India’s buoyant and growing economy makes it an attractive opportunity for businesses looking to expand their operations overseas. Selecting the right structure for inbound investment into India is the key to successful expansion. Smita Tyagi of TMF India outlines the options available.
Many factors have to be considered prior to starting business operations in India, including the nature of the proposed business, the size of the projected operation and the timescales involved. The options available fall into two broad categories:
- Operating as an Indian company, by establishing a Joint Venture or Wholly Owned Subsidiary. Such companies can be set up in a variety of sectors, although FDI is not permitted in any form in certain areas – a full list is published below.
- Operating as a foreign company, by setting up a Liaison Office, Branch Office or Project Office.
Operating as an Indian Company
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Wholly Owned Subsidiary (WOS) – A foreign company can set up a WOS, which, in spite of being 100% foreign owned, will be treated as an Indian company in respect of all Indian regulations including Income Tax and Foreign Exchange Management. The WOS offers the advantages of total control over the business’s funding, management and profits.
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Joint Venture (JV) with an Indian Partner – Some foreign companies have also begun operations in India by forging strategic alliances with Indian companies, choosing a partner which operates in the same field/area of activity or brings synergy to the foreign investor’s ambitions. Such a JV is particularly beneficial in cases where a WOS would not be permitted due to legislation capping Foreign Direct Investment in certain business sectors.
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Automatic and Government approval – It is important to ascertain what level of approval is required prior to setting up a WOS or JV. In many cases, approval is automatic, but government approval through the Foreign Investment Promotion Board (FIPB), is required in certain sectors including tea and tea plantations, mining and mineral separation, defense, broadcasting, print media, civil aviation, satellites, telecom services, banking, insurance, commodity exchanges and single-brand retail.
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Prohibited business – FDI in the following sectors is not permitted: retail trading (except single brand product retailing); lotteries, gambling and betting; chit funds and nidhi companies; trading in Transferable Development Rights (TDRs); Real Estate business or the construction of farmhouses; manufacturing of tobacco products; activities / sectors not open to private sector investment e.g. atomic energy and railway transport (other than mass rapid transport systems).
Operating as a Foreign Company
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Liaison Office – Setting up a Liaison or Representative Office is a common practice for foreign companies seeking to enter the Indian market. Such an office may only carry out liaison activities, namely acting as a channel of communication between the Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. In sanctioning the establishment of a Liaison Office, the Reserve Bank of India (RBI) will require evidence of a track-record of profitability in the home country for a minimum of three years, plus net worth of at least USD 50,000.
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Branch Office – Setting up a branch office, or offices in India allows a trading or manufacturing business to appoint representatives who can buying or sell on its behalf, conduct research, import or export goods or services or provide other services including IT, technical support and consultancy.
The Branch Office should be engaged in the same activity as the parent company, and retail trading, manufacturing or processing activities are not permitted. Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
Establishing a Branch Office requires RBI approval and requires evidence of a track-record of profitability in the home country for a minimum of five years, plus net worth of at least USD 100,000.
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Project Office – Foreign companies planning to execute specific projects in India can set up temporary Project Offices in India for this purpose, subject to the fulfillment of certain conditions. The foreign entity must provide a report to the jurisdictional Regional Office of the RBI giving the particulars of the project/contract.
Smita Tyagi is Manager, Business Services for TMF India, and has extensive experience in working with foreign companies looking to enter and expand in India. If you would like to learn more about the above structures, she can be contacted at on +91 120 4625800/900; mobile: +91 965 0899288; email: smita.tyagi@tmf-group.com