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Entity Structures and Their Setup Process

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 communicator between the foreign parent company and Indian company as it is not allowed to conduct any revenue generating business activity in India.

Requirements to set up a liaison office

  • The foreign company should have a profit-making track record during the immediately preceding three financial years in the home country
  • The foreign company should have a minimum net worth of US$50,000
  • Foreign applicants should have the latest audited balance sheet
  • The latest balance sheet has to be certified by a certified public accountant or any registered accounts practitioner
  • Foreign applicants should have the English version of the Certificate of Incorporation/ Registration or Memorandum and Articles of Association
  • The COI/MOA & AOA should be attested by Indian Embassy/notary authority in the country of registration
  • The bankers’ report from the applicant’s banker in the host country should show the number of years the applicant has maintained banking relations with that bank

 Procedure to set up the liaison office

  • Under the Foreign Exchange Management Act (FEMA) of 1999, liaison offices can be set up by either taking the reserve bank route or the government route
  • Foreign applicants will have to check which route suits them the best
  • Foreign applicants will have to submit their applications in Form FNC through the designated AD category-I to the RBI
  • After foreign applicants have been approved, they will be given a unique identification number (UIN)
  • Foreign applicants must also obtain a permanent account number (PAN) to be able to set up the office
  • If foreign applicants are unable to meet the required criteria, the parent company may submit a Letter of Comfort as per Annexure-B

Branch office

Foreign companies can set up branch offices that will be responsible for carrying out the 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.

Pre-requisites to set up a branch office

In order to sanction the branch offices of foreign companies, the RBI has recently begun considering the following additional criteria:

  • Profit making track record during the immediately preceding five financial years in the home country

As per the latest audited balance sheet certified by a certified public accountant, net worth should not be less than US$100,000 or its equivalent

Requirements to set up a branch office

The branch office must apply for approval from the RBI under the provisions of FEMA. It must submit a copy of Certificate of Incorporation or the MOA and AOA, along with the parent company’s audited balance sheet for the last three years. It must also obtain a PAN and register with the RoC through the Ministry of Corporate Affairs’ website.

The RBI will track the financial position of the applicant company as well as the scope of

activity it is proposing. Applications will be submitted via Form FNC (Annex-1) and will be considered under two routes – Reserve Bank route and government route. The Reserve Bank route is in case the principal business of the foreign entity falls under sectors where 100 percent foreign direct investment (FDI) is permissible under the automatic route. The government route is the same as the Reserve Bank route, the only difference being that applicant companies taking this route are non-government and non-profit organizations/bodies/departments.

To get approval from the RBI, the applicant companies need to submit their applications through the authorized dealer. An authorized dealer refers to the various institutions that have banking licenses.

 

The following documents are required for the branch office setup:

  • Three copies of Form FNC
  • Letter from the principal officer of the parent company to the RBI
  • Letter of authority from the parent company in favor of local representative
  • Letter of authority/resolution from the parent company
  • Comfort letter from the parent company intending to support the operation in India
  • Two copies of the English version of the Certificate of Incorporation, Memorandum and Articles of Association (charter document) of the parent company, duly attested by the Indian embassy or notary public in the country of registration
  • Certification of Incorporation that has been translated & duly notarized and certified by Indian Consulate
  • The latest audited balance sheet and annual accounts of the parent company duly translated and notarized for the past three years and certified by the Indian Consulate
  • Name, address, email ID and telephone number of the authorized person in the home country
  • Details of the bankers of the organization and the country of origin along with the bank account number
  • Commitment from the organization to the effect that it will be open to report/opinion sought from its banker by the Government of India/RBI
  • Expected funding level for operations in India
  • Details relating to address of the proposed local office, number of persons likely to be employed, number of foreigners among such employees and address of the head of the local office, if decided
  • Brief details regarding the activities carried out in the home country and the product and services offered by the applicant organization
  • Bankers Certificate
  • Latest proof of identity of all the directors, certified by the Consulate and Banker in the home country
  • Latest proof of address all of the directors, certified by the Consulate and Banker in the home country
  • Details of the individuals/company holding more 10 percent of equity
  • Structure of the organization w.r.t share holding pattern
  • Complete KYC of shareholders holding more than 10 percent equity in the applicant company
  • Resolution for opening up a bank account with the Banker
  • Duly signed bank account opening form for the Indian Bank

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 of time. 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).

Requirements to set up a project office

A project office can open non-interest-bearing foreign currency accounts in India for expenses and credits. The office can maintain both a foreign and Indian rupee account while operating in India. After the project is completed, the project office may repatriate any capital surplus once all tax liabilities have been paid and the final account audit is completed.

It takes about 10 days to receive approval for the project office. The project office must be opened within six months from the date of approval letter. If it is not set up by then, an extension of six months may be granted by the RBI.

Procedure to set up a project office

  • Submission of applications in Form FNC
  • Submission of a copy of the Certificate of Incorporation
  • Submission of the latest audited balance sheet of the home country
  • Submission of a banker’s report from the applicant’s banker in the host country

Time limit for starting a PO:

  • The office shall be opened within six months from the date of approval letter
  • An extension of six months may be granted by AD Category-I bank for reasons beyond the control of the person resident outside India and any further extension will be granted by the RBI
  • Registration of the PO takes approximately 15 days

Limited liability partnership (LLP)

A limited liability partnership (LLP) is a hybrid cross 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.

Requirements to set up an Indian LLP

The process is as below: 

  • Two people are required to register the LLP, though there is no limit on the number of partners
  • Obtain a Designated Partner Identification Number (DPIN) by filing eForm DIR-3 through the ministry’s online portal
  • Acquire Digital Signature Certificate (DSC) of the partners
  • Apply for the name of the LLP to be registered by filling Form 1
  • Once the name (which must be unique) is approved, fill up Form 2 (Incorporation Document and Statement) online
  • An initial LLP agreement has to be filed within 30 days of incorporation of LLP

After submitting the required forms and documentation, the registrar will register the LLP within 14 days of filing Form 2. The LLP must be registered with the RoC. There is no limit on the maximum number of partners, but a minimum of two partners are required for forming an LLP, and at least one of them has to be a resident of India.

It is possible to convert an existing partnership firm and existing private and public company into an LLP. The LLP is also required to obtain a Permanent Account Number (PAN). An LLP is taxed at 30 percent of its total income. An additional surcharge of 12 percent is levied if the total income of the LLP exceeds INR 10 million (US$140,000). Further, health and education cess at the rate of four percent will be added to the income tax and applicable surcharge.

Wholly owned subsidiary (WOS)

Foreign companies can set up wholly owned subsidiaries in the form of private limited companies in sectors where 100 percent FDI is permitted.

Requirements to set up a WOS

At least two directors, with one being an Indian resident, must be appointed and registered through India’s e-filing system for Director Identification Numbers (DIN). A minimum authorized share capital of INR 100,000 (US$1,400), two directors, and two shareholders (who can be same as the directors) are required to establish a private limited company.

The following form along with requisite documents must be filed with the Ministry of Corporate Affairs for establishing a WOS in India:

  • SPICe+ for incorporation of the company

Once the documents are submitted, the RoC will issue a Certificate of Incorporation and a Corporate Identification Number. It takes about four to five weeks to complete the process. The commencement of business certificate must be obtained within 180 days of incorporation of the company by filing Form INC 20A with the RoC.

The WOS will be subjected to Indian taxes and laws as applicable to other domestic companies in India. Under this structure, companies have to pay Corporate Income Tax (CIT). 

Joint venture (JV)

A joint venture is a partnership between two or more companies or individuals who agree to pool capital or goods into a uniform project. Joint ventures in India have

been most popular for sectors that do not have 100 percent FDI.

Requirements to set up a JV

Once a partner/associate company is selected, a memorandum of understanding (MoU) or a letter of intent is signed by the parties.

An MoU and a joint venture agreement/shareholders’ agreement must be marked after consulting a chartered accountant firm well versed in the FEMA; Indian Income Tax Act, 1961; the Companies Act, 2013; international laws and applicable Indian rules, regulations, and procedures.

Terms and conditions should be properly assessed before signing the contract. The JV union should obtain all the required governmental approvals and licenses within a specified period.

Foreign companies no longer require a no-objection certificate (NOC) from the Indian associate for investing in the sector where the joint venture operates. Therefore, foreign firms in existing joint ventures can function independently in the same business segment. Previously, they needed prior approval from their Indian partners.

Before signing a joint venture contract, the below points must be properly assessed: 

  • Applicable law
  • Shareholding pattern
  • Composition of board of directors
  • Management committee
  • Frequency of board meetings and its venue
  • General meeting and its venue
  • Composition of quorum for important decision at board meeting
  • Transfer of shares
  • Dividend policy
  • Employment of funds in cash or kind
  • Change of control
  • Restriction/prohibition on assignment
  • Non-compete parameters
  • Confidentiality
  • Indemnity
  • Break of deadlock
  • Jurisdiction for resolution of dispute
  • Termination criteria and notice

 

 

 

 

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