FDI India Entry Options

FDI INDIA ENTRY OPTIONS

India is an attractive destination for Foreign Direct Investment (FDI). A foreign entity can establish its presence in India, depending on the proposed activities of such entity, either through the opening of a liaison office, a project office, a branch office or by directly investing in an Indian company or a partnership firm or a LLP. The Foreign Exchange Management Act, 1999 (“FEMA”) is the central legislation that any foreign investor is required to comply with, with regard to its entry, operations and exit strategy in India. Set out below is the brief overview of each of the aforesaid entities and the activities permitted to be carried on by them:

1.LIAISON OFFICE

A liaison office is a place of business to act as a channel of communication between the principal place of business or head office, by whatever name called, and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel. For establishing a liaison office in India, the entity has to comply with certain conditions prescribed by the Reserve Bank of India (“RBI”). A liaison office is permitted to undertake a limited number of activities in India and any activity in addition to those will need prior approval from the RBI. The administrative cost of setting up a liaison office is relatively cheap and it serves as an effective initial entry into India to explore the Indian market. A liaison office cannot earn any income or generate any profits in India.

2.BRANCH OFFICE

Prior approval of the RBI is required for foreign companies to establish branches in India. An exception is however carved out for banking companies provided that such companies have obtained necessary approval under the Banking Regulations Act, 1949. Furthermore, no RBI approval is required by a foreign company for setting up a branch/unit in a Special Economic Zone for undertaking manufacturing and service activities, subject to certain conditions. The RBI has laid down certain criteria to be complied with in order to consider an application for establishing a branch office. A liaison office is permitted to undertake a limited number of activities in India and any activity in addition to those will need prior approval from the RBI. The branch office may only engage in other activities with prior permission from the RBI. However, branch offices in India are not permitted to engage in retail trading activities of any nature, or carry out manufacturing or processing activities in India, whether directly or indirectly. Normally, a branch office is required to be engaged in the activity in which the parent company is engaged. The application from a foreign company for branch office is considered by the RBI under two routes: RBI route and Government route. A branch office is permitted to remit outside India, the profits of the branch (net of applicable Indian taxes).

3.COMPANY

FDI into an Indian company is brought in either through the automatic route (i.e. where prior regulatory approval is not required) or under the approval route (i.e. where prior regulatory approval is required). The Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 (“Regulation 20”) issued under the FEMA regulates the transfer or issue of securities by or to persons resident outside India, along with various press notes and other press releases issued by the Government from time to time. The Government has on August 28, 2017 issued the Consolidated FDI Policy (“Consolidated FDI Policy”) which has replaced all earlier press notes, press releases and clarifications on FDI and now reflects the current policies on FDI in India. FDI can be brought into an Indian company either through incorporation of a new company or acquisition of the shares of an existing company.

(i)   Automatic Route

An Indian company may, subject to the prescribed FDI caps, sectoral regulations and licensing requirements applicable for various sectors / activities (if any), issue equity shares / compulsorily convertible preference shares / compulsorily convertible debentures to persons resident outside India under the automatic route. In terms of the said sectoral regulations, there are certain sectors in which foreign investment is not permitted under the automatic route and requires specific approval, such as, the domestic airlines, broadcasting, print and news media, atomic minerals, defense etc. Further, FDI is prohibited in certain sectors / activities, such as atomic energy sector, lottery business, gambling and betting business and the manufacture of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes. The Government has, in the Consolidated FDI Policy, laid down the manner in which indirect foreign investment in Indian companies and the transfer of ownership or control from residents to non-residents in Indian companies is calculated.

(ii)     Approval Route

If the proposed investment does not qualify for the “automatic route”, the company in which such foreign investment is sought to be made would have to make an application on the “Foreign Investment Facilitation Portal” for approval. The approval is granted on a case to case basis at the discretion of the concerned ministry/department, and in approving an investment proposal, the concerned department/ministry ordinarily considers factors such as inflow and outflow of foreign exchange, general benefit to the Indian economy, induction of technology, export potential, potential for large-scale employment, etc.

4.PARTNERSHIP FIRM

A partnership is defined as a relation between two or more persons who have agreed to share the profits of a business carried on by all of them or any of them acting for all. The owners of a partnership business are individually known as the “partners” and collectively as a “firm”. A partnership is formed by an agreement, which may be either written or oral. When the written agreement is duly stamped and registered, it is known as “Partnership Deed”. Ordinarily, the rights, duties and liabilities of partners are laid down in the deed. But in the case where the deed does not specify the rights and obligations, the provisions of the Indian Partnership Act, 1932 will apply.

• A Non-Resident Indian (“NRI”) or a Person of Indian Origin (“PIO”) resident outside India can invest in the capital of a firm or a proprietary concern in India on non-repatriation basis provided that:
• Amount is invested by inward remittance or out of NRE/FCNR(B)/NRO account maintained with Authorized Dealers / authorized banks;
• The partnership firm is not engaged in any agricultural/plantation or real estate business or print media sector; and
• Amount invested shall not be eligible for repatriation outside India.
• Investments with repatriation option: NRIs/PIO may seek prior permission of RBI for investment in partnership firms with repatriation option. The application will be decided in consultation with the Government.
• Investment by non-residents other than NRIs/PIO: A person resident outside India other than NRIs/PIO may make an application and seek prior approval of the RBI for making investment in the capital of a partnership firm in India. The application will be decided in consultation with the Government.
• Restrictions: An NRI or PIO is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media.

5.LIMITED LIABILITY PARTNERSHIP

Limited Liability Partnership (“LLP”) combines the flexibility of a partnership and the advantages of limited liability of a company at a low compliance cost. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, but allows its members the flexibility of organising their internal management on the basis of a mutually arrived agreement, as is the case in a partnership firm.  A LLP is governed by the provisions of the Limited Liability Partnership Act, 2008 (“LLP Act”). FDI is permitted under the automatic route, only in LLPs operating in sectors/activities where 100% (one hundred percent) FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.