FOREIGN INVESTMENT IN INDIA

India has lately been on the forefront of investments and has developed policies and implemented reforms in order to attract them. In particular, India provides many opportunities to foreign companies to grow and strengthen their business: the foreign investments are governed by the rules and policies of the Company Law Act, the Foreign Direct Investment Policies, the Foreign Exchange Management Act and the Reserve Bank of India.

I – Background

India was the first Asian country to create Export Processing Zones (EPZ) in Kandla in 1965, and from that time 7 EPZs were established till 1990. The primary purpose of Export Processing Zones was to provide incentives to the manufactures operating in the region, in order to push the economic growth; these Zones were supported by infrastructure complemented by an attractive fiscal package, with the minimum possible regulations. However, India followed a strategy of self-reliance and import substitution till 1980s, but foreign investments or private commercial flows were not preferred until the launch of reforms in 1990-91.

Foreign investment regulation in India, indeed, had historically been very restrictive, as it reflected the socialist economic policies adopted since its independence declared in 1947 and arguably also its earlier colonial history.

In 1991, in reaction to its balance of payments crisis and International Monetary Fund (IMF) bailout, India initiated an economic liberalization project under the Prime Minister Narasimha Rao and the Finance Minister Manmohan Singh. The economic reforms included reducing tax and tariff rates, easing licensing requirements and regulations on corporations and opening up of the economy to foreign investments. Initial reforms also saw the creation of the Foreign Investment Promotion Board established in order to liaise with international companies over investment clearances.
II – Undertaking business

In order to establish its business, any foreign entity has the following options:

Joint Ventures with an Indian Company: they are the most preferred practice of foreign corporate entities to undertake business in India, because a joint venture can be done with any of the business units available in India. A joint venture is a new enterprise where two or more units come together to achieve a commercial objective, and it is done for a specific business purpose and for a limited time period. In this way, a foreign company can invest equity in Indian company through a joint venture agreement, where both the parties exercise control over the new enterprise and share revenues, expenses and assets.

Wholly Owned Subsidiary Company: wholly owned subsidiary is a company in which a foreign entity makes 100% FDI in India through automatic route, governed by the Companies Act. Indian transfer pricing regulations apply on such companies, and they are treated as domestic companies, and eligible for all exemptions, deductions benefits as applicable to any other Indian company.

Limited Liability Partnerships: they have been allowed 100 percent FDI through automatic route in the recent reforms of FDI, making easier for foreign entities to develop their business in India: indeed, now any foreign national or entity can register and establish a small business in India.

Branch office is another instrument for foreign investors in India, and the functions of a branch office are much wider as compared to those of a liaison office. Branch office is an extension of a foreign company involved in business of trading or manufacturing, and it’s considered suitable for foreign companies which are interested in setup of temporary office in India and do not have long term plans for operation in India. Any company incorporated outside India engaged in business of trading or manufacturing is permitted to open a branch office, on basis of specific approval of Reserve Bank of India. There are several activities which a branch office is permitted to do, such as export or import goods, providing professional or consultancy services, researching in the areas in which its parent company is engaged, promoting technical and financial collaborations between Indian companies and its parent company or overseas group company, acting as buying or selling agent of its parent company in India, providing technical support for the products supplied by its foreign company, rendering services in developing software and information technology.

Liaison Office: is a business office which acts as a channel of communication between the head office outside India and parties in India, setup under the jurisdiction of the Reserve Bank of India. The main role of a liaison office is collecting information about market opportunities and providing information about the company and its products to the Indian customers, promoting import export from and to India. The permission for establishment of such offices is given for three years initially, and it can be renewed thereafter.

Project Office: Project offices are temporary project or site offices which are setup by foreign companies to execute specific projects in India, by the permission of Reserve bank of India, and treated as an extension of a foreign company in India and so taxed at the rate applicable to foreign companies; they can be setup by the foreign companies which are awarded any contract by and Indian company, and they are not allowed to undertake any work other than work related to the project offices. The project office can repatriate profits earned by it after completing the project once it clears all the payment of taxes in India.

III – Advantages and Disadvantages

Joint venture is considered the best means to enter sectors where 100% FDI is not allowed in India. Furthermore, a joint venture offers a low risk option for companies willing to enter into the Indian market, since there are no separate laws for joint venture, because laws governing Indian company are applicable equally to joint venture as well. The main advantages for any foreign entity is that they get an established distribution or marketing setup of the Indian partner, available financial resource of Indian partner and established contacts of the Indian partner.

However, Wholly Owned Subsidiary Company is considered as the preferred route by the foreign entities for establishment of their business in India, since it can be formed as a private limited or public limited company and it has more flexibility to conduct business in India: funding can be done via equity, debt and internal accruals.

Instead, by comparison with joint ventures and wholly owned subsidiary company, branch office, liaison and project office have some disadvantages, like for example, there some activities which branch office are not allowed to undertake, like retail trading activities of any nature, manufacturing activities whether directly or indirectly; however foreign companies are given permission by Reserve Bank of India to undertake manufacturing and service activities through branch offices in India’s Special Economic Zones.

A liaison office, then, cannot undertake any commercial activities and cannot earn any income in India; the expenses of this office, indeed, are entirely met by its parent company outside India, though inward remittances received in convertible foreign exchanges. Furthermore, it is not allowed to acquire immovable property, but it may take any property on lease for a period not exceeding five years; it is not also permitted to involve into activities such as entering into any contracts with Indian residents, or borrowing funds, trading.

Project offices have some limitations as well, as there are certain conditions prescribed by Reserve Bank of India which are required to be fulfilled for setting up of project offices, like: the project should be funded directly by inward remittance from abroad, funded by bilateral or multilateral international financing agency, cleared by appropriate authority, and the company in India awarding the contract has been granted a term loan by a Public Financial Institution or a bank in India for the project. If any of the above conditions are not met, then in such case the foreign company has to approach Reserve Bank of India for approval. But the most important disadvantage is that, as we said, they are not allowed to undertake any work other than work related to the project offices.

Conclusions

1) We can affirm that joint ventures and wholly owned subsidiaries and limited liability partnerships are the means to undertake business which let foreign companies to create a new entity and setup its own business in India.

2) If a company already exists in a foreign country, the branch offices, the project or the liaison offices are the means to setup their business in India as well.

3) It is also important to highlight that, as we described above, there are some limitations and some sectors where it’s not possible to open an activity or an office, because Indian policies are still strict; but recently the Government has turned into an easier way to approach foreign investments, so if all the rules are followed, foreign investors have wide opportunities to undertake business in India.

Disclaimer
This article is intended solely for informational purposes and does not constitute legal advice. Although the information in this article was obtained from reliable official sources, no guarantee is made with regard to its accuracy and completeness.

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