Establishing A Business In India.

Legal News & Analysis - Asia Pacific - India - FDI

Asia Pacific Legal Updates

 

3 October, 2019

 

Establishing A Business In India.

 

Any business interested in establishing a business in India is required to first ascertain whether the business is to operate as a foreign entity having a presence in India (through the opening of a liaison office, a branch office, a project office) or as an Indian entity (through direct investment in an Indian company as a joint venture or a wholly owned subsidiary).

 

Foreign entity having a presence in India:

 

Only foreign entities may have a presence in India through this route, where applications from body corporates incorporated outside India, firms or other associations of individuals are considered by certain permitted commercial banks (AD Category – I) as per the guidelines given by the Reserve Bank of India (“RBI”)[1]. The applicant or the parent/ group company is also required to satisfy certain net worth and profit qualifying criteria.

 

Liaison Office: A liaison office may only be set up in the event the office is to engage in the following activities:

 

(i) representing the parent company / group companies in India;

 

(ii) promoting export / import from / to India;

 

(iii) promoting technical/ financial collaborations between parent / group companies and companies in India; or

 

(iv) acting as a communication channel between the parent company and Indian companies.

 

Branch Office: A branch office may only be set up if the branch office is engaged in the activity in which the parent company is engaged.

 

These may be any of the following:

 

(i) export/import of goods;

 

(ii) rendering professional or consultancy services;

 

(iii) carrying out research work in which the parent company is engaged;

 

(iv) promoting technical or financial collaborations between Indian companies and parent or overseas group company;

 

(v) representing the parent company in India and acting as buying/ selling agent in India;

 

(vi) rendering services in Information Technology and development of software in India;

 

(vii) rendering technical support to the products supplied by parent/group companies; or

 

(viii) representing a foreign airline/shipping company.

 

Project Office: A project office is a short term office and it is permitted only for the tenure of the project (generally 3 years). Non-resident companies may establish a project office in India, provided:

 

(i) they have secured a contract from an Indian company to execute a project in India;

 

(ii) the project has secured the necessary regulatory clearances; and

 

(iii) the project is funded in certain specific ways.

 

The procedure for setting up these offices usually takes about 4-6 weeks, and there are minor reporting compliances that these offices need to undertake on a yearly basis.

As or in an Indian entity:

 

Other ways of investing in India include investing in proprietorship concerns, partnership firms, companies or limited liability partnership. A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited[2], and in turn, the Indian entity may issue equity shares; fully, compulsorily & mandatorily convertible preference shares; fully, compulsorily & mandatorily convertible debentures and warrants.

 

The Indian regulatory regime imposes certain sector specific caps and conditions, which eligibility criteria the investment would have to comply with. It is pertinent to note that there are certain sectors (such as print and news media, atomic minerals and defense) in which foreign investment is prohibited. Moreover, certain industries require governmental approval above certain investment thresholds. Some of the key sectors relevant to Australian businesses are discussed below:

 

Business Sector FDI Policy[3] Recent Developments

Mining – India is a mineral rich country and has favorable geological milieu which is yet to be fully explored, assessed and exploited.

The regulatory framework of the sector is contained in the Mines and Minerals (Development and Regulation) Act, 1957.

Government Route: Investment up to 100% is permitted in mining and mineral separation of titanium bearing minerals and ores, its value addition and integrated activities.

Automatic Route: Investment up to 100% is allowed in mining and exploration of metal and non-metal ores including diamond, gold, silver and precious ores but excluding titanium bearing minerals and its ores.

The Mines and Minerals (Development and Regulation) Act, 1957 was recently amended to remove the discretionary power that was previously exercised by instituting auction to be the sole method of grant of major mineral concessions. It also provided for deemed extension of mining leases in certain circumstances.

The National Mineral Exploration Policy, 2016 identified multiple blocks for auctioning on revenue sharing mechanism for regional exploration. It also provides for certain entitlements in the event of unsuccessful outcomes.

Food Processing – Contract farming, raw material sourcing and creation of agri-linkages are key business areas that have growth potential.

Automatic Route: Investment up to 100% is allowed in food processing industries.

Government Route: Investment up to 100% is permitted in trading, including through e-commerce in respect of food products manufactured or produced in India.

The Ministry of Food Processing Industries provides a host of financial assistance to food processing companies in India under the umbrella scheme of Pradhan Mantri Kisan Sampada Yojna, with special emphasis on creation of infrastructure facilities, such as mega food parks and cold chains.

Biotechnology – India is amongst the top 12 biotech destinations in the world and ranks third in the Asia Pacific region. The Department of Biotechnology has established biotech parks in various parts of the country to facilitate product development, research and innovation, and the development of biotechnology industrial clusters.

Research and development in Biotechnology is governed in India by various regulations including the National Guidelines for Stem Cell Research, 2013, the National Biotechnology Development Strategy, 2015 and the National Intellectual Property Rights Policy, 2016.

Automatic Route: Investment up to 100% is allowed in greenfield pharma and the manufacturing of medical devices and up to 74% investment is allowed in brownfield pharma.

Government Route: Investment above 74% and up to 100% is permitted in brownfield pharma.

The Biotechnology Industry Research Assistance Council has recently launched an equity based fund – AcE (Accelerating Entrepreneurs) Fund, which is an equity fund to accelerate the growth of entrepreneurs in the field of biotechnology by lending a funding support of up to USD 150,000 to promising ventures.

Automobile – By 2020, India is expected to be the third largest automotive market by volume in the world, after China and USA. The interest of foreign manufacturers setting up their facilities is further supported by the presence of a large pool of skilled and semi-skilled workers.

The automobile sector in India is governed by the Automotive Mission Plan 2016-26, which encourages research and development in the industry by offering rebates such expenditure.

Automatic Route: Investment up to 100% is allowed in the auto sector. The Government has released a two-pronged strategy aimed at both buyers and manufacturers, in which it offers subsidies to buyers while imposing a hike on import tariffs to increase manufacturing of electric vehicles by domestic companies. The Government is focused to electrify public transportation and has earmarked funds to develop charging infrastructure.
Tourism and Hospitality– India has a diverse portfolio of niche tourism products which includes cruises, adventure, medical, wellness, sports such as golf and polo, MICE (meetings, incentives, conferencing and exhibitions), eco-tourism, film, rural and religious tourism. Automatic Route: Investment up to 100% is allowed in the tourism and hospitality. Moreover, Investment up to 100% is allowed in construction-development projects including development of townships, construction of residential/commercial premises, roads, or roads, or bridges, hotels, resorts and hospitals. The Government has recently permitted the issuance of e-visas for 161 countries, allowing tourists to procure a visa online.

 

All such permitted investments (whether through the government route or the automatic route) require the entity to make exchange control filings with the Reserve Bank of India.

 

An Indian entity which has received foreign direct investment is required to comply with regulations applicable to such an entity in India generally. In this context, India has a rigorous regulatory framework, requiring filings with governmental entities from the incorporation stage right up to winding up, and several licenses, permits, filings and compliances to be undertaken, based on the sector and the place in which the business is conducted. In certain cases, the government has relaxed the requirement of specific compliances in order to promote trade and development.

 

In the past, industries such as hospitality, financial services and mining and materials have had relatively higher concentration of Australian expatriates. At present, several large Australian firms such as BHP Billiton, Rio Tinto, TNT express, Telstra, Snowy Mountain Engineering, Macquarie Group, Fosters, ANZ and Leighton Holdings have operations in India.

 

For further information, please contact:

 

Prashanth Sabeshan, Partner, AZB & Partners

prashanth.sabeshan@azbpartners.com

 

Footnotes:

 

[1] AZB Comment: In certain cases, the application is considered by the RBI, and not the AD Category-I Bank. These include situations where: (i) the principal business falls in any of the following sectors: defence, telecom, private security and information and broadcasting; or (ii) the applicant is a non-government organization (NGO), non-profit organization, body/ agency/ department of a foreign government.
[2] AZB Comment: FDI is prohibited in: (i) lottery business including government/private lottery, online lotteries, etc.; (ii) gambling and betting including casinos etc.; (iii) chit funds; (iv) nidhi company; (v) trading in transferable development rights (tdrs); (vi) real estate business or construction of farm houses (certain carve-outs are permitted); (vii) manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes; and (viii) activities/sectors not open to private sector investment e.g. atomic energy and certain railway operations.
[3] AZB Comment: The entry restrictions are termed ‘Government Route’ when the entry into the sector requires prior governmental approval. All other entry routes are termed ‘Automatic Route’. Exchange control filings are to be made after the investment in all cases.