For many centuries now India has been a hotspot for many commercial activities. Many foreign firms come and invest here or are planning to make an entry in India. The prime reason for this can be credited to the large population of the nation, buying capacity of the people and low labour cost. The recent Make in India initiative is an attempt to revive and catalyse the foreign investment in the nation. Owing to some serious efforts by the government, India has escalated to 130th rank from 142 in 2015 as a country to do business with ease. However, there are many battles that need to be won and there is a long way to go to make India an epicentre of business activities.
To attract more foreign investors to India, the Government of India has increased Foreign Direct Investment (FDI). There are, however, certain fields where FDI is not allowed as of now.
But why would foreign companies want to come and establish their presence here in the first place?
Common opinion about FDI and the actual facts
People hold a different opinion regarding overseas business ventures entering India. The opponents of this theory believe that it is a threat to the Indian companies and establishments and the country might lose its sovereignty. However, the proponents of this theory hold a different view; they believe that it will build the nation’s economy and at the same time will generate more employment opportunities for people. Moreover, having the best companies coming to India we can easily take a leap into the league of developed nations.
Another way to enter India
The way for foreign establishments to come in India and do business was never so easy but thanks to the new lofty policies introduced by the government, the foreign investment has again gained pace. A foreign company can do business in India in the following ways:
- Enter as an Indian company – an overseas firm can start working by registering under private or public limited company under Company’s Act, 2013 in either of the ways described below:
- As a JV - They can form a JV or Joint Venture with an Indian firm in the partnership in the ratio of 51:49 where the maximum ratio is held by an Indian firm or an Indian partner.
- Wholly owned subsidiary (WOS) – This mode is open in the areas where 100-percent FDI has been allowed by the government. In this mode the foreign company can hold 100 percent ownership with them.
In order for companies to register, an application needs to filed with ROC or Registrar of Companies. Once a foreign company completes the due diligence and registers itself with ROC, it becomes subject to all the laws that are applicable to any Indian company. For example, labour law, PF, ESI, tax etc., all have to be as per defined Indian standards.
- As a foreign company - They can also set up their base in India by either of the following ways:
- Liaison office - Also known as representative office, they act as connecting link between the head office and its entities in India. They cannot indulge in any commercial activity, their role is to study the market in India and disseminate the information to the parent company. It can only can export or import from or to India and also helps in aiding the technical partnership between the parent company and companies of India.
- Branch offices –This way is the best for those foreign companies who are in the business of manufacturing and trading. It serves the following purpose:
- Export and import of goods
- Carry research work
- Consultancy services
- Rendering technical support to the products supplied by the parent/group companies.
- Promoting technical collaboration between the parent company and other companies in India
- Rendering IT services in India
- Project office- It is the best way for companies that are looking towards India for specific projects. Project offices are not allowed to carry out any other work apart from those specified at the time of establishment.
Now, we know the various ways via which a foreign company can do business in India. Once the mode of operation is decided, the next step is to register the company.
So what are the basic requirements?
- Two people or companies in case of private limited company and seven people or companies in case of public limited company
- One director must be resident of India i.e., he must have been residing in India for 182 days or more in the preceding financial year)
- Indian address
- Registration of the company
- Reporting to Reserve Bank of India.
An Indian company may receive FDI under the two routes as given under:
- Automatic route: Under automatic route foreign individuals/companies do not need a prior government/ Foreign Investment Promotion Board (FIPB) approval for investment in India.
- Government Route: FDI requires prior approval of the government, considered by FIPB in activities not covered under the automatic route.
FDI in Limited Liability Partnership
Limited Liability Partnership is always known for less compliance as compared to a private limited company. The foreign nationals/companies can now enter India as Limited Liability Partnership. The LLP makes you responsible only to a limited amount of debts for a company, but requires pre-approval from the government in FDI as compared to the private limited company. FDI in LLP has opened new avenues of opportunities for many foreign companies to enter India.
With 100 percent FDI in LLP, it has become easy for foreign nationals to come and do business in India, yet there are certain norms that you need to know:
- An LLP operating in sectors/activities where 100 percent FDI is allowed under the automatic route of FDI scheme would only be eligible to receive FDI.
- LLP shall not be eligible to accept FDI in sectors in which less than 100 percent FDI under automatic route.
- LLP shall not be eligible to accept FDI in sectors in which FDI is allowed under government approval route;
- FDI in a LLP shall always require prior government/FIPB approval.
- No FDI in LLP to operate in agriculture, real estate, plantation and print media
- Foreign venture capital investors and FPI or foreign portfolio investors will not be allowed to make investment in LLPs
- In the case of LLP with FDI, that has a body corporate as a designated partner or nominates someone as a designated partner (as defined in Section 7 of LLP Act 2008) must be a company registered under the Company’s Act 1956/2013.
All companies formed as LLP must adhere to the aforementioned terms. Such policies ensure safety the sovereignty of the Indian companies and at the same time lure foreign investment. FDI in LLPs has made it very easy for foreign companies to come in India.
Now if we compare FDI in private limited/public limited vs LLP we find the following differences:
- In case of private limited/public limited company FDI is allowed in both automatic route and approval route, whereas in case of LLP, FDI is allowed only in automatic route.
- LLPs investing in sectors that fall under category of automatic route still need to take government/FIPB approval, whereas in case of private limited/public limited company if investment is made in automatic route no prior government/FIPB approval is required.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
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- International business
- venture capital investors
- economic geography
- foreign investors