The article primarily provides an overview of the regulatory aspects of setting up/ incorporating a 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, 2013 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 incorporate 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, Defence, Telecom, Real Estate etc.
Thus today, FDI is classified into:
- Business sectors where FDI is not allowed at all
- A business where prior permission is required from the Government (concerned ministry). This is also called as Approval Route.
- A 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. They have 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 Approval Route
Now let us talk in detail about the approval process. This is being used very less with a great amount of liberalization nowadays. But if the proposed FDI does not fall within the automatic route, then prior permission has to be taken from the RBI and the concerned ministry before the investment is brought in India. Please note that the Foreign Investment and Promotion Board (FIPB) is no longer in existence.
Once a person is clear with the FDI rules applicable to the proposed transaction, then they can decide on the nature of the business entity that they want to set up
Types of Entity
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 a non-repatriable basis. However, it may not be advisable to opt for that route. Also, FDI is not allowed in trusts and non-governmental organisations 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 to merely 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 Company / Private Limited Company
A Limited Company/ Private Limited Company means having 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)
With the liberalization in FDI norms and also the automatic route being applicable for most LLP, hence the LLP route is now being considered to be one of the most preferred routes for Foreign Direct Investment (FDI). It does away with the compulsory presence of the directors/ shareholders or proxy directors. However at least one partner (even though he or she can be merely nominee partner) should be resident Indian. The absence of many requirements like rigorous rules for deposits, for maintenance of various registers and books of accounts for audits, for meeting of management and shareholders etc. coupled with absence of dividend distribution taxes mean that LLP, in most cases, should become the most favoured entity for Foreign Individuals and Multi-national Corporations in the future while investing in India.
- The first thing to note is that FDI will be allowed only in those LLPs where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.
- No FDI shall be allowed in agricultural/plantation activity, print media or real estate business.
Practical Procedures for setting up 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.
- 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, the reason for setting up an office in India etc.
- 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.
- 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.
- 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.
- One important thing to be noted is the appointment of an Authorised Signatory in India. He shall be responsible for all the compliances of the Foreign Company in India.
Procedure to set up a limited company in India is given by the following flowchart.
Business Setup by Foreign Nationals / NRI Flow Chart
Formation of Limited Liability Partnership
The procedure is quite similar to that of a private limited or limited Company. First, we have to check if the same falls under automatic route, then the incorporation process starts immediately else the required approvals need to be taken from the RBI/ concerned Ministry.
The name approval and incorporation process are slightly easier as compared to a private limited/ limited company since it is, at the moment, decentralised across individual Registrar of Companies. It does take some more time to incorporate but the slight delay is worth it.
After the incorporation, the subscribers need to sign an LLP Deed with adequate stamp duty. The LLP deed combines the role which the Articles and Memorandum of Association have for the Company structure.