Navigating the Gateway: A Guide to Establishing Companies In India For Foreign Entities

India’s dynamic economy and growing market potential have made it an attractive destination for foreign entities looking to establish a presence in the country. Over the last few years, tremendous opportunities present in India have attracted a large amount of Foreign Direct Investment (FDI), and initiatives have been taken to ensure that establishing a business is direct and straightforward. This article provides an overview of the key steps and considerations for foreign entities seeking to establish a business presence in India.

FDI Guidelines 

Foreign entities must adhere to the liberal and transparent FDI guidelines outlined by the Government of India, which dictate the sectors in which foreign investment is permitted and the limits on foreign equity ownership. In India, FDI up to 100% is allowed under almost all activities, except a few, through the following entry routes:

1. Automatic route : This route is less restricted and more liberalised and the foreign entity does not require any approval from the Government of India or the Reserve Bank of India (RBI).
2. Government route : Where the principal business  of the foreign holding company falls under the sectors where FDI is not permissible under the automatic route, applications from companies in this category must be approved by the Governm ent.    

Forms of Business Entities   

Foreign entities are not allowed to establish a sole proprietorship concern in India and can instead set up operations in India through the following business structures:

1. Private Limited Company : It is a separate legal entity with limited liability, and is the fastest way to set up a company in India. It requires a minimum of two shareholders and two directors, with at least one director being a resident in India [any person who has lived in India for more than 182 days in a year is considered an Indian resident].

• Wholly Owned Subsidiary (WOS) – A foreign entity can invest 100% FDI in an Indian company through the automatic route in permitted sectors, thus making such an Indian company a wholly owned subsidiary of the foreign company. WOS allows the foreign investors to exercise uninterrupted control over the business operations, with limited liability and fewer restrictions. Since there is no requirement for minimum shareholding by an Indian resident (the WOS must still have minimum 2 shareholders), the foreign entity has the freedom to hold 100% of the shares of the company established in India.
• Joint Venture (JV) – International JV’s have become essential wherein two business entities join forces to achieve a commercial objective, with the foreign entity utilizing the existing networks of their Indian partners. A JV allows for shared control and ownership between the foreign and Indian partners and are a relatively low-risk route opted for by foreign entities wishing to enter the Indian market.

2. Limited Liability Partnership (LLP) : An LLP is a hybrid form of business that combines the flexibility of a partnership with the limited liability of a company. An investor can become a partner of an LLP either by contributing to its capital or by acquiring the partnership share from an existing partner. Post changes to FDI Regulations on 10.11.2015, 100% FDI in an LLP is now permitted under the automatic route. A minimum of two partners will be required for the formation of an LLP. It also requires at least two designated partners, with one being a resident in India.

3. Branch Office / Liaison Office / Project Office : For a foreign company to establish a temporary presence in India, this can be an effective strategy. However, setting up such an office requires compliance with the provisions laid down in the Companies Act, 2013 and approval from the Government or the RBI.

• Branch office – It is an extension of the foreign company, engaging in commercial business as a representative of the parent company, and can be established if the foreign entity is a large business and provides proof of profitability. The branch office must meet all its expenses through remittances from the foreign head office or through revenue generated from the Indian operations, as permitted by RBI.
• Liaison office – It serves as a communication link between the parent company, principal place of business or head office and entities in India, but it does not engage in any commercial activity in India, either directly or indirectly. It is set up to usually carry out market research activities and interact with potential Indian customers and hence, the operating cost must be sustained by inward remittances received from their foreign parent company.
• Project office – They are set up by foreign entities to execute specific projects as per contracts to represent their interests in India, for a limited period.

Approvals and Compliance

Before establishing a company in India, foreign entities must obtain certain regulatory approvals and permissions. These may include:

1. Approval from the RBI, depending on the sector and the percentage of foreign equity.
2. Filling of Form FC-1 with the Registrar of Companies.
3. Obtaining Director Identification Number and Digital Signature Certificate.
4. Obtaining Permanent Account Number and Tax Deduction Account Number for tax compliance.
5. Other Sector-Specific Licenses and Approvals from relevant regulatory authorities.

It is also crucial for a foreign entity intending to establish business in India to understand the tax implications. Foreign entities are subject to Indian taxation laws, including corporate income tax, goods and services tax (GST), among others, and it is advisable to engage with a local tax advisor to navigate the complexities thereof.

Conclusion

Setting up a company in India as a foreign entity can be a lucrative venture, given the country’s robust market and economic potential. However, it is imperative to navigate the legal and regulatory landscape effectively. Engaging with experienced legal and financial advisors can greatly facilitate the process and ensure compliance with all necessary requirements.

About the Authors:

Pankhuri Jain has been a practicing lawyer for over 15 years and is a Partner at ZEUS Law. She heads the Project Team, which deals in complex commercial and civil disputes, scams, corporate investigations, etc., spread across various courts and forums. Nikita Maheshwari is a Senior Associate at ZEUS Law and works in the Dispute Resolution practice vertical, with a focus on commercial litigation.

ZEUS Law Associates is an ISO certified full service corporate commercial law firm with a team of dedicated and experienced lawyers well versed in handling domestic and cross border transactions across sectors, jurisdictions and regulatory landscapes. The firm’s distinct practice areas include Litigation, Alternate Dispute Resolution, Corporate & Commercial Law, Real Estate & Infrastructure, Indirect Tax and Overseas Indian Services.