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Establishment of Foreign Business in India

India is currently going through unprecedented growth trajectory. With the coming up of NDA Government in 2014 with optimistic P.M Mr. Narendra Modi, Businesses across the globe is attracted towards India for starting their business here. GoI is implementing initiatives that not only will facilitate investments into India but will also make India a better and easier place to do business in. Some of the initiatives that the current government has started are Make in India, Startup India, Digital India, Skill India, Smart Cities among others. 


Why to start business in India?


Before going into how to start business, We should know why to start business here: 



1. Unique features of India


  • India with its 1350 million population is the second biggest market in the world after china for any goods and services. 
  • India has a very good demographic dividend because it has more than 800 million young and working population which is not available in any country of the world. 
  • India is growing 7% per year since 1998 which is the fastest growing economy in the world after china.
  • India has coastline of 7500 KMs which is connecting Asia to the south Asia and South-east Asia. 
  • India has abundance of natural resources. 


2. Future Prospects 


  • India will have 69 cities with a population of more than one million each by 2025. Economic growth will center on them, and the biggest infrastructure building will take place there. 
  • Average wealth per person increased from $900 in 2000 to $2,800 in 2015. 
  • Internet users to double to 829 million from 373 million in 2016. Online consumers are expected to cross 100 million by the end of 2017 from 69 million in 2016.
  • 41% Indian parents funding kids' education more important than retirement saving. So, more and more educated mass will be coming out.
  • India targets 500 million skilled workers by 2022.


3. Business friendly environment 


  • India offers open investment regime with majority of sectors under automatic route. 
  • The financial and the capital market in India is also very deep and mature, offering investors and other entities a very effective and competent infrastructure. BSE and NSE are largest stock exchanges in India. 
  • The Government of India is also constantly working towards rationalizing the process of setting up business in India and has undertaken several notable steps to improve the ease of setting up and doing business in India. 
  • The recent legal and taxation reforms like coming into effect of the Insolvency and Bankruptcy Code and the Goods & Services Tax clearly demonstrate India’s resolve to emerge as one of the most business friendly jurisdictions in the world. 
  • The start-up culture in India is also witnessing a tremendous boom. This offers immense investment opportunities for investors who wish to be part of this new phenomenon wherein young ventures are changing the way businesses are run and are creating great value for all the stakeholders.
  • India is on the path of being an economic superpower and therefore it is imperative for global entrepreneurs and investors to have pie of the India’s growth story.


4. Open Foreign Direct Investment Policy


  • Except for few strategic and core sectors, almost all the sectors have been opened up for foreign investment. In several sectors foreign investment upto to the extent of 100% is allowed, thereby making it possible to set up completely foreign owned ventures in India. 
  • Under the FDI Policy, foreign investors can invest into Indian business using various investment instruments like equity shares, convertible preference share, convertible equity shares etc. 


5. Lower operational cost


  • The cost of starting business is very low in India as compared to setting up a company in the U.S, the U.K, or Singapore.
  • The cost of the basic amenities required for businesses is lower in India, whether it is investing in infrastructure, labour, food, transportation, Internet, or even taxes. 


6. Low Tax Rate


Corporate Tax Rate in India for companies having turnover upto Rs. 250 crore is 25%. The following are the tax rates of different developing and developed countries across the globe.


No.

Country

Rate

No.

Country

Rate

1. 

Australia

28.5-30%

11.

US

21%

2.

Belgium 

29.58%

12.

Malaysia

18-24%

3.

Brazil

34%

13.

Mexico

30%

4.

Cambodia

20%

14.

New Zealand

28%

5.

China

25%

15.

Philippines

30%

6.

Chile

24%

16. 

Russia

20%

7.

Germany

29.65%

17.

Singapore

17%

8.

Greece

29%

18.

South Africa

28%

9.

Indonesia 

25%

19.

Spain

25%

10.

Japan

32.11%

20.

UK

19%


How to Start Business in India?


Entry Options for Foreign Businesses in India


There are mainly two types of entry options for foreign businesses in India i.e First, Registration of a company/LLP in India and Second, Establishing a Branch/Liaison/Project office in India.


1. As an Indian Company or Limited Liability Partnership


A Foreign Company can commence operations in India by incorporating either a Company or LLP. LLP is a new form of business structure in India that combines the advantages of a Company (a separate legal entity having perpetual succession) with the benefits of organizational flexibility associated with a partnership. Such a Company or LLP may enter into Joint Venture with Indian party or incorporate as a Wholly Owned Subsidiary of foreign Company. Foreign equity in such Indian companies or LLPs can be up to 100%, subject to equity caps under the Foreign Direct Investment Policy.


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 distribution/marketing set up of the Indian partner.
  • Available financial resource of the Indian partners.
  • Established contacts of the Indian partners which help smoothen the process of setting up of operations.


Wholly Owned Subsidiary Company


Foreign companies can also to set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.


2. As a Foreign Company


Foreign Companies can set up their operations in India through Liaison Office, Project Office or Branch Office. Such offices can undertake any permitted activities. Companies have to register themselves with Ministry of Corporate Affairs, Govt. of India within 30 days of setting up a place of business in India.


Liaison office


  • Liaison offices (LOs) are a popular option for foreign investors exploring the Indian market for the first time, and unsure of how the country’s liberalizing F.D.I cap will affect their business.
  • The Foreign Exchange Management Act (FEMA) governs the application and approval process for the establishment of a liaison or branch office in India. The approval for establishing a liaison office in India is granted by the Reserve Bank of India (RBI).
  • Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. 
  • Liaison office cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. 
  • Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. 
  • It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India.


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.


Branch Office


  • Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:


  • Export/Import of goods.
  • Rendering professional or consultancy services.
  • Carrying out research work, in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying/selling agents in India.
  • Rendering services in Information Technology and development of software in India.
  • Rendering technical support to the products supplied by the parent/ group companies.
  • Foreign Airline/shipping Company.


  • A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. 
  • Branch Offices established with the approval of RBI may remit outside India profit of the branch net of applicable Indian taxes and subject to RBI guidelines. 
  • Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).


Minimum requirements before starting business in India


Number of Shareholders and Directors


  • Minimum 2 shareholders for a Private Limited Company and Minimum 7 shareholders for a Public Limited Company.
  • Minimum 2 Directors for a Private Limited Company and Minimum 3 Directors for a Public Limited Company.
  • There must be 1 Indian Resident Director i.e person who have stayed in India for 182 days or more in previous calendar year.


Foreign Ownership


  • 100% Foreign Direct Investment, subject to equity sectoral cap of R.B.I.
  • Do check if your business required prior approval from Reserve Bank of India.


Initial Share Capital


  • No minimum capital requirement for starting company in India.
  • Do plan for initial capital based on initial expenses, until the business reaches at Break Even Point (BEP).


Registered Office


  • A registered office address in India is required for correspondence and AGM purpose.
  • Option will be there to arrange within 30 days of incorporation.


Conclusion


India is a land of opportunities. A per EY report, India is the most attractive market by international investors, ranking India as the premier choice for investors worldwide. India’s outlook among investors has improved, that India would be among the top three economies by 2020, is the view of 37%, against 29 percent last year. Existing investor experience has been encouraging, with 70 percent of businesses, which already operate in India extending support to that idea.