A foreign company or a non-resident planning to set up business operations in India can do so in the following manner:
- As a foreign company through a Liaison Office/ Representative Office, Project Office or a Branch Office; or
- As an Indian company through a Joint Venture or a Wholly Owned Subsidiary.
A foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Co Act.
Liaison Office/ Representative Office
A liaison office is not allowed to undertake any business activity in India and earn any income in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.
The Foreign Exchange Management Act (“FEMA”) regulates the opening and operation of liaison offices. Prior approval of Reserve Bank of India (“RBI”) is required for opening of such offices. Permission for such offices is typically granted for a period of three years initially and may be extended from time to time. These offices have to ensure compliance with the following conditions:
- Expenses are met entirely through inward remittances of foreign exchange from Head Office abroad.
- These offices do not undertake any trading or commercial activities. Activities should be limited to collecting and transmitting information between overseas Head Office and potential Indian customers.
- Such offices should not charge any commission or receive other income from Indian customers for provision of liaison services.
A person resident outside India permitted by RBI to establish a liaison office in India may carry out the following activities:
- Represent in India the parent company/ group companies.
- Promote export import from/ to India.
- Promote technical/ financial collaborations between parent/ group companies and companies in India.
- Act as a communication channel between the parent company and the Indian companies.
Further, liaison/ representative offices are required to furnish an annual compliance certificate, from their auditors, with the RBI.
Foreign companies planning to execute specific projects in India can set up temporary project/ site offices in India. Under the earlier provisions of FEMA, specific approval was required to be obtained from RBI for establishment of a Project Office. Recently, the RBI has accorded general permission to foreign companies for establishment of Project Offices in India subject to following conditions:
- It has secured from an Indian company a contract to execute a project in India;
- The project is funded by inward remittance from abroad or bilateral/ multilateral International Finance Agency or the project has been cleared by an appropriate authority or the contracting entity has been granted term loan by a Public Financial Institution or a bank in India for the project; and
- Intimation is required to be filed with the regional office of RBI in the prescribed manner.
Further, until recently an approval from the RBI was required for:
- opening of foreign currency accounts by Project Offices in India; and/ or
- Intermittent remittances to be made by such Project Offices.
In order to further liberalize the procedure for Project Offices, the Authorized Dealers (bankers) have been empowered to open foreign currency accounts for the Project Offices as well as permit intermittent remittances by Project Offices without an approval from the RBI, subject to fulfillment of certain conditions.
Foreign companies may set up Branch Offices in India, with prior permission of RBI, for the following purposes:
- To represent parent company/ other foreign companies in various matters in India e.g. acting as buying/ selling agents in India.
- To conduct research work in the area in which parent company is engaged.
- To undertake export and import.
- To promote possible technical and financial collaborations between Indian companies and parent/ overseas group companies.
- To render professional or consultancy services.
- To render services in Information Technology and development of software in India.
- To render technical support to products supplied by the parent/ overseas group companies.
A Branch Office is not permitted to carry out manufacturing activities on its own. A Branch Office is required to file an annual compliance letter, from their auditors, with the RBI. Remittance of profits of the Branch Office is permissible by furnishing requisite documents with an authorized dealer.
Further, RBI has granted general permission to foreign companies to establish Branch Offices/ units in SEZs to undertake manufacturing/ service activities subject to the following conditions:
- such units function in those sectors where 100 percent FDI is permitted;
- such units comply with prescribed requirements of the Co Act;
- such units function on a stand-alone basis; and
- in the event of winding-up of business and for remittance of winding-up proceeds the branch/ unit shall approach an Authorized Dealer with the prescribed documents.
As an Indian Company
A foreign company can commence operations in India through incorporation of a company under the provisions of Co Act. Foreign equity in such Indian companies can be up to 100 percent depending upon the business plan of the foreign investor, prevailing foreign investment policies of the Government and receipt of requisite approvals.
Joint Venture with an Indian Partner
Foreign companies can set up their operations in India by forming strategic alliances with Indian partners. Setting up of operations through Joint Venture may entail the following advantages to a foreign investor:
- Already established distribution/ marketing set up of the Indian partner.
- Available financial resources of the Indian partner.
- Already established contacts of the Indian partner that help smoothen the process of setting up operations.
Foreign investments are approved through two routes as under:
- Automatic Route: Approvals for foreign equity up to 26 percent, 50 percent, 51 percent, 74 percent and 100 percent are given on an automatic basis subject to fulfillment of prescribed parameters in certain industries as specified by the Government. RBI accords automatic approval to all such cases.
- Government Approval: Approval in all other cases where the proposed foreign equity exceeds 26 percent, 50 percent, 51 percent or 74 percent in the specified industries or if the industry is not in the specified list, it requires prior specific approval from Foreign Investment Promotion Board (“FIPB”).