A foreign company can commence operations in India in one of the many different legal forms as described below. 100% foreign equity is allowed in Indian companies, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy of India. If a company is incorporated in India, even if it is wholly owned by a foreign company, it is treated on par with domestic companies.
In India, no legal definition as such has been given to Joint Venture Company (JVC). JVCs in India typically comprise two or more individuals/companies, one of whom may be non-resident, who come together to form an Indian private/public limited company, holding agreed portions of its share capital.
There are no separate laws for incorporation of Joint Venture Company in India. It is incorporated or established as a private limited company or a public limited company under the Indian Companies Act, 1956.
Generally Indian JVCs have a 51%- 49% equity ratio between the foreign and Indian partners, respectively. A majority of share gives voting privilege hence foreign investors by virtue of their investment potential seek an upper hand and secure a majority stake in equity. There are no restrictions on repatriation of earnings from the JVC.
A foreign company can invest in an Indian company through a joint venture agreement in the sectors which are open for foreign investments. Some areas are exclusively reserved for public sector and some are excluded for foreign participation such as real estate, agriculture, plantation etc. So it is important to check if there is any foreign investment cap for the sector in which the proposed JVC will operate. Approval of Reserve bank of India (RBI) or Foreign Investment Promotion Board (FIPB), as applicable, must be obtained for acquiring shares of the company and establishing place of business in India.
Although India’s foreign direct investment (FDI) rules have been substantially liberalized since the country first allowed foreign investment in the early 1990s and most sectors are now open to 100% FDI, JVC remains a popular vehicle for foreign companies. While JVC brings several benefits, it also has the inherent potential to fail because of incompatibility of the participants, management gridlocks, inadequate research, failure to contribute, misinterpretation of roles etc. Therefore it is essential to choose the right partners and clearly spell out the roles, responsibilities and rights of each participant.
Foreign companies can also set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy. A WOS can be formed either as a private or public company, limited by shares or guarantee, or an unlimited liability company. Most often due to the unique advantages Private Limited Company is the most preferred form for a WOS. This structure gives the most flexibility and protection to a foreign investor.
Foreign companies are allowed to establish Liaison Office in India after obtaining prior approval from the Reserve Bank of India (RBI), which is the apex bank India .The RBI grants approval, for one to three years, and it is renewable upon expiry. It is primarily a communication bridge between the foreign company and its customers or potential customers in India. The Liaison Office can also be setup to establish business contacts or gather market intelligence to promote the products or services of the parent company. It cannot engage in revenue generating activities.
The Liaison Office is permitted to undertake following activities only:
A Liaison Office is not permitted to undertake any commercial / trading / industrial activity, directly or indirectly, and is required to meet its expenses out of inward remittances received from parent company through normal banking channels. As a no-income earning entity it is not subjected to tax in India. However, the Liaison Office would be required to withhold tax from certain payments and hence is expected to comply with the requisite “tax withholding” obligations under the domestic tax law. The office must file regular returns to the RBI. Such returns must include Audited Annual accounts and an activity report for the year. This is highly suitable for foreign companies that intend to setup full-fledged operations in India. They can conduct a detailed review of plans and potential before making a long term commitment through this vehicle.
The provisions regarding setting up Branch Office in India are governed by Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations. Foreign companies are allowed to setup branch office in India after obtaining the requisite approval from the Reserve Bank of India (RBI). Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Authorized Dealer in whose jurisdiction the office is set up. The general permission of RBI permits a Branch Office to conduct the following activities
RBI has given general permission to foreign companies, subject to certain conditions, for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities.
The branch office cannot expand its activities or undertake any new trading, commercial or industrial activity other than those which are expressly approved by the RBI.
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch offices in India. Although such branch offices can undertake trading activities they are prohibited to carry out manufacturing activities directly. They are allowed to sub-contract these to Indian manufacturers.
Branch offices are extensions of the foreign company and do not constitute a body corporate of its own. The foreign parent company is liable for the acts of the branch office.
It is allowed to generate incomes in India and can meet its expenses from parent company’s remittance from abroad or from its local income. It is not allowed to accept deposits. The commission earned by the branch office from parties abroad for any agency business shall be repatriated to India through normal banking channels. For the purpose of taxation it is deemed a resident of India. Profits earned by the Branch Offices are freely remittable from India, subject to payment of applicable taxes.
A foreign corporation, which has secured a contract from an Indian company to execute a project in India, is allowed to establish a Project Office in India, without obtaining prior permission from RBI. RBI has now granted general permission to foreign entities to establish Project Offices subject to conditions specified below:
If the above conditions are not met, the foreign entity has to approach RBI to obtain approval. The activities of the offices should remain limited to the purview of the project and must close after the project is completed.
The project office is treated as an extension of the foreign corporation in India and is taxed at the rate applicable to foreign corporations. Under the general permission granted by the RBI, Project Offices may remit outside India the surplus of the project on its completion.