How one can enter in Indian Market
One can enter the Indian market in more ways than one. These are:
1. Liaison Office
A Liaison Office is in the nature of a representative office set up primarily to explore and understand the business and investment climate.
A liaison Office is not permitted to undertake any commercial / trading/ industrial activity, directly or indirectly, and is required to maintain itself out of inward remittances received from abroad through normal banking channels.
Activities Permitted:
- Representing in India the parent Company / group Companies
- Promoting export/ import from/ to India
- Promoting technical / financial collaborations between the parent / group companies and companies in India
- Acting as a communication channel between the parent company and Indian companies
Approval / Incorporation
Any foreign company intending to open a liaison Office in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof. In addition to above, the foreign company is also required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC).
Typical Points about Branch Office
- Any foreign company intending to open a liaison Office in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof.
- In addition to above, the foreign company is also required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC).
Suitability of a Liaison Office
The liaison office generally acts as a communication channel between the parent company overseas and its present or prospective customers in India. The liaison office can also be set up to establish business contacts or gather market intelligence to promote the products or services of the overseas parent company. The liaison Office cannot undertake any business activity in India nor earn any income in India. The liaison Office has to meet its entire expenses from funds received from the parent company through normal banking channels. At the time of closure of the liaison Office, the RBI grants permission to repatriate the balance in the Indian bank account to the parent company. Since the liaison Office is not permitted to earn any income, it should not constitute a taxable entity in India. However, the liaison Office would be required to withhold tax from certain payments and hence to comply with the requisite tax withholding requirements under the domestic tax law.
2. Branch Office
A branch would mean an establishment carrying on substantially the same activity as its Head Office.
Activities Permitted:
As per the guidelines laid down by the RBI, the Branch Office in India is allowed to carry on only the following activities:
- Export / Import of goods
- Rendering professional or consultancy services
- Carrying out research work, in which the parent company is engaged
- Promoting technical or financial collaboration between Indian companies and parent or overseas group companies
- Representing the parent company in India and acting as buying / selling agent in India
- Rendering services in Information Technology and development of software in India
- Rendering technical support to the products supplied by parent / group companies
Approval / Incorporation
Foreign companies intending to open a Branch Office in India need to obtain prior permission of RBI which would encompass even approval to the scope of activities that are intended to be carried out in India.
In addition to above, the foreign company is also required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC).
Typical Points about Branch Office
- Branch Office is considered a part of the foreign company and is not treated as a separate legal entity.
- The office can undertake trading activities, but not manufacturing.
- It is subject to taxation in India at 42.23% on income accrued in India.
- If there is a double taxation agreement with the country in which the foreign company is incorporated, the tax paid in India can be set off against the total tax payable by the parent company abroad.
- Branch offices may repatriate profits to their Head Office without obtaining prior approval.
- The Branch Office would not expand its activities or undertake any new trading, commercial or industrial activity other than that is expressly approved by the RBI.
- The entire expenses of the Branch Office in India will be met either out of the funds received from abroad through normal banking channels or through income generated by it in India.
- The Branch Office will not accept any deposits in India.
Repatriation of Profits
A Branch Office can remit the profits (net of any withholding tax) generated out of its operations in India on production of the prescribed documents, and on establishing that it has earned a net profit by undertaking the permitted activities. The Branch Office need not retain any profits as reserves in India.
3. 100% Owned subsidiary
- Form a Company and the parent Company will hold 100% of Shares in the Company.
- The Company can take up any business in India.
- NO RBI permission.
- Will be treated as Domestic Company
- Tax Rate Slab will be 30%
Approval / Incorporation
The Company is required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC).
- Can be independently promoted by Parent Company
- Can be promoted by any two people in India and then the holding of this person can be purchased by the Parent Company. (If this is the case, intimation about the transfer of share is required to be informed to Reserve Bank of India).
Typical Points about 100% Subsidiary
- The profit earned in India can only be taken away by parent Company in the form of dividend after payment of dividend tax.
- No easy exit.
- Transfer pricing issues if purchases made from sister concern.
4. Project Office
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
5. Joint Venture, With An Indian Partner
Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners. Joint Venture may entail the following advantages for a foreign investor:
- Established contacts of the Indian partners which help smoothen the process of setting up of operations
- Established distribution/ marketing set up of the Indian partner
- Available financial resource of the Indian partners
6. Foreign Direct Investment (FDI)
India's foreign trade policies have been formulated with a view to invite and encourage Foreign Direct Investment in India (FDI). The process of regulation and approval has been substantially liberalized. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI.
FDI can be divided into two broad categories - Investment under automatic route and investment through prior approval of Government.
Procedure under automatic route
FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Procedure under Government approval
FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB. For detail of project under Automatic Route and Government Route.
7. Investment by way of Share Acquisition
A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.