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Market entry options

There are many international companies eyeing opportunities in India.  For entry into the Indian market, it is essential to identify the right target market and industry. A few market entry options are detailed below.

Establishment of a Joint Venture (JV) in India

A joint venture is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.

In a JV, each participant is responsible for profits, losses, and costs associated with it. A JV is recognised as a distinct legal concept in India.

As per the provisions of the Companies Act 2013, a JV is defined as a joint arrangement, whereby the parties that have joint control and the rights to its net assets.

Why choose a JV in India?

In sectors where 100 percent foreign direct entry (FDI) is not allowed in a JV is the best medium, offering a low-risk option for companies wanting to enter into the vibrant Indian market.

All companies registered in India, even those with up to 100 percent overseas equity, are considered the same as local companies.

Under Indian law, a JV is primarily governed by:

A JV may be formed with any of the existing business entities in India.

Types of JV in India

In India, a JV can be classified broadly on the basis of constitution and ownership:

  1. Constitution:

    JVs are either incorporated or unincorporated.
    An incorporated JV acquires a separate legal entity, perpetual succession, and its own rights and obligations, whereby it can sue and be sued.

    A JV can be incorporated as a limited liability company under the Companies Act or a limited liability partnership (LLP) under the Limited Liability Partnership Act 2008.

    To avoid being a permanent and formal corporate vehicle, an unincorporated JV can be established in the nature of a simple partnership firm or a strategic alliance, governed by the JV agreement, which stipulates all nuances of the relationship, including the rights and obligations among the parties and with third parties.

  2. Ownership:

    JVs are either equity-based or contractual and are either under equal ownership or majority-minority ownership.

    An equity-based JV is one in which all the JV parties hold joint ownership by establishing a separate business entity, which can be in the form of, among others, a company, an LLP or a trust.

    In a contractual JV, there is an arrangement to collaborate without creating a jointly owned separate entity. Such contractual JVs may revolve around a particular issue (such as entry into a new market, technology collaboration and revenue-sharing) and can be most commonly found in the form of franchise arrangements, licensing agreements, and purchasing and distribution agreements.

Entering into a JV in India

Once an associate is selected, normally a memorandum of understanding (MoU) or a letter of intent is signed by the parties – stressing the foundation of the future JV agreement.

Terms and conditions should be properly assessed before signing the contract. Negotiations need an understanding of the cultural and legal background of all the involved parties. The JV union should obtain all the required governmental approvals and licenses within a specified period.

Companies in India are grouped into two categories – companies owned or controlled by foreign investors and companies owned and controlled by Indian residents.

Before signing a JV contract, the below points must be properly assessed:

Choosing a business structure for your JV in India

A JV in the form of an incorporated company is the most popular recourse among foreign investors in India.

In the case of a company JV, the parties to the arrangement may either incorporate a new company or collaborate with the promoters of an existing company. Setting up a new company provides the most flexibility as the entity can be structured according to the specifications, intentions, and obligations of the associated parties.

In the case of an LLP, the parties to the JV incorporate a legal entity under the Limited Liability Partnership Act, 2008. This may be secured by setting up a new LLP by the JV parties or by transferring one partner's stake in an existing LLP to the JV partner.

A partnership JV is created under the Partnership Act, 1932. This type of JV includes aspects of a corporate JV and a contractual JV. The business structure of a partnership JV is typically defined by the relationship between the persons who agree to share the profits of their business, which is either managed by all of them or any of them acting for all.

Where a JV is a strategic alliance, the parties involved will mutually agree to collaborate as independent contractors rather than be shareholders in a company or enter into a legal partnership. The JV contract in this scenario will state the rights, duties, and obligations expected of the partners to the JV and between the JV parties and third parties. The JV contract will also state the duration of their legal relationship.

Advantages of JVs

Apart from the access to the established distribution and marketing channels of the Indian partner and access to their available financial resources, the main advantages for a foreign investor choosing a JV structure when entering India are:

JVs allow businesses to access new global markets and channels of distribution without geographical obstacles, gain insights and use each other's expertise to deliver results.

Management of JV companies

It is important to have the same opinion over the proposed management structure.

The management constitution, control, and safeguards should be agreed upon when preparing the memorandum of understanding (MoU).

In the case of JV companies, the Companies Act, 2013 requires the entity to have a Memorandum of Association (MoA) and Articles of Association (AoA), which serve as the charter documents of the company.

Foreign investors should note that in India, the JV agreement between the partners will not bind the JV company unless its terms are included in the AoA of the JV company.

Further, to avoid potential future conflicts, the parties to the JV should include a provision in the JV agreement stating that if the AoA is inconsistent with the provisions of the JV agreement, then the parties will amend the MoA and AoA accordingly.

Royalty payments

In the past, there were considerable monetary caps on remittances (both lump sum fees and royalties) for technology collaborations and license or use of trademark or brand name. These restrictions and caps have now been removed, subject to some conditions.

Profit repatriation

India allows free of charge repatriation of profits once the entire domestic and federal (tax) liabilities are met. Investment exit processes are also simple and profits can be repatriated once all the tax debt and other compulsions are fulfilled.

Exit strategy

JVs in India are normally planned for a particular period, and overseas companies should take the length of such a lifespan seriously.

JVs can fall short because the domestic associates are not capable to fund the expansion of the business as rapidly as the foreign company had hoped for or because the partners have different interests. It is therefore advisable to have a clear exit plan in place from the beginning. The general exit options available are - buy-sell agreements, unilateral sale rights and put/call rights.

On the other hand, the Indian JV agreement may also provide for the termination of operations and the liquidation and closure of the venture. Any of those options can be used independently or in combination with each other.

The exit strategy depends upon the type of entity that is constituted/incorporated.

Important considerations during a JV

  1. Pre-incorporation due diligence:

    Due diligence is the detailed investigation that a potential investor carries out after successfully completing preliminary negotiations with its owner. Overseas firms should conduct a formal due diligence check to evaluate the expectations and limitations of the Indian associate, to check the validity of the partners' business operations, to review the validity of the documents produced by the prospective partners, and to evaluate any risk factors associated with the potential partners.

    The major types of due diligence are – legal, tax, HR, and financial; however, depending on the company’s sector and the proposed business deal, due diligence on intellectual property, environment, real estate, valuation, forensic accounting, and vendors can also be conducted.

  2. Tax consideration:

    Tax is recognized as an important factor in investment decisions. The main tax considerations for a JV in India are corporate income tax, dividend tax, withholding tax, capital gains tax and provisions of double taxation avoidance agreements signed between India and the investor’s country.
    Foreign firms should reach out for tax advice at the beginning of an Indian investment. India has a very low entry threshold for creating a taxable presence.

  3. Intellectual property rights:

    India recognizes different types of intellectual property (IP), which are protected under separate laws. As a result, registering intellectual property involves navigating complex legalities and submitting numerous documents.

    This whole process requires expertise and familiarity with procedural norms to ensure fast and effective registration. Overseas investors entering into JVs in India can protect their IP through registration and detailing provisions in the JV agreement. Additionally, independent documentation may also be executed, such as a name and logo license agreement (also known as a registered user agreement) with Indian organizations.

Incorporating a Wholly Owned Subsidiary in India

Meaning of a Company in Indian Law

According to Section 2(20) of the Companies Act, 2013, “Company” means a company incorporated under this Act or under any previous company law. It is a legal entity representing an association of people, whether natural, legal or a mixture of both, who shares a common objective/purpose and unite to achieve the declared objectives.

A company can be registered in India as private limited or a public limited company.

Generally foreign companies prefer to form a wholly owned subsidiary in India.

Wholly Owned Subsidiary Company

A wholly owned subsidiary company is a company which is incorporated under the provisions of the Companies Act, 2013 and in which parent company holds all the shares of such company which gives them control and access to appoint board of directors. In other words, a wholly owned subsidiary company can be defined as an entity whose entire share capital is held by another Indian or a foreign company.

Companies who choose to operate in more than one country can operate their business by simply setting up a wholly owned subsidiary in other countries. These types of companies can be referred as a private limited company in India. They are recognised as Indian companies under the Income Tax Act, and they are also eligible for the deductions and exemption benefits like any other Indian companies.

Requirements of setting up a Wholly Owned Subsidiary of a foreign company in India:

Procedure for incorporation of wholly owned subsidiary (WOS)

Step 1: Apply for Digital Signature Certificate (DSC)

All the proposed directors of the company are required to obtain Class 3 DSC, for which the following information and documents are required:

  1. Passport size photograph of the proposed director
  2. Photo ID proof of the proposed director:
    • For foreign national: Notarized and apostilled copy of the passport
    • For Indian national: Voter ID/ driving license/ passport along with Permanent Account Number (PAN) issued by the Ministry of Home Affairs of Central/State Government.
  3. Address proof of the proposed director:
    • For foreign national: Notarized and apostilled copy of current months’ telephone bill or mobile bill or electricity bill or latest bank statement
    • For Indian national: Telephone bill or mobile bill or electricity bill or bank statement (not older than two months)
  4. Email ID and Indian mobile number

Step 2: Apply for name reservation of the proposed company in SPICe+ web form

The Simplified Proforma for Incorporating a Company Electronically (SPICe+) (INC-32) form deals with the single application for reservation of name, incorporation of a new company and/or application for allotment of the director Identification number (DIN) and/or application for PAN and Tax deduction account number (TAN).

SPICe+ has been divided into two parts viz., SPICe+ Part A and SPICe+ Part B.

SPICe+ Part A represents the section wherein all the details with respect to name reservation for a new company has to be entered. It can be submitted individually only for the name reservation or it can be submitted together with SPICe+ Part B for both name reservation as well as incorporation. In case the SPICe+ Part A is submitted individually for name reservation, Part B and all other linked forms shall be enabled only after the SRN of SPICE+ Part A is ‘Approved’ i.e. the name is reserved.

Two names can be filed at a time. The name once approved is reserved for 20 days, which can be extended for 40 days or 60 days on filing the extension application.

A foreign company can use its complete name or part of it followed by (Pvt. Ltd.) in applying for the name reservation of its WOS.

In case of the foreign company using its own name as the name of WOS in India, then the foreign company is required to pass a resolution to this effect and the same needs to be provided while filing the application for name reservation.

Documents required for filing the name reservation application:

Step 3: Incorporation of wholly owned subsidiary

Once the name of the proposed company is reserved or SPICe+ Part A is submitted, the form Spice+ Part B is required to be filed on the Ministry of Corporate Affairs’ (MCA) website for registration of the proposed WOS. SPICe+ Part B represents the section wherein all the remaining details required for incorporation of a company has to be entered.

Below are the services offered by completion of the form:

Documents required for the above services which shall be duly notarized and apostilled:

  1. A copy of the resolution passed by the board of Foreign Company, mentioning the following details:
    • Name and designation of the authorized representative
    • Proposed capital structure of the company
    • Subscribers/ Investors details
    • Proposed directors’ details
  2. ID proofs of the authorized representative; passport is mandatory if such person is a non-resident
  3. ID proof and address proof of the of the directors
  4. A copy of the Certificate of Registration, Charter (MOA), Articles of foreign holding company
  5. Information / particulars of nominee of the share of foreign company
  6. Business activity/ object of the company along with subscriber sheet
  7. Articles/ by-laws of the company along with subscriber sheet
  8. Proof of place where the registered office of the companies is to be situated in India, that is, Lease Deed/ Rent Agreement/ NOC from the owner of the property in case the property is taken on lease for use of registered office of the company.
  9. Copy of utilities bill of the registered office address not older than two months.

Once the e-form is processed and found complete, the company would be registered and the Corporation Identification Number (CIN) would be allocated. Also the Direct Identification Numbers (DINs) would get issued to the proposed Directors who do not have a valid DIN.

Step 4: Post incorporation compliances:

The compliances to be followed by Wholly Owned Company:

RBI compliance for FDI received in India:

Any contribution from a foreign citizen to capital in the company is considered as foreign direct investment (FDI) and accordingly, RBI compliance needs to be secured by the newly registered company in India. It involves the following steps:

  1. Opening a capital Account at a Bank and generating an Authorised Dealer Code (AD) code in order to be able to receive the remittance from the Investor
  2. Remittance of subscription amount in an Indian bank through a swift channel
  3. Indian bank will update the company about the receipt of money and will share details required to transfer money in the company’s Capital account
  4. Once the documents are received, the bank will transfer the amount to the company’s Capital Account
  5. Obtaining Foreign Inward Remittance Certificate (FIRC) and Know Your Customer (KYC) documents from the remitter’s bank
  6. The allotment of shares to the subscriber must be done within 180 days from the date of inward remittance to the foreign investor in order to avoid violation of the Foreign Exchange Management Act (FEMA) regulations
  7. The company will have to file the below documents in Form FC-GPR to the concerned AD bank within 30 days from the date of receipt of the money in respect to the shares allotted at the time of Incorporation of a Wholly Owned Subsidiary in India:
    • Copy of FIRC
    • Copy of KYC
    • Valuation Report
    • CS Certificate
    • Debit Authority letter
    • Other documents, if required by RBI

Limited Liability Partnership

The concept of the Limited Liability Partnership (LLP) was introduced in India in 2008. The Limited liability Partnership Act, 2008 regulates the LLP in India.

LLP has become a preferred form of organization among entrepreneurs as it incorporates the benefits of both partnership firm and company into a single form of organisation.

There are minimum two partners required to incorporate an LLP. However, there is no upper limit on the maximum number of partners in an LLP.

Among the partners, there should be a minimum of two designated partners who shall be individuals, and at least one of them should be a resident of India. The rights and duties of the designated partners are governed by the LLP agreement. They are directly responsible for the compliance of all the provisions of the LLP Act, 2008 and provisions specified in the LLP agreement.

Features of LLP

Foreign direct investment (FDI) in limited liability partnership (LLP) has opened new avenues of opportunities for many foreign companies to enter into India.

Any person resident outside India or a company incorporated outside India (other than those from Bangladesh and Pakistan) can invest in an LLP in the form of capital contribution or by way of acquisition of profit shares. That is, an investor can become a partner of an LLP, either by contributing to its capital or by acquiring a partnership share from an existing partner.

Advantages of setting up an LLP

FDI in LLPs: key teforms

To promote foreign holdings in LLPs, the Reserve Bank of India (RBI) liberalized its policy for accepting FDI in LLPs in March 2017, by making amendments to the Foreign Exchange Management Regulations, 2000.

New rules allow LLPs by foreign entities to perform downstream investment in any other company or LLP operating in sectors in which foreign investment is allowed.

Other changes include permitting LLPs having foreign investments availing borrowings from abroad (External Commercial Borrowings or ECBs) at a lower cost.

A company that has received foreign investment can now be converted into an LLP under the automatic route without government approval subject to some conditions. Previously, this required government approval.

LLP registration for non-resident investors

An LLP must have at least two designated partners (DPs) with one being resident in India for at least 180 days. According to the Ministry of Corporate Affairs (MCA), designated partners will be accountable for regulatory and legal compliances, besides their liability as partners.

Foreign nationals, including foreign companies and LLPs, can incorporate an LLP in India, provided that at least one designated partner is a resident of India. However, the LLP/Partners must comply with all relevant foreign exchange laws, rules, regulations and guidelines.

The MCA states: “In case of an LLP in which all the partners are bodies corporate or in which one or more partners are individuals and bodies corporate, at least two individuals who are partners of such an LLP or nominees of such bodies corporate shall act as designated partners.”

Steps for setting up an LLP

Documents required for incorporating a LLP:

For Partners:

For LLP:

Tax liability of the LLP

The LLP is liable to pay income tax at 30 percent on its income. In case the total income exceeds INR 10 million, the LLP is also liable to pay surcharge at 12 percent on the income tax. Additionally, health and education cess of four percent is always payable on the income tax plus surcharge (if any).

Choosing the LLP route

Prospective companies and investors seeking to take advantage of India’s liberalized FDI caps must carefully consider their options for investment in the country and choose a business or corporate entity that takes care of their liability as well as tax planning issues. Foreign companies planning to do business in India must pay special attention to available avenues for establishing a business presence and corporate structuring  in order to save taxes to the best extent possible.

Branch Office

A Branch Office (BO) is a suitable business model for foreign companies looking to establish a temporary presence in India. The branch office serves as an extension of the head office and carries on the same business and activity as that of its parent company.

As a BO, foreign companies can conduct full-fledged business in India. BOs can carry the same or substantially the same trading activities as carried out by their parent companies or group companies.

However, a branch office cannot directly carry out manufacturing activities unless such manufacturing activity is done in a special economic zone (SEZ) with the purpose of exporting products out of India. It may also sub-contract such activity to an Indian manufacturer.

Objectives of setting up the branch office:  

Conditions for setting up a branch office:

Businesses that would like to set up a branch office in India need to meet the following conditions:

Provided that a person resident outside India that is not financially sound and is subsidiaries of other companies may submit a Letter of Comfort (Annex A) from their parent company subject to the condition that the parent company satisfies the prescribed criterion for net worth and profit.

How to register a branch office in India

To open a BO in India, a foreign company must apply for approval from the Reserve Bank of India (RBI) under provisions of the Foreign Exchange Management Act, 1999.

Foreign entities whose principal business falls under sectors where 100% FDI is permissible under the automatic route, must submit the Form- FNC to the RBI, along with the associated documents.

For other sectors, the form must be submitted to the Ministry of Finance. In this case, the application for establishing branch office must be forwarded by the foreign entity through a designated AD Category – I Bank to the RBI.

If the foreign entity wishes to establish a branch office in more than one location in India, it must register the branch, or seek approval from the RBI for each of the location separately. The RBI approval is necessary for each activity the branch office intends to undertake in India.

Taxation

A branch office does not have a separate legal entity and is subject to the law governing its parent office. As a result, in India, a branch office is taxed as a foreign company and is liable to pay tax at the rate of 40 percent plus applicable surcharge and cess.

Disclaimer

The Canadian Trade Commissioner Service in India recommends that readers seek professional advice regarding their particular circumstances. This publication should not be relied on as a substitute for such professional advice. The Government of Canada does not guarantee the accuracy of any of the information contained on this page. Readers should independently verify the accuracy and reliability of the information.

Content on this page is provided by Dezan Shira & Associates a pan-Asia, multi-disciplinary professional services firm, providing legal, tax, and operational advisory to international corporate investors.

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