of business in India to represent the interests of the foreign company executing a project in India but excludes a Liaison Office. It is generally a temporary office and best suitable for executing any short term projects etc. in India. The Project Office can also be considered for the following scenarios:
- A foreign company may open project office/s in India provided it has secured from an Indian company, a contract to execute a project in India, and
- the project is funded directly by inward remittance from abroad; or
- the project is funded by a bilateral or multilateral International Financing Agency, or the project has been cleared by an appropriate authority; or
- a company or entity in India awarding the contract has been granted term loan by a Public Financial Institution or a bank in India for the Project.
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(4) WHOLLY OWNED SUBSIDIARY AND JOINT VENTURE IN INDIA
These are the most preferred forms of entry model for foreign companies interested in doing business in India. A Wholly-owned subsidiary generally refers to a company whose entire shares are held by another company, called the parent company i.e. Foreign Company. Generally, this is allowed under those sectors where 100% FDI has been permitted by the Reserve Bank of India (RBI). In these cases, it becomes necessary to register the company with the Registrar of Companies (ROC) as per the Indian business laws. A Foreign Investor can start a business in India through the registration of the company in the form of Private Limited Company or Public Company under the concerned Companies Act, 2013.
Under the Joint Venture option, a Foreign Investor can either invest directly in existing Indian Company by subscribing to its shares or register a newly incorporated Company. In this case, foreign investors are can start their operations and businesses by forming a strategic association with one or more Indian partners.
Under the Foreign Direct Investment (FDI) guidelines, investment is prohibited/not allowed by the Government of India in the following sectors:
- Lottery Business including Government/ private lottery, online lotteries.
- Gambling and betting including casinos.
- Chit funds (except for investment made by NRIs and OCIs on a non-repatriation basis).
- Nidhi company.
- Trading in Transferable Development Rights (TDRs).
- Real Estate Business or Construction of Farm Houses.
- Manufacturing of Cigars, cheroots, cigarillos, and cigarettes, of tobacco or of tobacco substitutes. The prohibition is on the manufacturing of the products mentioned and foreign investment in other activities relating to these products including wholesale cash and carry, retail trading, etc. will be governed by the sectoral restrictions laid down in Regulation 16 of FEMA 20(R).
- Activities/ sectors not open to private sector investment viz., (i) Atomic energy and (ii) Railway operations
- Foreign technology collaboration in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.
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(5) LIMITED LIABILITY PARTNERSHIP (LLP) IN INDIA
‘Limited Liability Partnership (LLP)’ is a partnership formed and registered under the Limited Liability Partnership Act, 2008. A Foreign Investor can also invest in a Limited Liability Partnership Firm through the FDI policy. FDI permitted under automatic route in LLPs operating in sectors/activities where 100% FDI is allowed through the automatic route and there are no FDI-linked performance conditions.
Investment in an LLP
Investment in an LLP either by way of capital contribution or by way of acquisition/ transfer of profit shares, should not be less than the fair price worked out as per any valuation norm which is internationally accepted/ adopted as per market practice (hereinafter referred to as "fair price of capital contribution/ profit share of an LLP") and a valuation certificate to that effect should be issued by a Chartered Accountant or by a practicing Cost Accountant or by an approved valuer from the panel maintained by the Central Government.
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