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Home / Articles / Doing Business in India? A quick reckoner for Foreign Investors By Bhumesh Verma

Doing Business in India? A quick reckoner for Foreign Investors By Bhumesh Verma

February 18,2019:

The Author, Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in “The A-List – India’s Top 100 Lawyers” by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters.

Any foreign investor contemplating to do business in India on its own or with an Indian partner must have a well thought out entry strategy in terms of business vehicle. Foreign investors have the option of setting up a company, branch/liaison office or a limited liability partnership (LLP).

The most commonly used vehicle is a private limited company. Indian companies are regulated under the Companies Act, 2013. LLPs, which are a comparatively new phenomenon in India, are governed by the Limited Liability Partnership Act, 2008.

FOREIGN INVESTMENT POLICY

The Department for Promotion of Industry and Internal Trade (DIPP), a department under the Ministry of Commerce and Industry, Government of India issues the country’s foreign direct investment (FDI) policy. For matters seeking urgent attention and intervention by the government, press notes are issued.

Inflow and outflow aspects of foreign exchange are regulated by rules, regulations and circulars issued by the Reserve Bank of India (RBI), which acts as the Central / Federal Bank of India as well as forex market regulator. RBI sets the financial norms, e.g., the valuation of securities of Indian entities for issue and transfer, eligibility norms for foreign investors, etc.

Most investment sectors are under the automatic route (i.e. no prior approval is required for foreign investment); only a few sectors such as insurance, real estate, non-banking financial corporations are regulated, and prior approval may be required from the concerned Ministry / Department at a Central Government level. FDI into LLPs is also permitted, subject to certain conditions. Indian Government has been liberalising India’s FDI policy from time to time.

PROHIBITED SECTORS

FDI in India is currently not permitted in broadly the following sectors:

Lottery Business including Government /private lottery, online lotteries, etc;

Gambling and Betting including casinos etc.;

Chit funds;

Nidhi company (borrowing from members and lending to members only);

Trading in Transferable Development Rights (TDRs);

Real Estate Business or Construction of Farm Houses;

Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;

Activities / sectors not open to private sector investment e.g. Atomic Energy.

Legal, accounting and architecture services

TAXATION

Personal and corporate Income tax in India is governed by a Central legislation, the Income tax Act, 1961, while most of the indirect taxes have been subsumed in the Goods and Services Tax (GST) introduced in 2017. Apart from these, India also has robust transfer pricing rules which apply to any related party transactions.

DISPUTE RESOLUTION

India follows the common law and has a single court system, i.e., the Courts administer both Central and State laws. The court system is three tiered, comprising the District courts, the High Courts (at State level) and the Supreme Court of India (at the Central level). In addition, there are subject specific tribunals too – e.g., National Company Law Tribunal (NCLT).

Considering the slow pace of litigation in India and a huge backlog of cases before Indian courts, parties to commercial relationships are increasingly relying on alternative modes of dispute resolution, such as arbitration.

An investor must be very careful about the choice of dispute resolution mechanism in any commercial transaction involving an Indian part as it can have very significant consequences.

The investors must carefully discuss and examine the merits and demerits of different modes of dispute resolution, be it litigation before Indian / foreign courts or arbitration.

EMPLOYMENT LAWS

There are different Central and State laws on labour issues, and these vary at times depending on the Indian State where an investor has its operations. All appropriate registrations should be secured within prescribed deadlines and all HR records must be maintained as per mandated requirements.

The government has been introducing several reforms with respect to labour and employment laws to make these laws industry friendly and minimise the compliance burden for the private sector, particularly entities operating in the medium or small scale segment.

ANTI-TRUST REGULATION

Competition Act, 2002 governs the anti-trust issues in India. This legislation prohibits or regulates (a) anti-competitive agreements (b) abuse of a dominant position and (c) combinations.

Anti-competitive agreements are broadly defined as any agreement in respect of ‘production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India’.

For example, certain kinds of tie-in arrangements or bid-rigging are presumed to cause an appreciable adverse effect on competition and are subject to the legislation.

MODES OF ENTRY

There are two major entry routes for foreign entities into India: equity and non-equity. Under the equity route, a foreign investor can form a joint venture with an Indian partner or set up a wholly owned subsidiaries (allowed in most industry and service segments).The non-equity route would mean exports and contractual agreements.

Incorporating a private or public company or One Person Company (OPC) as a subsidiary in India involves paperwork for approvals and other formalities. In addition to the basic procedures, depending upon the sector and nature of business activities, companies may need to register with the relevant sector regulators.

For incorporation of an Indian company, a set of applications (name approval, incorporation) have to be filed with concerned Registrar of Companies (ROC) with details of directors, proposed capital, registered office, etc.

The most common route is to incorporate a private limited company with 2 shareholders and 2 directors (at least 1 director has to be resident Indian).

Choosing the right market entry strategy for India requires careful consideration of the needs, capacities and format of each particular business. Whether you choose to set up a subsidiary, a liaison office or a joint venture, there are several options available, each with different implications and advantages.

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