Setting Up Business in India – What Foreign Companies Must Know

Foreign companies may set up business in India in any one of the following manners while retaining its status as a foreign company:

Liaison Offices – A foreign company can open a liaison office in India to look after its Indian operations, to promote its business interests, to spread awareness of the company’s products and to explore further opportunities. Liaison offices are not allowed to carry on any business or earn any income in India and all expenses are to be borne by remittances from abroad.

Project Offices – The project office is the ideal method for companies to establish a business presence in India, if the object is to have a presence for a limited period of time. It is essentially a branch office set up with the limited purpose for executing a specific project. Foreign companies engaged in turnkey construction or installation normally set up a project office for their operations in India.

Branch Offices – Foreign companies engaged in manufacturing and trading activities outside India may open branch offices for the purpose of:

o Representing the parent company or other foreign companies in various matters in India, like acting as buying and selling agents.

o Conducting research, in which the parent company is engaged, provided the results of this research are made available to Indian companies

o Undertaking export and import trading activities.

o Promoting technical and financial collaborations between Indian and foreign companies.

Trading companies – Foreign companies may invest in trading companies engaged primarily in exports. Such trading companies are treated at par with domestic trading companies in accordance with the trade policy.

The RBI accords automatic approval for foreign equity up to 51 per cent for setting up trading companies engaged primarily in exports. All other proposals, which do not meet the criteria for automatic approval, can be addressed to the Foreign Investment Promotion Board, i.e. “FIPB”.

Wholly owned subsidiaries – Foreign companies may set up a wholly owned subsidiary, which is an Indian Company with an independent legal status, distinct from the parent foreign company.

Under the current foreign investment policy, a wholly owned subsidiary can be established either under the automatic route, if the conditions specified therein are complied with (specific high priority industries) or obtain an approval from the FIPB.

Joint venture companies – Foreign companies may set up a joint venture company i.e. in financial collaboration with an Indian business house/company in India, which is an Indian Company with an independent legal status, distinct from the parent foreign company.

Under the current foreign investment policy, a joint venture can be established either under the automatic route, if the conditions specified therein are complied with or obtain an approval from the FIPB.

Foreign companies intending to set up any kind of office mentioned above activities on behalf of the parent company or foreign trading companies in India for promotion of exports from India have to obtain a prior approval of the Reserve Bank by submitting an application in the prescribed form to the Central Office of Reserve Bank. On approval of such cases, permission is granted initially for a period of 3 years, subject to the condition that expenses of such office will be met exclusively out of inward remittances; such offices are not permitted to generate any income in India.

Industrial Policy:

Industrial Policy: Industrial Policy determines items/areas reserved under automatic route of approval by the RBI for Foreign Company to do business in India. Automatic approval is available through the RBI in all items/activities with the exception of a few items which are set out in Press Notes issued by the Government of India.

Besides reserved items/areas reserved by Reserve Bank of India are also notified a “List A” which specifies activities that are not covered by its Automatic Route.

To carry on business in items/areas reserved in List A, proposals are required to be approved by Foreign Investment Promotion Board, Government of India for which an application is required to be made to Secretariat for Industrial Assistance, Ministry of Commerce and Industry, Government of India, New Delhi.

Industrial licensing is mandatory in respect certain industries i.e. Distillation and brewing of alcoholic drinks; Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

Electronic Aerospace and defense equipment of all types; Industrial explosives including detonating fuses, safety fuses, gun powder, nitro cellulose and matches; Hazardous chemicals; Drugs & Pharmaceuticals (according to modified drug policy issued in September ’94).

The compulsory licensing provisions do not apply to the small-scale units manufacturing any of the above items reserved for exclusive manufacture in small scale sector.

Specific Industries are exclusively reserved for the public sector i.e. Arms and ammunition and allied items of defense equipment; defence aircraft and warships; Atomic energy; Railway transport.

Foreign Collaboration:

Indian Companies can also enter into Technical Collaboration Agreements with Foreign Collaborators under two routes:

” The automatic route of Reserve Bank ” Under approval of Secretariat for Industrial Assistance (SIA), Ministry of Industry, Government of India, New Delhi.

Application for foreign technical collaboration which do not conform to the parameters given in automatic route are required to be made to SIA, Ministry of Industry, Government of India, New Delhi. The extension of Foreign Technical Collaboration Agreements (including those approved by the Reserve Bank) is also required to be approved by SIA.

Nuts and Bolts-1: Registration & Incorporation

The procedure for registration of an industrial undertaking varies; it entirely depends upon whether the item proposed to be manufactured falls within the licensed, de-licensed, or small-scale sector. An application seeking an industrial license must be filed with the Ministry of Industry together with the application seeking NRI investment approval. An application in Form FC/IL – SIA must be submitted to the Ministry of Industry for grant of an industrial license.

Form FC/IL – SIA should comprise information related to the promoter and collaborator, proposed activities, items of manufacture, capital structure, borrowings, investment, foreign exchange inflow, technology transfer, if any. There is no definite time frame as when the approval will be granted, it depends on a case-to-case basis. However, if the information supplied in Form FC / IL – SIA is precise and calls for no clarification from the Government, approval is normally obtained in 4-6 weeks.

In case of an item reserved for manufacture in the small-scale sector unit must get itself registered with the Directorate of Industries/District Industries Centre of the State Government concerned.

Can capital investment made in India be repatriated Capital investment made in India can be fully repatriated along-with the profits after completing certain formalities. Also, returns on the investment can be repatriated in two forms i.e.:

“Dividend – dividend on shares held by foreign investors is fully repatriable subject to certain formalities “Interest – interest earned on bonds or debentures can be repatriated after paying appropriate tax. the profit, earned by the branch doing permitted activities can be remitted after payment of the necessary taxes in India, the branch office should submit an application for remittance to the authorized person along with necessary documents/certificates etc., as prescribed. Direct Tax Issues Tax liability in India is basically determined on two criteria viz. Scope of total income and Residential status of the taxpayer. Company that is registered outside India is treated as a Foreign Company. Taxable income of foreign enterprises determined as per the various provisions contained in the Indian Income-tax Act, wherever a foreign enterprise belongs to a country with which India as entered into an agreement for Avoidance of Double Taxation (AADT), the tax liability determines as per the provision of the relevant AADT.

Rakesh Saxena, Advocate

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