Series on Foreign investment & Compliances under RBI & FEMA - Part 2

In this part, we will look how Foreign Direct Investments (FDIs) actually come in India with the detailed procedures.  So let's begin.

In the Part-1, I gave a hint that how can a foreign business entity invest into a Private Limited Company, let's see this in detail. 

1. ENTRY OPTIONS & OPPORTUNITIES FOR BUSINESS IN INDIA

Basically, to start a Business in India, following options are available to the foreign companies:

• Wholly owned subsidiary (WOS)
• Joint Venture (JV) with an Indian partner 
• Foreign Institutional Investors (FII)
• Liaison Office (LO)
• Branch Office (BO)
• Project Office

But, a foreign company can also purchase shares in an indian company directly by investing in that company, it also amounts to FDI, but the foreign company through this mode will get the right to share the profits earned by the company in the form of dividend and also through this mode the foreign company can not be able to start business in India. 

So, to start business in India, the above 6 types are available for their consideration. Now let's discuss each of them briefly:

Wholly owned subsidiary (WOS) : Foreign companies can set up wholly owned subsidiary companies in India in form of private companies subject to FDI guidelines of RBI. A wholly owned or a normal subsidiary company has the maximum flexibility to conduct business in India when compared with a liaison or branch office and has following salient features: 

1. Funding can be done via equity, debt (foreign as well as local) and internal accruals; 
2. Indian transfer pricing regulations apply; 
3. Repatriation of dividends is allowed without approvals.

Joint Venture (JV) with an Indian partner : Foreign companies can also set up joint venture with Indian or foreign companies in India. There are no separate laws for joint ventures in India and laws governing domestics companies apply equally to joint ventures. Making JV's compliances much more easier as no special act is there to regulate them.

Foreign Institutional Investor (FII) : FIIs can also invest in India in financial markets particularly such as pension funds, mutual funds, investment trusts and asset management companies or their power of attorney holders. FIIs can invest in all securities in primary and secondary markets including the equity and other instruments of companies which are listed or are to be listed on stock exchanges of India.

Liaison Office (LO) : As its name suggest an office for liaisoning purposes only and not for any other commercial activities. A liaison or a representative office can be opened in India subject to approval by Reserve Bank of India. 

Such an office can undertake liaison activities on its company’s behalf. A liaison office can also undertake following activities: 

• Representing parent/group companies in India; 

• Promoting import/export in India; 

• Promoting technical/financial collaborations on parent company/group’s behalf; 

• Coordinating communications between parent/group companies and Indian companies.

Branch Office : Foreign companies can conduct their business in India through its branch office which can be opened after obtaining a specific approval from Reserve Bank of India. 

A branch office can undertake following activities: 

• Import & export of goods 

• Rendering professional or consultancy services 

• Carrying out research work in area which its parent company is engaged 

• Promoting technical/financial collaborations on behalf of parent company/ overseas group company 

• Representing parent/group companies in India and acting as buying/selling agent in India 

• Providing IT services and developing software in India 

• Providing technical support for products supplied by parent company/group.

Project Office : If a foreign company is engaged by an Indian company to execute a project in India, it may set up a project office without obtaining approval from Reserve Bank of India but subject to prescribed reporting compliances. 

As applicable in case of a branch office, a project office is treated as an extension of foreign company and is taxed at the rate applicable to foreign companies.

ENTRY PROCEDURE

Private company : As per the Indian Companies Act, A private company is a company which has minimum of two members and two directors.

By its Articles of Association, a private company has to:

 

• Restrict rights to transfer its shares, if any 

• Limit its shareholders to a number of two hundred 

• Prohibit any invitation to public to subscribe any of its Securities.

Public company: As per the Indian Companies Act, A public company is defined as a company which is not a private company. 

A subsidiary of a public company is also treated as a public company. A public company is required to have a minimum seven members and three directors. 

Procedure of Incorporation of Company

Following steps are required to incorporate a company:

• Obtaining DIN (Director Identification Number)

• Applying for name availability

• Drafting Memorandum of Association (MOA) and Articles of Association (AOA)

• Court stamping of MOA and AOA

• Signing of MOA and AOA by first subscribers

• Filing Forms with Registrar of Companies (ROC)

• Vetting of MOA and AOA by ROC

• Obtaining Certificate of Incorporation

• Other State & Central level registrations

• Meeting annual compliances

Immediate Business Compliances

Step Involved in Investment

• Identification of structure
• Central Government approval if required
• Setting up or incorporating the structure
• Inflow of funds via eligible instruments and following pricing guidelines
• Meeting reporting requirements of RBI and applicable Acts/Laws
• Registrations/obtaining key documents like PAN etc.
• Project approval at State/UT level
• Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.
• Manufacturing projects are required to file Industrial Entrepreneur’s
• Memorandum (IEM), some of the industries may also require industrial license
• Construction/renovation of unit
• Hiring of manpower
• Obtaining licenses if any

Entry and Investments Routes

• Foreigners can directly invest in India either on their own or as a joint venture,

with a few exceptions with regard to investment limits and sectors.

• No government approval is required for FDI in virtually all sectors except a

small negative list formulated by government. Sector specific guidelines are

formulated by government giving sectoral investment caps if any.

• If an investment does not qualify for automatic approval, Competent Authority

considers the proposal.

• Use of foreign brands names/trademarks is permitted for sales in India.

• Indian capital markets are open to FII’s and Indian companies are allowed to

raise funds from international capital markets

• Foreign technology collaborations are allowed with agreements on Technical

knowhow fees

• NRI’s can invest in shares and or convertible debentures of Indian companies

on a non-repatriable basis and these investments are not considered as FDI

Other Important Aspects

• Repatriation of investment capital and profits earned:

There are three basic points to note with respect to repatriation:

1. All foreign investments are freely repatriable, subject to sectoral policies.

Dividends declared on foreign investments can be remitted freely through an

authorised dealer.

16 Foreign Direct Investment - A Practitioner’s Guide

2. Non-residents can sell shares on the stock exchange without prior approval of

the Reserve Bank of India (RBI) and repatriate the sale proceeds through a

bank, if they hold the shares on repatriation basis and if they have to take

necessary NOC/tax clearance certificate issued by the Income Tax authorities.

3. For sale of shares through private arrangements, regional offices of the RBI

grant permission for recognized units of foreign equity in Indian company in

terms of guidelines indicated in Regulation 10.B of Notification No. FEMA.20/

2000 RB dated May 2000. The sale price of shares on recognized units is to be

determined in accordance with the guidelines prescribed under Regulation

10.B (2) of the above Notification (www.rbi.org.in).

• Locational Restrictions : Industrial undertakings are free to select the location of

their projects. Industrial License is required if the proposed location is within 25 km

of the Standard Urban Area limits of 23 cities having population of 1 million as per

1991 census. (www.censusindia.net)

• Environmental Clearances : Entrepreneurs are required to obtain statutory

clearances relating to pollution control and environment as necessary for setting up

an industrial project for 31 categories of industries in terms of Notification S.O. 60 (E)

dated 27.1.94 as amended from time to time, issued by the Ministry of Environment

Forests & Climate Change under The Environment (Protection) Act, 1986. Details

can be obtained at the website of Ministry of Environment, Forests & Climate Change.

Incentives

Central Government Incentives:

• Investment allowance

• Incentives available to units set-up in Special Economic Zones (SEZ), National

Investment & Manufacturing Zones (NIMZ) etc. and Export Oriented Units

(EOUs).

• Exports incentives like duty drawback, duty exemption/remission schemes,

focus products & market schemes etc.

• Areas based incentives like unit set-up in North-East region, Jammu & Kashmir,

Himachal Pradesh, Uttarakhand.

• Sector specific incentives like Modified Special Incentive Package Scheme(MSIPS) in electronics.

State Government Incentives:

• Each state government has its own incentive policy which offers various types

of incentives based on the amount of investments, project location, employment

generation, etc. The incentives differ from state to state and are generally laid 

down in each state’s industrial policy.

• The broad categories of state incentives include: stamp duty exemption for

land acquisition, refund or exemption of value added tax, exemption from

payment of electricity duty etc.