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Types of Business in India

A foreign investor or company may set up as an unincorporated entity or incorporated entity in India.

Unincorporated entities are 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.

Below we summarize the different entity structures and their setup process.

Liaison office (LO)

Foreign companies may open a liaison office to carry out market research activities and interact with potential Indian customers. Also known as a representative office, an LO is not allowed to conduct any revenue generating business activity.

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Since it cannot engage in commercial, trading, or industrial activities, operating cost must be sustained by inward remittances received from their foreign parent company.

Foreign companies often use liaison offices to create awareness about their services and products, promote business activities, network, and explore market potential.

The liaison office is established as per the provisions of the Foreign Exchange Management Act  (1999) under the guidance of the Reserve Bank of India (RBI).

Timeline to establish: 6-8 weeks

Features of a liaison office

  • Represent the foreign parent company;
  • Carries out only liaison activities;
  • Carries out market research on behalf of parent company;
  • It can provide information about potential market opportunities;
  • It can provide information about the company and the products the parent company manufactures to Indian customers; and
  • Promote export and import between the countries.

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; and
  • 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.

Did You Know
In contrast to the Government route, which requires prior permission from the Government, the FDI through the Automatic route does not require the foreign investor to obtain any approval from the Government of India.

Procedure to set up the liaison office

  • Liaison offices can be set up by applying to the Reserve Bank of India;
  • Foreign applicants will have to submit their applications in Form FNC through the designated AD category-I Bank 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; and
  • The RBI usually accords approval to a Liaison Office for 3 years. Application for extension has to be made with reasons why an extension is required.

Branch office

Foreign companies can set up branch offices to conduct  branch activity for its businesses.

Important Tip
Foreign companies can generate revenue from the Indian branch office from those activities specifically approved by the Reserve Bank of India. The branch office requires approval from the RBI and once it is given, it can commence with its operations. Any change in the nature of activities will require approval from the RBI.

The branch office must meet all its expenses through remittances from the foreign head office or through revenue generated from the Indian operation – as permitted by the RBI. The branch office is not permitted to engage in manufacturing activities unless it is in a Special Economic Zone (SEZ), for export.

To establish these offices, it is necessary to follow the provisions laid down by the RBI and the Companies Act, 2013.

Branch offices are permitted to undertake 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 collaborations between Indian companies and parent or overseas group company;
  • 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; and
  • Representing a foreign airline/shipping company.

Branch offices are prohibited to undertake the following activities:

  • Retail trading activities of any kind; and
  • Any direct or indirect manufacturing or processing activities in India.

All earned profits are freely remittable from India but subject to payment of applicable taxes.

Timeline to establish: 6-8 weeks if all documentation is in order

General features of a branch office include:

  • The name of the Indian branch office should be the same as the parent company;
  • The governing body for the branch office license will be the Reserve Bank of India;
  • It is suitable for foreign companies who are looking for a temporary office;
  • All expenses of the office are met by the head office if it does not receive revenue from Indian operations; and
  • It can increase the foreign company’s customer base by spreading its business to diverse locations but not more than 4 offices across the different zones in India. Additional offices will need approval from the RBI.

Pre-requisites to set up a branch office

To sanction the branch offices of foreign companies, the RBI consider the following additional criteria:

  • Profit making track record during the immediately preceding five financial years in the home country; and
  • Net worth should not be less than US$100,000 or its equivalent, as per the latest audited balance sheet verified by a certified public accountant..

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 - 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.

Government route -  if the business of the parent company does not fall under the automatic route under the FDI Policy. 

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.

Documents required for 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; and
  • 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. 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).

Eligibility criteria

Foreign companies may launch project offices to execute projects in India only if they have received a contract to do so from an Indian company and if:

  • The project is directly funded by an inward remittance from abroad;
  • The project has been approved by the appropriate authority;
  • The project is being funded by an international financial institution; and
  • The Indian company awarding the contract has been granted a loan from a bank or other public financial institution in India.

Cases of exception:

  • Approval from the RBI is granted in consultation with the government of India to those entity residents in Pakistan, Bangladesh, Sri Lanka, Iran, Afghanistan, China, Macau, or Hong-Kong who wish to open offices in Jammu & Kashmir, the northeastern states, or the Andaman and Nicobar Islands. In all other cases, authorized dealer category-I banks may grant approval; and
  • If a contract settled by a project office has been awarded by the Ministry of Defense, then its proposals relating to the defense sector will require no other approval from the government of India.

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.

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; and
  • Submission of a banker’s report from the applicant’s banker in the host country.

Time to establish: 4 weeks

Limited liability partnership (LLP)

A limited liability partnership (LLP) is a preferred corporate establishment strategy for many small-and-medium sized enterprises in India.

The LLP is a hybrid between a partnership firm 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. The liability of the partner is limited to their agreed contribution, and it provides flexibility without the imposition of detailed legal requirements.

Did You Know
Investors or companies from Bangladesh and Pakistan are only permitted to make investment in LLPs in sectors that allow FDI through the government route.

FDI in an LLP under the automatic route is subject to the following conditions:

  • The LLP should come under a sector that has no FDI-linked performance conditions, which refers to sector specific conditions for companies receiving foreign investment;
  • The LLP should be in a sector that permits 100 percent FDI; and
  • The conditions of the LLP Act of 2008 are met.

The eligible form of FDI accepted from foreign entities includes their investment either by way of capital contribution or transfer of profit shares in the capital structure of the LLP.

Timeline to establish: 4-6 weeks if all documentation is in order

Eligible investors include all foreign persons/entities except:

  • Foreign portfolio investors;
  • Foreign institutional investors; and
  • Foreign venture capital investors that have been registered in accordance with the guidelines of the Securities and Exchange Board of India (SEBI).

Advantages of an LLP

  • The process is simpler and less expensive compared to public or private limited company. The minimum government fee for incorporating an LLP is INR 500 (US$7) and the maximum fee is INR 5,000 (US$70), depending on the capital contribution;
  • There is no requirement to get the accounts audited unless the annual turnover exceeds INR 4 million (US$55,750) or contribution to the LLP exceeds INR 2.5 million (US$34,900);
  • There is no minimum capital requirement for registration of an LLP;
  • Partners are not liable to pay the company debts from their personal assets; and
  • Partners are permitted to enter any legal contracts outside India.

Requirements to set up an Indian LLP

  • 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; and
  • 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.

Converting to an LLP

An existing partnership firm, as well as an existing private or public corporation, can be converted 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)

A wholly owned subsidiary (WOS) operates as an independent legal entity whose 100 percent common stock is owned by another company, the parent company. Since a minimum of 2 shareholders are required for a WoS, the foreign holding company may nominate a person or another company to hold 1 share and the remainder can be held by itself.

WOS allows foreign investors to have control over business operations, with limited liability and fewer restrictions on business activities compared to a branch office, liaison office or project office. However, the activities must be in accordance with the FDI policy.

Foreign companies can set up Joint Venture companies with Indian partners in sectors where 100 percent FDI is not permitted.

Time to establish: 4-8 weeks if all documentation is in order

Requirements to set up a WOS

  • At least 2 shareholders.  
  • No minimum share capital is stipulated.  
  • At least two directors (with one being a resident in India for at least 182 days in the preceding financial year) must be appointed and registered through India’s e-filing system for Director Identification Numbers (DIN).
  • No minimum capital is stipulated.

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 and must 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.

Important Tip
Joint ventures offer relatively low risk to foreign companies, provided that these companies conduct due diligence on their Indian partners.

A joint venture allows foreign companies to utilize the existing networks of their Indian partners, and once taxed, such companies can remit their Indian profits outside the country.

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A JV may be formed with any of the business entities existing in India.

Corporate JVs will also be subject to the country’s tax laws, FEMA, labor laws (such as Code on Wages Act, 2019, Industrial Disputes Act, 1947, and state-specific shops and establishment legislation), the Competition Act of 2002, and various industry-specific laws.

Time to establish: 4-8 weeks

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.

The 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. 

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; and
  • Termination criteria and notice.

FAQ: Establishing an Entity in India – What Foreign Investors Need to Know

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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