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FOREIGN DIRECT INVESTMENTS

The process of regulation and approval for the FDI in India has been considerably liberalized since the 1990s’. The India’s foreign trade policy has been formulated with a view of encouraging the FDI in India by the foreign Investors. The Reserve Bank of India has prescribed the administrative and compliance aspects of FDI. 

V R K S & Associates offers comprehensive services and consultancy to foreign investors in facilitating the Foreign Direct Investment (FDI) in almost all sectors. We help them and guide on the issue of holding minority or majority stake in most of the sectors, be it manufacturing, telecom, software, services sector, trading, export-import to name a few. 

Our services broadly cover following areas in Foreign Investment Services to our clients:

  • Entry Options for Foreign Investors
  • Routes for Foreign investment
  • NRI /PIO/Overseas Corporate Bodies

ENTRY OPTIONS FOR FOREIGN INVESTORS

The Foreign investors/Companies in India have following entry options to do business in India:

Liaison Office
The liaison office acts as a communication channel between the parent company incorporated abroad and its present or prospective customers in India.

  • Activities Permitted:
    • Representing in India the parent Company / group Companies.
    • Promoting export/ import from/ to India.
    • Promoting technical / financial collaborations between the parent / group companies and companies in India.
    • Acting as a communication channel between the parent company and Indian companies.
  • Approval / Incorporation 
    Any foreign company can open a liaison office in India for which it has to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC) and is also required to obtain prior approval from the RBI valid for three years and can be renewed on expiry thereof.
  • Suitability of a Liaison Office 
    The liaison office can be set up to promote the products/services, to establish business contacts or gather market intelligence for the parent company. The liaison Office has to meet its entire expenses from funds received from the parent company through normal banking channels. The liaison office is not permitted to earn any income hence it is not a taxable entity. However, the liaison Office would be required to withhold tax from certain payments and hence to comply with the requisite tax withholding requirements under the domestic tax law.
  • In Short 
    Liaison Office procures order & sends the same to parent company, parent company to supply the ordered goods and payment can be pursued by the liaison office. However payment would be directly remitted to the parent company. No Income Tax in India, only liability of Fringe Benefit Tax (FBT) will arise.


Branch Office
A branch office is meant to carry on substantially the same activities as the head office.

  • Activities Permitted: 
    The RBI has laid down guidelines for the Branch Office to carry on only the following activities:
    • Export / Import of goods
    • Rendering professional or consultancy services
    • Carrying out research work, in which the parent company is engaged.
    • Promoting technical or financial collaboration between Indian companies and parent or overseas group companies.
    • Representing the parent company in India and acting as buying / selling agent in India
    • Rendering services in Information Technology and development of software in India
    • Rendering technical support to the products supplied by parent / group companies.
  • Approval / Incorporation 
    Foreign companies intending to open a Branch Office in India need to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC) and is also required to obtain prior approval from the RBI which would encompass even approval to the scope of activities that are intended to be carried out in India.
  • Typical Points about 100% Subsidiary 
    The office can undertake trading activities, but not manufacturing. Branch offices may repatriate profits to their Head Office without obtaining prior approval. The entire expenses of the Branch Office in India will be met either out of the funds received from abroad through normal banking channels or through income generated by it in India. The Branch Office would not expand its activities or undertake any new trading, commercial or industrial activity other than that is expressly approved by the RBI. It is subject to taxation in India at 42.23% on income accrued in India and may repatriate profits to their Head Office without obtaining prior approval. If there is a double taxation agreement with the country in which the parent company is incorporated, the tax paid in India can be set off against the total tax payable by the parent company abroad on the income accrued in India.
  • In Short 
    Branch Office can do only business activities similar to that to its parent company. No new activity permitted. In the highest tax slab of Indian Income Tax slab(40%). The profit so earned net of taxes can be remitted to parent company.


Wholly owned Subsidiary Company
A wholly owned subsidiary is the 100% Owned subsidiary of the foreign company in India.

  • Activities Permitted: 
    • The Company can take up any business in India as it is treated as a domestic Company.
    • It can be independently promoted by Parent Company
  • Approval / Incorporation 
    The wholly owned subsidiary can be promoted by any two people in India and then the holding of this person can be purchased by the Parent Company. (If this is the case, intimation about the transfer of share is required to be informed to Reserve Bank of India). The Company is required to obtain a Certificate of establishment of place of business in India from the Registrar of Companies (ROC).
  • Typical Points about 100% Subsidiary 
    The profit earned in India can only be taken away by parent Company in the form of dividend after payment of dividend tax @ 15%+ surcharge +Education cess. Transfer pricing issues can arise if purchases made from sister concern. It cannot exit easily. Tax Rate Slab of 30% is entailed.
  • In Short 
    100% Subsidiary can take up any business in India. In the tax slab of domestic Indian company Tax slab (30%). The profit so earned after payment of 30% + 15% can be remitted to parent company in the form of dividend.


Project Office 
Foreign companies involved in the execution of turnkey projects on pan India basis can set up temporary project/site offices in India. RBI has granted general permission to foreign entities to establish project offices in India subject to specified conditions. Such offices cannot undertake or carry on any other activity, relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

Joint Venture With An Indian Partner 
Foreign companies have to forge strategic alliances with Indian partners either due to FDI limitations or lack of specified competencies and experience in the domestic market. Apart from these there are certain advantages of Joint Venture for foreign investors like:

  • Established distribution/ marketing set up of the Indian partner which helps in smoothening the process of setting up of operations.
  • Readily available access financial resource of the Indian partners.

 

ROUTES FOR FOREIGN INVESTMENT

FDI Investment can be made in India under two broad categories under the automatic route and investment through prior approval of Government.

Procedure under automatic route 
FDI in the sectors/activities under permitted under the automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the Regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.

  • Procedure under Government approval
    FDI in activities not covered under the automatic route, requires prior Government approval and are considered by the Foreign Investment Promotion Board (FIPB). Approvals of composite proposals involving foreign investment/foreign technical collaboration are also granted on the recommendations of the FIPB.
  • Investment by way of Share Acquisition
    A foreign investing company is entitled to acquire the shares of an Indian company without obtaining any prior permission of the FIPB subject to prescribed parameters/ guidelines. If the acquisition of shares directly or indirectly results in the acquisition of a company listed on the stock exchange, it would require the approval of the Security Exchange Board of India.

 

NRI /PIO/OVERSEAS CORPORATE BODIES

There are various investment opportunities, which are available to Non Resident Indian (NRI), Person of Indian Origin (PIO) or Overseas Corporate Bodies (OCBs). We, at CA Varun Sharma  & Co. provide consultancy services with individuals on how to take advantage of the schemes promoted by the Reserve Bank of India and the Department of Industrial Promotion and Policy. We also guide our NRI/PIO/OCB clients in getting their incomes and properties assessed accurately and in simplified manner for tax liability purposes.
Some of the facilities granted to NRIs/PIOs/OCBs are :

  • Maintenance of bank accounts in India.
  • Investment in securities/shares of, and deposits with Indian firms/ companies.
  • Investments in immovable properties in India.