India is one of the most investment-friendly countries where a foreign national can invest and recoup his/her investment in no distant time. Since the inception of the administration of the current Prime Minister, Narendra Modi in 2014, the business terrain has seen a lot of improvements in the inflow of foreign direct investments. Some of the initiatives targeted toward the business world by the Modi’s government are “Startup India”, “Digital India”, “Make in India,” “Smart Cities,” as well as “Skill India,” among others.
It is in this regard that this article will take a look at the establishment of foreign businesses in India. But before we progress forward, let’s take a look at the benefit of doing business in India.
- Great Market Potential: The Indian market is one of the most robust markets in the world after China due to its huge population. There are hardly any goods or services that won’t sell in the Indian market. Also, the country boasts of over 800 million young people who work day and night to move the economy forward. In addition, the current statistic shows that the Indian economy has been growing by 7% since 1998. This figure puts the country second in the world after China.
- Future Prospects: By projection, India would have over 69 cities with over one million people each doing various businesses by 2025. Over 41% of Indian parents are not funding the education of the child, which mean by more people would be educated as the country progresses. By 2022, it is projected that over 500 million skilled workers would be targeted.
- Friendly Business Environment: The Indian business environment is very friendly. Foreign Investors currently doing business in the country are smiling to the bank each financial year in terms of high turnover. In a bid to make the ease of doing business seamlessly, the government recently introduced taxation reforms which triggered the introduction of the Goods and Services Tax and the Insolvency and Bankruptcy Code. This review demonstrates the fact that the country is one of the best places to invest.
- 4. Favorable FDI Policy: The country’s Foreign Direct Investment Policy is top-notch. Apart from a few strategic sectors, every other sector of the economy has been opened for free flow of foreign direct investment. With favourable FDI policies in place, it is now possible to establish 100% foreign-owned businesses in the country. There are different investment routes foreigner investors can leverage such as convertible preference share, equity shares, and convertible equity shares etc.
- Low Cost of doing business: The cost of establishing a business in India is very low compared to the amount you would spend to set up the same business in the UK, US, and Singapore. In addition, the cost of procuring basic amenities to smoothly operate a business is low in India.
- Low Tax rate: The tax rate charged by the Indian government on businesses with a turnover of INR 20 crore revolves around 25%. This figure is highly encouraging compared to what other countries charged.
HOW TO ESTABLISH A BUSINESS IN INDIA?
When you are ready to set up a business in India, there are basically two entry options you can avail. The first entry option is the set up an Indian company or LLP, while the second option is to set up a Branch or project office or Liaison office. Let’s now take you through the details of the two entry options.
INDIAN COMPANY OR A LLP
Foreign investors can establish a business in India either as a Limited Liability Partnership (LLP) or a Company. The concept of LLP is a new structure which combines the advantages and features of a Company and that of a partnership form of business. A foreign company can register as a Wholly Owned Subsidiary or can enter into a joint venture with an Indian citizen, who would be the foreign company’s partner. The foreign equity in such as arrangement would be 100% although depending on the equity caps in line with the Foreign Investment Policy.
JOINT VENTURE WITH A PARTNER IN INDIA
One of the easiest ways to establish a foreign company in Indian is to enter into a joint venture with an Indian partner. With this arrangement, foreign investors stand to benefit the following:
- Established marketing or distribution network already created by the Indian partner
- Financial resources of the Indian partner would be readily available
- The Indian partner would ensure that the operation of the business goes smoothly.
WHOLLY OWNED SUBSIDIARY COMPANY
Under the FDI policy, some sectors of the economy are open to the free flow of foreign direct investment. Setting up a Wholly Owned Subsidiary Company by foreign investors means 100% ownership of the firms.
As A Foreign Company
Foreign Companies can establishment businesses in the country via Liaison Office, Branch Office, and Project office. The business can operate freely and can take lawful actions so far the actions are within the ambit of the law. However, such businesses must register with the Ministry of Corporate Affairs not less than 30 days the operation of the company started.
The following are the features of establishing a Liaison Office in India;
- It is one of the easiest ways of setting up a foreign company, the reason being that the promoters of the company can test the Indian market as a first timer, particularly when the promoters are unsure of the effect of the country’s FDI policy.
- The approval to establish a foreign company in India as a Liaison Office is granted by the Reserve Bank of India. The application procedures and approval are governed by the Foreign Exchange Management Act.
- Liaison Office of a foreign company cannot carry out commercial activities and hence cannot rake in income.
- The responsibility of the Liaison Office is basically to seek more business opportunities for the company and to also advertise the company to Indian consumers.
Liaison office can also promote both import and export of commodities in and out of India.
The following are the features of establishing a Project Office in India;
- Foreign companies with the intention of executing a project in India can set up a temporary project office at any location in the country.
- Subject to specified conditions, the Reserve Bank Of India has granted foreign companies the leverage to establish a project office
- A project Office cannot carry out any other activities apart from the project it is executing.
- A project office can wire the project’s surplus back to its parent company after the project has been completed.
The following are the features of establishing a Branch Office in India;
Foreign Companies who are into the business of trading and manufacturing are granted leverage to establish a branch office for the following purposes:
- Import and Export of Goods
- Offering consultancy or professionals services
- Carrying out the company’s research work
- Promoting financial collaboration between the foreign company and the parent company.
- Acting as a seller or buyer agent in India representing the parent company.
- Developing software or offering Information Technology services
- Foreign shipping company or foreign airlines
A branch office is not permitted to manufacture any goods on its own, but it is permitted to subcontract the same to a manufacturer from India. The approval to establish a branch office is only granted by the Reserve Bank of India
MINIMUM REQUIREMENTS TO ESTABLISHMENT A FOREIGN COMPANY IN INDIA
DIRECTORS AND SHAREHOLDERS’ NUMBER
- For a Private Limited Company, the number of shareholders should be two (2) and a maximum of seven (7) for a Public Limited Company
- For a Private Limited Company, the number of Directors should be two (2) and a maximum of three (3) for a Public Limited Company
- There must be at least an Indian resident who must have lived in the country for more than 182 days in previous years
- Subject to the equity sectoral cap of the Reserve Bank of India, Foreign Direct Investment is 100%.
- Ensure you check with the RBI if your business needs prior approval.
Initial Share Capital
- Starting a foreign company in India does not require a minimum capital
- Promoters of the business should, however, plan for the initial capital expenses until a point when the business can operate smoothly.
For a foreign company to be established in India, the proposed company must have a register office address for purposes of AGM and correspondence. However, there is a window of 30 days to get a registered office address from the date of incorporation.
IMPORTANT DOCUMENTS REQUIRED WHEN SETTING UP A FOREIGN COMPANY
The following are the important documents that would be required when setting a foreign company in India;
- A copy of the foreigners’ passport
- Proof of address (Bank statement or driver’s license)
- Copies of the relevant company documents
- All the originals documents should be notarized in the country of origin of the foreigner or at the Indian Embassy where the foreigner lives.