All About Setting Up Business In India By A Foreign (Alien) Company

Given India’s rapidly growing market, the country’s investment potential has been attracting an unending stream of foreign (alien) companies to establish their presence in India. Over the last few years, initiatives have been taken to ensure that establishing a business in India is more simple and foreign companies are encouraged to invest in the country. Drawing parlance with US terminology, an ‘alien company’ is a company or corporation that was created in another country but is doing business in the host country. This article lays down the exact requirements and the options that are available for a Foreign Company, that has decided or is exploring to come and do business in India.

Foreign investment in India is governed by the Foreign Direct Investment (FDI) policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) has
issued a notification which contains the relevant regulations. Foreign investment is freely permitted in almost all sectors. Foreign Direct Investments (FDI) can be made under two routes—the Automatic Route and the Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the RBI or the Government of India for the investment. Under the Government Route, approval by the Foreign Investment Promotion Board (FIPB), the inter-ministerial body responsible for processing FDI proposals and making recommendations for Government approval, is required.

Prohibited areas

Foreign investment in any form is prohibited in a company, a partnership firm, a proprietary concern or any entity, whether incorporated or not (such as Trusts) which is engaged, or proposes to engage, in the following activities:

• Business of a chit fund, or
• A Nidhi company, or
• Agricultural or plantation activities, or
• Real estate business, or construction of farm houses, or
• Trading in Transferable Development Rights (TDRs).

Please note that real estate business does not include the development of townships, construction of residential/commercial premises, roads or bridges. To further clarify, partnership firms/ proprietorship concerns having investments as per FEMA regulations are not allowed to engage in the print media sector.

In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as:

• Retail trading.
• Atomic energy.
• Lottery business.
• Gambling and betting.
• Agriculture (excluding floriculture, horticulture, development of seeds, animal husbandry, pisciculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agriculture and allied sectors) and plantations (other than tea plantations).

Mode of Investment

Indian companies can freely issue equity shares / convertible debentures and preference shares subject to valuation norms prescribed under FEMA regulations. Issue of other types of preference shares such as non-convertible, optionally convertible or partially convertible are considered debt. As such, the guidelines applicable for External Commercial Borrowing (ECB), viz. eligible borrowers, recognized lenders, amount and maturity, end use stipulations and so on, will apply to such issues. Since these instruments are denominated in rupees, the rupee interest rate will be based on the swap equivalent of the London Inter-Bank Offered Rate (LIBOR) plus the spread permissible for ECBs of corresponding maturity. As far as debentures are concerned, only those which are fully and mandatorily convertible into equity, within a specified time would be reckoned as part of equity under the FDI Policy.

BUSINESS STRUCTURE ALLOWED

Joint Ventures vs Wholly Owned Subsidiary

Joint Ventures

Foreign companies can establish a business by forming a strategic partnership
with business entities in India. International joint ventures have become essential wherein two business entities join forces to achieve a commercial objective. Joint ventures are becoming the ideal way to enter industries where 100% of FDI is not permitted in India.

Joint ventures are a relatively a low-risk route opted for by foreign companies wishing to enter the Indian market, provided these companies conduct appropriate due diligence on the Indian partners prior to forming an alliance. It
allows the foreign investor to benefit from the Indian partner’s established market and consumers, distribution channels, local know-how and management.

Wholly Owned Subsidiary

By allowing foreign companies to establish wholly-owned subsidiary companies in India, the Indian market provides a convenient and beneficial business environment for these foreign entities. Foreign companies can set up wholly- owned subsidiaries by making 100% FDI in India through an automatic route (as defined previously) subject to the provisions of the Reserve Bank of India (RBI), Foreign Exchange Management Act, 1999 and the Act.

Requirements for Establishing a Company in India

Forming a new company provides flexibility and freedom as it can be structured in accordance with the requirements, objectives and obligations of both parties. A private limited company must have at least 2 (two) shareholders, while a public company should have at least 7 (seven) shareholders. Under the Act, it is a mandate that at least one director of every company is a resident of India [any person who has lived in India for more than 186 (one eighty-six) days is considered an Indian resident]. For a company to be registered, it must have an address in India. The legal jurisdiction applicable to the company will be determined by the city in which the company’s registered office is located.

Foreign companies can choose to establish a company with three directors, two being foreign nationals from the parent company and as a legal mandate, one being an Indian citizen. Further, as there is no requirement for minimum
shareholding by the Indian director, foreign companies or nationals have the freedom to hold 100% of the shares of the Indian company.

Branch Office

For a foreign company to establish a temporary presence in India, a branch office is an effective strategy. The branch office is an extension of a foreign company and can engage in commercial business as a representative of the parent company.
Businesses keen on setting up a branch office should meet the following criterion as prescribed by the RBI:

• The applicant must be a body corporate incorporated outside India;
• The net worth of the parent company must not be less than USD 100,000 or its equivalent;
• The parent company should have a profit-making record during the immediately preceding five financial years in the home country.

Once established with the prior approval of the RBI, a branch office may remit profits of the branch outside India, subject to RBI guidelines and applicable taxes. Companies incorporated outside of India that are involved in manufacturing or trading are permitted to set up branch offices in India with the prior approval of the RBI. These branch offices are allowed to represent the parent company in India and carry out activities including, but not limited to, the following:

• Export/import of goods.
• Rendering professional or consultancy services.
• Promoting technical or financial collaborations between Indian companies and parent companies.
• Representing the parent company in India and acting as buying/selling agent in India.

Liaison Office

A liaison office 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, trading, or industrial activity, either directly or
indirectly, and is restricted to gathering and providing information to potential Indian consumers.

Businesses wanting to set up a liaison office should meet the following criterion as prescribed by the RBI:

• The applicant must be a body corporate incorporated outside of India.
• The net worth of the parent company must not be less than USD 50,000 or its equivalent.
• The parent company should have a profit-making record during the immediately preceding three financial years in the home country.

Liaison offices are not allowed to undertake any business activity or to earn any income in India. The expenses of liaison offices are covered through inward remittances of foreign exchange from the head office outside India.

Project Office

As the name suggests, project offices are established by foreign companies to execute specific projects as per contracts to represent the parent company’s interests in India.

The RBI has granted general permission to foreign companies to establish project offices only if they have secured a contract, to execute a project in India, from an Indian company and subject to the following conditions:

• The project is funded directly by inward remittance from abroad; or
• The project is funded by a bilateral or multilateral international financing agency; or
• The project has been cleared by an appropriate authority; or
• A company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.

The RBI has given general permission for setting up project offices in India if the above-listed criterion is met. However, if the listed conditions are not met, the foreign company must approach the RBI for approval.

Comparative Analysis

Basis	Liaison Office [LO]	Branch Office [BO]	Wholly Owned Subsidiary
Meaning	A Liaison Office [also known as representative office] can undertake only liaison activities i.e., it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot have any income in India.	Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to setup Branch Offices with specific approval by the RBI. Normally, the Branch Office should be engaged in the activity of the parent company.	An incorporated entity formed and registered under the Companies Act, 1956. It is a distinct legal entity, apart from its shareholders.
Constitution	1. An extension of the Head Office. 2. It is a simple structure format. 3. No separate legal standing of its own.	1. An extension of the Head Office with right to accrue income in India. 2. It is a simple structure format. 3. No separate legal standing of its own.	1. Company format. 2. Separate legal entity.
Permitted Activities	1. Representing in India the parent company / group companies. 2. Promoting export / import from / to India. 3. Promoting technical/ financial collaborations between parent / group companies and companies in India. 4. Acting as a communication channel between the parent company and Indian companies	1. Export/import of goods. 2. Rendering professional or consultancy services. 3. Carrying out research work, in areas in which the parent company is engaged. 4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. 5. Representing the parent company in India and acting as buying/ selling agent in India. 6. Rendering services in information technology and development of software in India. 7. Rendering technical support to the products supplied by parent/group companies. 8. Foreign airline/shipping company.	As per its ‘main objectives’ stipulated in the Memorandum of Association subject to Indian regulations.
Criteria for set up	1. Parent company should have a profit-making track record during the immediately preceding three financial years in the home country. 2. Net worth of the parent company not less than USD 50,000 or its equivalent.	1. Parent company should have a profit-making track record during the immediately preceding five financial years in the home country. 2. Net worth of the parent company not less than USD 100,000 or its equivalent.	A private company is required to be incorporated with a minimum authorized & paid up capital of INR 100,000 and minimum two subscribers. No requirement of track record of parent company as shareholder
Typical Terms of approval	1. Not to undertake any activity of a trading, commercial or industrial nature and not to enter into any business contracts in its own name without RBI’s prior permission. 2. No commission/fees shall be charged or any other remuneration received / income earned by the office in India for the liaison activities/services rendered by it or otherwise in India. 3. The entire expenses of the office in India will be met exclusively by using funds received from head office through normal banking channels. 4. The office in India shall not borrow or lend any money from/to any person in India without RBI’s prior permission.	1. Not to expand its activities or undertake any new trading, commercial or industrial activity other than that expressly approved by the RBI. 2. The entire expenses in India will be met either by using funds received from head office through normal banking channels or through income generated by it in India. 3. The Branch Office will not accept any deposits in India. 4. The commission earned by the Branch Office from parties abroad for any agency business will be repatriated to India through normal banking channels. 5. Not to undertake any retail trading activity. 6. A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.	A private company is required to be incorporated with a minimum paid-up capital of INR 100,000 and minimum two subscribers. Broadly, it:   – restricts the right to transfer its shares; – limits the number of its members (shareholders) to fifty; – prohibits any invitation to the public to subscribe to any of its shares or debentures; and; – prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives.   The conditions will be different for Public Limited Companies.
Time limit of approval	Normally 3 years from the date of approval.	Normally 3 years from the date of approval.	Until the company decides to close down.
Basic Registration	The following registrations / approvals will be required:   1. Professional Tax. 2. Shops and Establishment Act Registration. 3. Permanent Account Number (PAN) / Tax Deduction and Collection Account Number (TAN). 4. Registrars of Companies (ROC) Registration. 5. Importer Exporter Code (IEC).	The following registrations / approvals will be required:   1. PAN / TAN. 2. Service Tax. 3. Professional Tax. 4. Shops and Establishment Act Registration. 5. IEC. 6. VAT/GST. 7. ROC Registration.	The following registrations / approvals will be required:   1. PAN / TAN. 2. Service Tax. 3. Professional Tax 4. Shops and Establishment Act Registration. 5. IEC 6. VAT/GST.
Liabilities of parent company/Head office	Parent company’s liability is unlimited for all acts and omission of LO.	The liability of the Branch is unlimited. The assets of the parent company are at risk of attachment in case the liabilities of the branch exceed its assets.	The liability of the Parent company is limited to the extent of its shareholding in the WOS. The assets of the foreign company are not subject to any attachments.
Permitted Incomes	The entire expenses of the LO in India will be met out of the funds received from Head Office through normal banking channels. There will not be any income of the LO.	The entire expenses of the BO in India will be met either out of the funds received from Head Office through normal banking channels or through income generated by it in India.	All income arising out of its business activities.
Indian Income Tax	Since there is no income accrual, there is no income tax. LO is required to file information in Form 49C with the Income Tax Department.	Since a branch office of a foreign company is taxed as a foreign company in India, it is taxed @ 41.2% or 42.23% if the taxable income exceeds INR 10,000,000 during any financial year (FY).	Any Indian company is taxed @ 30.90% or 33.99% if the taxable income exceeds INR 10,000,000 during any financial year (FY).
Payment of Dividend to Parent	Cannot pay dividend.	Dividend/surplus distribution to Parent is tax free subject to normal tax in India	Dividend can be paid & now shareholders need to pay tax.
Management	LO is managed by Authorized Representative, resident in India (Country Manager)	BO is managed by Authorized Representative, resident in India (Country Manager).	Minimum two directors (can be foreign national, no need to be resident in India).
Audit: A. Statutory Audit	Financials would be liable for statutory audit by a chartered accountant	Financials would be liable to statutory audit by a chartered accountant.	Financials would be liable for statutory audit by a chartered accountant
B. Internal Audit	Not Applicable.	Not Applicable.	Applicable, subject to conditions. Paid up capital + free reserves exceeding certain limits.
C. Tax Audit	Not Applicable	Applicable for cases where turnover exceeds INR 4 million. Noncompliance would result in a penalty @ 0.5 % of the total turnover or INR 0.1 million, whichever is the lesser amount.	Applicable in case of turnover exceeding INR 4 million. Noncompliance would result in a penalty @ 0.5 % of the total turnover or INR 0.1 million, whichever is the lesser amount.
Transfer Pricing	Not Applicable	Applicable	Applicable
Annual Compliance A) Filing	1. Yearly filings include the filing of audited accounts of the LO, world accounts with Registrar of Companies. 2. Yearly submission of activity certificate with the RBI and Authorized Dealer (AD) Bank. 3. Filing quarterly Tax Deducted at Source (TDS) returns. 4. Yearly filing of audited accounts of the LO with the Directorate of Income Tax, New Delhi. 5. File Form 49 C with Income Tax Department.	1. Yearly filings include the filing of audited accounts of BO, world accounts with Registrar of Companies. 2. Yearly submission of activity certificate with the RBI and AD Bank. 3. Annual return with the Income Tax Department. 4. Filing of quarterly TDS returns. 5. Filing of monthly Service Tax returns. 6. Filing of VAT/GST returns	1. Yearly filing of financials and Annual Return with the Registrar of Companies. 2. Filing of Compliance Certificate if paid up capital exceeds INR 1 million. 3. Annual Compliance with the RBI in the case of shares being allotted to foreign individuals (Form FC-GPR Part A & Part B). 4. Annual return with the Income Tax Department. 5. Filing of quarterly TDS returns. 6. Filing of monthly Service Tax returns. 7. Filing of VAT /GST returns.
B) Meeting	Not Applicable.	Not Applicable.	Board – One meeting per quarter. Shareholder – One meeting per year.
Remittance of Profit to Parent company	None, except upon closure of LO.	Profits can be freely repatriated to the Parent Company subject to payment of applicable taxes.	1. By way of dividend, subject to Dividend Distribution Tax. 2. By way of royalty/ fees for technical services. 3. By way of Management fees. 4. Related party transactions are subject to transfer pricing regulations.
Borrowing	Not allowed	The BO is not allowed to borrow locally unless given prior approval by the RBI.	1. There is no restriction on local borrowing. 2. ECBs are subject to guidelines issued by the RBI.

Finally, I can say that our viewers, particularly from the Aviation field, after going through the article, must have now been more clearer on the procedure that needs to be followed, when a foreign company tries to establish it’s presence in India. The other takeaway could be the value addition to your storehouse of information.

The post All About Setting Up Business In India By A Foreign (Alien) Company appeared first on N4M (News4masses).

from
https://news4masses.com/setting-up-business-in-india-by-foreign-alien-company/