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| Entry Strategy into INDIA |
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Broadly, entry strategies may be classified into two major types:
- A foreign investor may directly set up its operations in India
through a branch office or a representative office or liaison office
or project office of the foreign Company
- It may do so through an Indian arm i.e. through a subsidiary
company set - up in India under Indian laws.
Generally, setting up operations through an Indian arm is advisable,
especially if the quantum of investment is huge.
A Foreign company is one that has been incorporated outside India and
conducts business in India. These companies are required to comply with
the provisions of the Indian Companies Act, 1956 as far as the Indian
Operations are concerned.
Foreign companies can set up their operations in India through opening
of liaison, project and branch offices. Such companies have to register
themselves with the Registrar of Companies (ROC), New Delhi within 30
days of setting up a place of business in India.
The following are the entry strategies for a foreign enterprise in case
the Indian operations are to be run directly by a foreign company
through a branch office or a representative office or liaison office or
project office of the foreign company.
Liaison Office / Representative Office
A foreign company can set up a liaison or representative office in India
to test the Indian Market. It can enter with much greater investment
later if it is convinced about the potential of the Indian market. There
are however certain limitations regarding the type of work which can be
done through a liaison or representative office. A liaison office is not
allowed to undertake any business activity in India and cannot
therefore, earn any income in India. The role of such offices is,
therefore, limited to collecting information about possible market
opportunities and providing information about the company and its
products to the prospective Indian customers.
The opening and operation of such offices is regulated by the Foreign
Exchange Regulation Act (FERA). Approval from the Reserve Bank of India
(RBI) is required for opening such offices. There are certain standard
conditions imposed for operation of such offices.
- Expenses of such offices are to be met entirely through inward
remittances of foreign exchange from the Head Office abroad.
- Such offices should not undertake any trading or commercial activities
and their activities should be limited to collecting and transmitting
information between the overseas Head Office and potential Indian
customers.
- Such offices should not charge any commission or receive other income
from Indian customers for providing liaison services.
- Liaison/ representative offices also have to file regular returns
comprising of Annual Audited Accounts, an annual activity report on the
activities of the office and some other documents with RBI.
Permission to set up such offices is initially granted for a period of 3
years and this may be extended from time to time.
Project Office
Foreign companies planning to execute specific projects in India can set
up temporary project /site offices in India for the purpose. Specific
approval from the RBI is required for setting up a project office. Such
approval is generally accorded in respect of Government approved
projects, but the RBI can give approval for setting up project offices
even for executing private sector projects.
Approvals accorded for setting up project offices are specific to the
particular project to be executed and last only till the completion of
the project.
Branch Office
The Government has allowed foreign companies engaged in manufacturing
and trading activities abroad to set up Branch offices in India for the
following purposes:
To represent the parent company/other foreign companies in various
matters in India e.g. acting as buying / selling agents in India.
- To conduct research work in the area in which the parent company is
engaged provided the results of the research work are made available to
the Indian companies.
- To undertake export and import trading activities.
- To promote possible technical and financial collaborations between the
Indian companies and overseas companies. A branch office is not allowed
to carry out manufacturing activities on its own but is permitted to
subcontract these to an Indian manufacturer.
Permission for setting up branch offices is granted by the Reserve Bank
of India (RBI) on a case to case basis. RBI normally considers the
operating history of the applicant company worldwide and its proposed
activities in India for granting the approval.
The following is the policy and procedure for obtaining RBI approval for
setting up a branch / representative / liaison / project office in
India.
'Foreign companies', i.e., companies (other than banking companies)
which are not incorporated in India and foreign nationals (whether
resident in India or not) are subjected to special regulations relating
to their business etc. activities in India through the provisions of
Sections 28, 29 and 30 of FERA 1973. Acquisition/disposal of immovable
properties in India by foreign companies/foreign nationals is also
subject to regulation under Section 31 of FERA 1973.
Appointment as Agent in India :
Foreign companies and foreign nationals (whether resident in India or
not) are required to obtain permission of Reserve Bank for acting or
accepting appointment as agent in India of any person or company in the
trading or commercial transactions of such person or company.
Foreign companies intending to set up a liaison office in India or to
post a representative in India for undertaking liaison activities on
behalf of the parent company or foreign trading companies intending to
set up liaison offices in India for promotion of exports from India
should submit their applications to the Central Office of Reserve Bank
(Foreign Investment Division). In approved cases, permission is granted
initially for a period of 3 years subject, inter alia, to the condition
that the expenses of the liaison/representative office are met
exclusively out of inward remittances. Applications for renewal of
permission should, however, be made to the concerned regional office of
Reserve Bank under whose jurisdiction the office is situated.
Applications for opening temporary project/site offices in India by
foreign companies proposing to engage in execution of specific
projects/contracts undertaken with the approval of Government of
India/Reserve Bank should be submitted to the concerned regional office
of Reserve Bank under whose jurisdiction the office will be situated.
Authorized dealers ( Banks ) may open QA.22 accounts in the names of
Liaison Offices in India of foreign companies after verifying the
relative approval granted by Reserve Bank under Section 29(1)(a) of
Foreign Exchange Regulation Act, 1973. These accounts should be
non-interest bearing and should be funded exclusively by way of inward
remittances through normal banking channels. Authorized dealers may also
allow credits in these accounts of refunds/claims received from various
Government Departments/Municipal Authorities, Insurance Companies,
refunds of security deposits on termination of lease of immovable
property etc., provided the original payment relating to the transaction
was made from the QA.22 account after verifying the original claim,
refund order received from Government Department/Municipal
Authorities/Insurance Company/Utility Company etc. In case of refund of
security deposit from the landlords, the Lease Agreement and
correspondence leading to the termination of lease agreement and refund
of deposits may also be verified. Similarly, authorized dealers may also
allow credit of sale proceeds of assets of Indian branches/offices of
foreign companies to their respective QA.22 accounts provided these
amounts are less than the book value of the assets as certified by a
Chartered Accountant and the assets were acquired by payment from QA.22
account. Authorized dealers should keep copies of documentary evidence
so verified on their records for inspection by their internal
auditors/Reserve Bank.
Opening of Branches/Offices in India by Foreign Banks
Opening of branches/offices in India by banks incorporated abroad
requires permission of Reserve Bank under Section 22 of the Banking
Regulation (Foreign Banks)Act, 1949. Applications for the purpose should
be made to the Chief General Manager, Department of Banking Operations
and Development, Reserve Bank of India, Central Office, Mumbai 400 001.
Remittance of net profits/surplus by Indian branches of foreign banks to
their Head Offices abroad, however, requires prior approval of the
Exchange Control Department of Reserve Bank.
Acquisition of Undertakings in India Foreign companies and foreign
nationals (whether resident in India or not) need permission of Reserve
Bank under Section 29(1)(b) of FERA 1973 for acquiring the whole or any
part of any undertaking in India, of any person or company carrying on
any trade, commerce or industry.
The association of a foreign company or a foreign national as a partner
in an existing partnership firm in India is deemed to be an acquisition
of the undertaking in India by the foreign company/foreign national
requiring approval of Reserve Bank.
The following are the entry strategies through an Indian entity. The
Indian entity may be a subsidiary of the foreign company in India or it
may be joint venture company with an Indian partner.
I. As an Indian Company
A foreign company can commence operations in India through incorporation
of a company under the provisions of the Indian Companies Act, 1956.
Foreign equity in such Indian companies can be up to 100% depending on
the business plan of the foreign investor, prevailing investment
policies of the Government and receipt of requisite approvals. For
registration as an Indian company and its incorporation, an application
has to be filed with the Registrar of Companies (ROC). Once a company
has been duly registered and incorporated as an Indian company, it will
be subject to same Indian laws and regulations as applicable to other
domestic Indian companies.
II. Joint venture with an Indian partner
Foreign companies can set up their operations in India by forging
strategic alliances with Indian partners. Setting up of operations
through a joint venture may entail the following advantages for a
foreign investor:
1. Established distribution/marketing set up of the Indian partners
2. Available financial resources of the Indian partner
3. Established contacts of the Indian partner, which help, smoothen the
process of setting up of operations.
Foreign investments are approved through two routes
Automatic Route
Approvals for foreign equity up to 50%, 51% and 74% are given on an
automatic basis subject to fulfillment of prescribed parameters in
certain industries as specified by the Government.. The Reserve Bank of
India, accords automatic approval to all such cases.
Government Approval
Approvals in all other cases where the proposed foreign equity exceeds
50% or 51% or 74% in the specified industries or if the industry is not
in the specified list require prior specific approval from the Foreign
Investment Promotion Board.
III. Wholly owned subsidiary company
The other investment option open to foreign investors is the setting up
of a wholly owned subsidiary. This implies that the foreign company can
own 100% shares of the Indian company.
All such cases are subject to prior approval from the "Foreign
Investment Promotion Board" (FIPB).
FIPB considers cases on a flexible basis and grants permission for 100
percent ownership based on the following
criteria
- where only "holding" operation is involved and all subsequent
\downstream investments to be carried out would
- require prior approval
of the Government
- where proprietary technology is sought to be protected or
sophisticated technology is proposed to be brought in
- where at least 50% of production is to be exported
- proposals for consultancy
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