India’s growth story as one of the fastest-growing economies in the world has paved the way for numerous opportunities for businesses to expand. Even foreign companies are not exploring their prospects of entering the Indian market considering the large consumer base and favourable economic policies. However, the company formation process in India requires an understanding of the country’s legal and regulatory framework. Entities from abroad with business interests must be aware of certain restrictions, protocols, and guidelines that are specific to them. Look at the key considerations for foreign businesses during company formation in India.
Types of entities available for foreign companies
Before we discuss the protocols, it’s essential to know the types of entities available for foreign companies when considering company formation in India. Some of the common options include:
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Wholly Owned Subsidiary (WOS): It is a wholly owned subsidiary which has the ownership of a foreign company. The company can be either a private limited company or a public limited company.
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Branch Office: A branch office can be set up by a foreign company to serve the purpose of exporting or importing goods. A branch office can also be established for providing services or acting as a buying or selling agent.
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Liaison Office: The Liaison office is established to represent the parent company in India. However, they are limited to promoting export/import or acting as a channel that communicates with foreign companies and Indian businesses.
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Joint Venture (JV): To form a new business by blending in the expertise of an Indian company, a joint venture may be formed.
Restrictions for foreign companies
It has to be brought to the notice of the foreign companies that not all sectors are open to 100% foreign direct investment (FDI) in India. Many sectors do allow full ownership, but there are also some of them which restrict foreign investment unless government approval is achieved. The FDI policy goes through regular updates, and hence one should keep oneself informed about the current guidelines when planning company formation in India.
For instance, the sectors like defence, aviation, and media have a capping on foreign investment. Then there are also certain sectors wherein foreign companies can only enter through a joint venture or require prior approval from the government. Industries such as gambling, atomic energy, and lotteries have total restrictions on foreign investment.
Special protocols for foreign companies
Foreign companies must comply with the detailed procedures during company formation in India. Some vital steps include:
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Approval from the Reserve Bank of India (RBI): Foreign companies can establish branch or liaison offices only after approval from the RBI. While the approval is pretty straightforward, it may vary depending on the sector the foreign company is entering.
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Director Identification Number (DIN) and Digital Signature Certificate (DSC): All directors, whether an Indian subsidiary or joint venture need to procure a DIN and DSC. Foreign nationals can obtain these identifications once the necessary documentation and identification process is completed.
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Filing Documents with the Registrar of Companies (RoC): In order to comply with this step, the company’s charter documents, including the Memorandum of Association (MOA) and Articles of Association (AOA), must be filed with the RoC. These documents reflect the scope of the business and the rules governing the company.
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Foreign Exchange Management Act (FEMA) Compliance: Foreign companies face compliance duties with FEMA regulations. These regulations govern the inflow and outflow of foreign currency in India. Every investment by a foreign company in India has to adhere to FEMA rules to ensure that all capital transactions are legitimate.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.