India is an attractive market for international investments. There are numerous opportunities to invest and establish a company in the Indian market. It is very important to review all possible options, evaluate them, and make the right decisions regarding your industry and market potential.
Many foreign companies, already working with local distributors, are preparing to establish their own presence in the country and must carefully plan their approach. For some companies, a joint venture, merger, or acquisition might be the right approach, but for more and more companies, the best way is to establish their own entity in India. This process has been facilitated by simplified foreign direct investments in many sectors of the economy.
Legal Forms for Foreign Companies
The following legal forms of market entry are available for foreign companies in India:
Registration of a Subsidiary (Pvt. Ltd., WOS)
Establishing a wholly-owned subsidiary in India is a popular way for foreign companies to start business operations in India. For most industries, quick approvals are granted (via the so-called Automatic Route) for the Indian market – although a few still require the approval of the Foreign Investment and Promotion Board (FIPB) (via the so-called Approval Route). A newly established company (subsidiary) can conduct any legal business in India, including trade, services, consulting, and manufacturing. For income tax purposes, subsidiaries are treated the same as domestic companies.
If you decide to establish a business presence in India, you will need the following documents to register your company:
- Commercial register excerpt of the parent company
- Articles of association of the parent company
- Proof of trademark registration of the company name and/or logo (if available)
All documents must be written in English or accompanied by an English translation and notarized. According to Indian law, all notarized documents must also be certified by federal authorities in the home country and by the Indian Consulate.
Establishment of a Branch Office
Foreign companies can also open a branch office in India with the approval of the Reserve Bank of India (RBI) and by registering with the Registrar of Companies (ROC). This can perform all tasks permissible for a liaison office, in addition to providing consulting or technical support for their products or services in India. Goods may be imported and exported, and the branch office acts as a purchasing or sales agent in India. Branch Offices, however, may not engage directly or indirectly in the manufacture or processing of goods in India. While a branch of a foreign company can purchase property in India, it is prohibited from renting it to third parties. The Indian tax authority treats a branch of a foreign company like the foreign company itself and imposes higher taxes on its income compared to a wholly-owned subsidiary.
Establishment of a Project Office
The RBI grants permission for foreign companies to open a project office in India under the condition of a valid contract for project execution with an Indian company/organization and if the following conditions are met:
- The project is financed directly through transfers from abroad
- The project is promoted by a bilateral/multilateral financed agency
- The project has been approved by a competent authority
- The company awarded the contract has been granted a long-term loan by a public financial institution or a public bank for the project.
If none of the above conditions are met, then a case-specific explicit approval from the RBI is required. The legal form of Project Office is also treated like a foreign company, and the imposed tax is higher than that of a wholly-owned subsidiary. The Project Office requires registration with the ROC. After completion of the project, it is necessary to close it down.
Establishment of a Liaison Office (LO)
A liaison office can be opened in India with the approval of the RBI and requires registration with the ROC. The initial approval is granted for three years and requires further extension. This legal form is prohibited from conducting any kind of commercial, income-generating activities, or initiating business in India. The Liaison Office is often used for representative activities, market research, networking, as well as to represent the parent company for import and export.
Limited Liability Partnership (LLP)
The LLP is a newer concept in India. Foreign investments in the form of an LLP are not permitted under the simplified procedure of the ‘Automatic Route’ by the RBI, instead, approval of an LLP involving the Foreign Investment and Promotion Board (FIPB) is required (via so-called Approval Route). Moreover, registration of the LLP with the ROC is required. Forming an LLP requires at least one resident partner in India. The LLP model does not allow external commercial borrowings (ECB), and therefore is not suitable for companies that need foreign loans with guarantees from the parent company.
Reporting Obligations for Foreign Companies
The reporting obligations for foreign companies, like those for Indian companies, depend on various factors, such as:
- The nature of your business (e.g., manufacturing, trade, service)
- Whether you have a limited liability company or a joint stock company.
- In which states you operate (Maharashtra, Gujarat, etc., have different requirements)
- Type of business segment (e.g., pharmaceuticals, textiles, banking, and NBFC, etc.)
The reporting obligations depend on the specific laws applicable to your company, although some laws are universally applicable regardless of the business form and sector:
- Corporate legislation
- Tax laws
- Labor legislation (based on the number of employees)
- Property law
Further reporting obligations exist in two respects. Firstly, there is “periodic” reporting, and secondly, there is event-based reporting. Periodic reporting occurs regularly (monthly, quarterly, or annually) and is continuous. Event-based reporting, on the other hand, is a one-time reporting that is carried out after the occurrence of the respective event.
