Investing In India

Recently, India has represented the vanguard of attracting foreign investments, through the development of policies and the implementation of ad hoc reforms. In particular, the country offers various opportunities for growth and strengthening to foreign companies: foreign investments are governed by the rules of the Company Law Act, the Foreign Direct Investment Policy, the Foreign Exchange Management Act and the regulations of the Reserve Bank of India.

I - Background

India was the first Asian nation to create the Export Processing Zones (EPZ); after the establishment of the first in Kandla, in 1965, another seven EPZs were born until 1990. The primary purpose of the Zones was to stimulate the local manufacturing sector, to push economic growth; these areas were supported by infrastructures and special tax packages, with the reduction to the bone of administrative regulation.

India, however, followed a strategy of self-sufficiency and import substitution until the end of the 1980s, but the real turning point in the sense of attracting foreign and private capital occurred in the two-year period 1990-91.

The Indian legislation on foreign investments, in fact, has always been very restrictive, as a reflection of the socialist economic policies adopted since the conquest of independence in 1947.

In 1991, to face its own internal crisis and the bailout of the International Monetary Fund, the country started a long-term project of economic liberalization, with Prime Minister Narasimha Rao and Finance Minister Manmohan Singh. The economic reforms have included tax cuts and tariff reductions, facilitations in obtaining commercial licenses and administrative deregulation in the matter of companies, as well as general opening of the system to foreign investments. Furthermore, the initial reforms envisaged the creation of the Foreign Investment Promotion Council.

II - Establishment of a company

To start your own business, a foreigner in India can choose from the following options:

Joint Venture between foreign and domestic natural or legal persons: to date this model represents the preferred corporate form for foreign entities, as it allows investing in all economic sectors. A JV is a new entity with domestic and foreign holdings, which pursues an economic objective within a set term.

Wholly Owned Subsidiary Company: is a type of company 100% controlled by foreign capital, regulated by the Companies Act. The Indian regulations on transfer pricing apply to these companies, although these are in any case equated with domestic companies; they are therefore entitled to any kind of exemption benefits and tax deduction reserved for Indian companies.

Limited Liability Partnerships: 100% foreign investment, in this corporate form, has been made possible by the most recent Foreign Direct Investment reforms, which have facilitated the development of foreigners' business in India: to date, in fact , any foreign subject can register and conduct business in the country.

A branch is another tool for investing in India, whose functions are much larger than those attributable to a liaison office. A subsidiary is an extension of a foreign company involved in the business of trade or production of goods, and is suitable for those companies that want to establish a temporary office in India and do not have long-term plans for operations in the country.

Any company established outside the state and engaged in trade or in the production of goods has the right to open a branch, after approval by the Reserve Bank of India.

A branch has the right to perform various operations, such as importing and exporting goods, offering consulting or professional services , doing research in the areas in which the related parent company operates,

Liaison Office: this is a commercial office that acts as a communication link between the central offices located outside India and Indian parts, established under the jurisdiction of the Reserve Bank of India. The main role of this Office is to gather information on market opportunities and provide information on the parent company to Indian consumers, promoting import-export. Permission to open such offices is granted on a three-year basis, and is renewable.

Project Office: The Project offices are temporary offices consisting of foreign companies, with the authorization of the Reserve Bank of India, in order to carry out specific projects in the territory of the Indian State, and have the nature of branching of the relative parent companies. They may be constituted by foreign companies that have signed any contract with an Indian company, and it is not permitted to carry out any activity other than that provided for in this contract. The profits generated in this way can be repatriated at the end of the project at the base of the constitution, once the related taxes have been paid in India.

III - Advantages and Disadvantages

The JVs are considered as the best way to undertake in India, in those sectors in which it is not permitted to own 100% FDI. A JV, then, represents a low-risk opportunity for companies that want to access the Indian market for the first time, since there are no special laws for this company form.

The Wholly Owned Subsidiary Company, however, are considered as the preferential way for foreigners who intend to establish companies in India, since they offer greater flexibility in conducting business: capital can be provided via equity, debt and internal accrual.

Where compared with the two company forms already described, instead, the liaison offices, the branches and the project offices present several disadvantages, such as the presence of various activities in which these branches of foreign parent companies cannot undertake, as sales to detail and production of goods of any nature. However, these offices may obtain permission from the Reserves Bank of India to carry out such activities within the Special Economic Zones in the country.