The article primarily provides an overview about the regulatory aspects for setting up/ incorporating business in India by Foreign nationals / NRIs in light of the changed regulatory environment in the past few years. It aims to cover areas related to Foreign Direct Investment (FDI) policy and RBI Circulars, Companies Act, 1956 for Indian as well as Foreign Companies.
At the outset please note that the term ‘Indian’ or ‘Foreign’ companies do not necessarily denote ownership. It merely denotes the place of registration. Thus when a foreign national incorporates a company in India, it is indeed an Indian Company. But when a foreign company decided to set up only a branch office in India, it is termed as a Foreign Company. We shall see more of that later on.
What is Foreign Direct Investment (FDI)
It is to be noted that the capital to be invested by the Foreign National / NRI shall be classified as ‘Foreign Direct Investment’ (FDI) in India. Before the economic liberalisation in India in the 1990s, there were a high number of restrictions for FDI in India. Gradually, the restrictions have been watered down to a great extent and currently the restrictions are in place for only those business activities that are strategic to the interests of the country or are politically sensitive issues such as Retails trade, Defense, Telecom, Real Estate etc.
Thus today, FDI is classified into:
- Business sectors where FDI is not allowed at all
- Business where prior permission is required from the Foreign Investment Promotion Board (FIPB)
- Business where no prior permission is required.
Please note that in all case, once the FDI is received and accepted by the Recipient Company, an intimation is to be sent to the Reserve Bank of India(RBI) in Form FC-GPRS within a month of allotting the shares to the foreign shareholder.
Thus the first place for any foreign national or any Non-Resident to look out for is the FDI policy. He has to first understand if there are any restrictions, prohibitions in the proposed business activity and then move forward to the company formation process.
Note on Foreign Investment Promotion Board (FIPB)
Now let us talk in detail about the FIPB process. The FIPB is the high level body which approves investments which require prior approval through a single window clearance system. The FIPB has some of the topmost officers and secretaries as its members.
An online application is to be made and when the case is put up for discussion, the investor or his appointed professional can make a presentation. Please note that the FIPB is a highly transparent mechanism and it is indeed very fair to the investors.
Once a person is clear with the FDI rules applicable to the proposed transaction, then he can decide on the nature of business entity that he wants to set up.
Types of Entities
The next question that is to be asked is the type of entity to be formed in India. It can be noted that FDI is not allowed in India in the form of sole proprietorship or partnership businesses except that NRIs are allowed to do so on non-repatriable basis.
However it may not be advisable to opt for that route. Also, FDI is not allowed in trusts and non-governmental organizations except that of Venture Capital trusts. The options that remain are individually discussed below:
1. Liaison office:
This is most suitable for companies who neither have nor see much of a presence in India. Liaison offices are extremely restricted in what they can do and are mainly set up as a communication medium between the Foreign company and its existing customers in India. A Liaison office can’t solicit customers nor indulge in any form of promotion. They can’t carry out business operations in India. At the cost of repetition, their role is merely to act as a communication medium between the Foreign Company and the existing Indian customers.
Because of its limited role, the compliance to be completed by a Liaison Office are the least. The biggest advantage is in income taxes where the provisions of Permanent Establishment and Transfer Pricing may not be much of a concern since the Liaison office does not earn any income as such.
2. Branch Office:
This is the next step towards a full fledged branch business presence in India. A branch office in India can execute most of the tasks that a Limited Company can execute except manufacturing. A Branch Office acts as a branch of the foreign company, be its permanent establishment under the tax laws and can earn income from business operations. Recently the RBI has tightened the norms regarding who can open a branch office in India. One of the criteria is that the Foreign Company intending to open a branch office in India should have a track record of at least 5 years of profit making.
3. Project Office:
A Project office is like a temporary branch office set up for a particular project.
4. Limited Companies:
A Limited company can have a full fledged presence in India. Unlike the previous three entities which are technically called as Foreign Companies, a subsidiary company is called an Indian company. The compliances are also greater than a foreign company.
5. Limited Liability Partnership (LLP):
Recently the Government has allowed Foreign Direct Investment through Limited Liability Partnerships (LLPs). However the policy change seems to have been made for name’s sake and the conditions that accompany the investment in LLP have been made very stringent. For all practical purposes, one needs to wait for further clarity. Till then FDI in LLP shall be advisable only for a very limited set of investment proposals.
- First thing to note is that FDI will be allowed only in those companies where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.
- Automatic approval route means no prior permission from the Government/ FIPB is required. FDI-linked performance related conditions meant that in sectors, where conditions like minimum capitalization, compulsory disinvestment after a few years etc are prescribed; even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.
- No FDI shall be allowed in agricultural/plantation activity, print media or real estate business.
Procedures to setup a Branch, Liaison or Project Office in India
Now let us talk in detail about the procedure to set up a branch, liaison or project office in India.
1). The first step is to approach the Reserve Bank (RBI) of India for permission to do so. The documents that are generally required are Parent Company’s Annual Report for last three years, Certificate of registration, License, Power of Attorney attested by the Indian embassy in the home country, Board Resolution, reason for setting up an office in India etc.
2). If the RBI is satisfied with the above documents, then it gives a letter of approval .Kindly note that the approval letter from RBI may contain some conditions and which are to be observed in the strictest sense. The permission may be for a particular time period , generally three years.
3). Once the permission from the RBI is obtained, then the permission is required from the Registrar of Companies in a single form along with payment of the requisite fees.
4). The entity is known with the extension of the particular office. For example, the branch office in India of ‘ XYZ Inc.’ would be known as XYZ Inc. India Branch Office.
5). One important thing to be noted is the appointment of an Authorized Signatory in India. He shall be responsible for all the compliances of the Foreign Company in India
Business Setup by Foreign Nationals / NRI Flow Chart
Hope this articles gives you a brief overview of how Foreign Nationals & Non-Resident Indians can setup a Business in India. If you have any questions, please let us know in comments and we will be glad to answer your questions.