Types of businesses – What are my options for investing?
While setting up in India, foreign companies should choose an entity structure that caters best to their need. Selection of the right entity structure will help the company establish itself as a strong player in the Indian market, and also help them reap financial gains.A foreign investor or company may set up as an unincorporated entity or incorporated entity in India.Unincorporated entities permit a foreign company to do business in India by establishing a liaison office, branch office, project office, or a trust. An incorporated entity, like a limited liability partnership, joint venture, or a wholly owned subsidiary is considered a separate legal entity and has a more structured setup.
Find out more about the investment options in India
Key considerations when opening a business in India
Opening a bank account
Opening a bank account entail selecting a bank based on your preferences, submitting certain documents, and funding your account. Once the formalities are completed, you can begin using your account, saving both time and money. However, before beginning the process, a person should decide what type of bank account he or she wants to open, such as a savings, current, or fixed deposit account.
The Reserve Bank of India’s Know Your Customer Norms (KYC Norms) details the procedures that banks must follow while opening accounts. With the KYC norms as a foundation to secure against fraudulent and criminal activities, each bank may require mire documents and information as prescribed by the bank’s internal regulations for the opening of an account.
Intellectual property protection
India has been a World Trade Organisation (WTO) member since 1995. WTO member nations must include some IP protection in their national laws. India is also a signatory to the following international IP agreements:
- Paris Convention: Under this convention, any person from a signatory state can apply for a patent or trademark in any other signatory state and will be given the same enforcement rights and status as a national of that country would be.
- Berne Convention: Under this convention, each member state recognizes the copyright of authors from other member states in the same way as the copyright of its own nationals.
- Madrid Protocol: Under this convention, a person can file a single trademark application at their national office that will provide protection in multiple countries.
- Patent Cooperation Treaty: This is a central system for obtaining a ‘bundle’ of national patent applications in different jurisdictions through a single application.
[tips title="Did You Know"]India is not a signatory to the Hague Agreement, which would have enabled the protection of designs in multiple countries through a single filing.[/tips]
The following laws provide the legal basis for intellectual property protections in India and are periodically reviewed and amended as new technological developments and market reforms necessitate the case to be.
Click here to know more about IPR and opening a bank account in India
Setting up a business without entity
In india, businesses may do business without setting up a formal entity by working with a supplier agent or partner. On hiring an agent or supplier in India, businesses may conduct international trade through these partners.
Alternately, foreign companies may also use the “employer on record model” wherein an India based employer hires an employee on their payroll while the individual works for the foreign company. However, the foreign company takes on the risk of creating a permanent establishment in the country.
Read this article to know more.
Closing a business in India
The liquidation procedure is given by the Insolvency and Bankruptcy Code. Businesses may opt for the liquidation procedure due to a set of factors, such as faulty management, economic issues, low demand, among others. According to Indian legislation, the liquidation procedure refers to the way the company’s assets are terminated and distributed to the entitled parties. The liquidation can be triggered on a voluntary basis through the intervention of the company’s creditors or other members. In this case, the procedure can be completed without the intervention of a local court.
To gain insights on liquidation of businesses in India, read this section
[faq title="FAQ:Establishing an Entity in India – What Foreign Investors Need to Know" ui="accordion"]
What are the different entity types available for foreign companies planning to establish a presence in India?
Various entity options are available for foreign investors planning to setup their businesses in India. These include wholly owned subsidiaries, limited liability partnerships (LLP), branch offices, liaison offices, and project offices.
Each entity type has its advantages and disadvantages. Depending on the nature of work and the sector in which company intends to invest, a suitable entity type should be chosen.
We therefore advice companies to conduct a thorough study on various entry models before investing.
- Liaison office
Foreign companies may open a liaison office in India if they wish to expand their businesses and interact with Indian customers. Also known as a representative office, it can only act as a channel of communication between the foreign parent company and India office. An LO not allowed to conduct any revenue generating business activity in India. Since it cannot engage in commercial, trading, or industrial activities, their operating cost must be sustained by inward remittances received from their foreign parent company.
- Branch office
Foreign companies can set up branch offices that will be responsible for carrying out branch activity for its businesses. To establish these offices, it is necessary to follow the provisions laid down by the RBI and the Companies Act, 2013. Foreign companies can generate revenue from the Indian branch office in accordance with activities allowed by the Reserve Bank of India. A branch office requires approval from the RBI before commencement of any operations.
- Project office
A project office can be established if a foreign company has received a contract from an Indian company to execute a project in India. It is set up for a limited period. For example, if a foreign company has received a contract to execute an infrastructure or installation project in India through project offices duly registered with the RBI and the Registrar of Companies (ROC).
The difference between a project office and a liaison office is that project offices can carry out commercial activities in relation to the project awarded but liaison projects cannot carry out commercial activities.
- Limited liability partnership (LLP)
A limited liability partnership (LLP) is a hybrid between partnership firms and a company (private or public). LLP has limited liability for its partners like a company, and it receives tax benefits like a partnership firm. Under this structure, the liability of the partner is limited to their agreed contribution, and it provides flexibility without the imposition of detailed legal requirements.
- Wholly owned subsidiary (WOS)
A wholly owned subsidiary (WOS) operates as an independent legal entity whose 100 percent common stock is owned by another company, the parent company. In other words, the foreign company holds 100 percent of the subsidiary’s total share capital. A WOS may either be a part of the same industry as its parent company or a part of an entirely different industry.
What is the preferred entity structure for foreign companies setting up in India? Why?
The entity structure preferred by a foreign company depends on the goals and activities proposed to be carried out in India by that foreign company.
Companies should understand the limitations and advantages of each entity type before selecting a company type for market entry into India.
For instance, if the foreign enterprise wants to conduct commercial activity in India, then it needs to explore a branch office or a private limited company. The foreign entity should consider the sector, their business type, controlling interest, and mode of business funding before finalizing an entity structure.
What are the most prominent investment destinations in India? Why?
Each state in the country has a unique selling point; however, at present, the states of Gujarat, Maharashtra, Karnataka, Andhra Pradesh, Tamil Nadu, and Delhi are among the top preferences for investors.
Each state provides unique opportunities for potential foreign entities looking to establish in India. Thus, it is advisable that foreign companies decide on a location based on the industry of the foreign entity, network of trade and supply, land and labour costs, logistics, and compliance requirements after conducting a thorough due diligence and location analysis.
What are the sectors in which foreign investment is not allowed?
As per the current FDI policy, there are a handful of sectors in which foreign investment is prohibited. These are:
- Gambling and Betting
- Lottery Business including Government/private lottery, online lotteries, etc.
- Nidhi Company
- Chit Funds
- Real Estate Business or Construction of farmhouses
- Trading in Transferable Development Rights
- Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Sectors not open to private investment such as atomic energy.
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