A Foreign Company is a body corporate incorporated outside India which has a place of business in India whether by itself or through an agent, physically or through electronic mode; and conducts any business activity in India in any other manner.
To be considered a ‘Foreign Company’, one must fulfil both criteria mentioned above.
The Entry Routes for a Foreign Company to enter into India must be divided into three categories:
- Branch Offices (“BO”)
- Liaison Offices (“LO”)
- Foreign Subsidiary
BOs are suitable for a foreign company to test and understand the Indian market with stringent control by the Reserve Bank of India (“RBI”). It allows the companies to do business but just to do the activities mentioned in the application of BO. The Master Direction on Establishment of Branch Office (BO)/ Liaison Office (LO)/ Project Office (PO) or any other place of business in India by foreign entities shall be relevant for setting up of the BO.
An application from a person resident outside India for the opening of a BO in India shall require prior approval of RBI. The AD Category-I bank shall forward it to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi - 110 001 who shall process the applications in consultation with the Government of India, in the following cases:
- The applicant is a citizen of or is registered/incorporated in Pakistan;
- The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau, and the application is for opening a BO in Jammu and Kashmir, North East region and Andaman and the Nicobar Islands;
- The applicant’s principal business falls in the four sectors: Defence, Telecom, Private Security, and Information and Broadcasting. However, prior approval of the Reserve Bank of India shall not be required when government approval or license/permission by the concerned Ministry/Regulator has already been granted.
- The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, if such entity is engaged, partly or wholly, in any of the activities covered under the Foreign Contribution (Regulation) Act, 2010 (FCRA), in that case, they shall obtain a certificate of registration under the said Act. They shall not seek permission under FEMA 22.
The non-resident entity applying for a BO in India should have a financially sound track record of a profit-making track record during the immediately preceding five financial years in the home country and a net worth of not less than USD 100,000 or its equivalent.
Net Worth [total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name called].
The general conditions for setting up a BO in India are as follows –
- BOs are allowed to open non-interest bearing current accounts in India. Such Offices are required to approach their AD for opening the accounts.
- A BO must register with the Registrar of Companies (“ROCs”) once it establishes a place of business in India under the Companies Act, 2013.
- The BOs shall obtain Permanent Account Number (“PAN”) from the Income Tax Authorities on setting up of their office in India and report the same in the Annual Activity Certificate (AAC).
- Each BO is required to transact through one designated AD Category-I bank only, who shall be responsible for the BO’s due diligence and KYC norms. BOs, present in multiple locations, must transact through their designated AD.
- BO’s property acquisition shall be governed by the guidelines issued under Foreign Exchange Management (Acquisition and transfer of immovable property outside India) Regulations.
- AD Category-I bank can allow term deposit account for a period not exceeding 6 months in favour of a BO provided the bank is satisfied that the term deposit is out of temporary surplus funds and the BO furnishes an undertaking that the maturity proceeds of the term deposit will be utilised for their business in India within 3 months of maturity.
LO is "a place of business to act as a channel of communication between the principal place of business or Head Office and entities in India but which does not undertake any commercial / trading / industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel".
Permitted activities for a LO in India of a person resident outside India
- Representing the parent company/group companies in India.
- Promoting export / import from / to India.
- Promoting technical/ financial collaborations between parent/group companies and India.
- Acting as a communication channel between the parent company and Indian companies.
Applications from foreign companies (a body corporate incorporated outside India, including a firm or other association of individuals) for establishing LO in India shall be considered by the AD Category-I bank as per the guidelines given by RBI.
An application from a person resident outside India for opening a LO in India shall require prior approval of RBI. The AD Category-I bank shall forward it to the General Manager, Reserve Bank of India, Central Office Cell, Foreign Exchange Department, 6, Sansad Marg, New Delhi - 110 001 who shall process the applications in consultation with the Government of India, in the following cases:
- The applicant is a citizen of or is registered/incorporated in Pakistan;
- The applicant is a citizen of or is registered/incorporated in Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong Kong or Macau, and the application is for opening a LO in Jammu and Kashmir, North East region and Andaman and the Nicobar Islands;
- The applicant’s principal business falls in the four sectors: Defence, Telecom, Private Security, and Information and Broadcasting.
- The applicant is a Non-Government Organisation (NGO), Non-Profit Organisation, Body/ Agency/ Department of a foreign government. However, suppose, applicant’s principal business such entity is engaged, partly or wholly, in any of the activities covered under the Foreign Contribution (Regulation) Act, 2010 (FCRA). In that case, they shall obtain a certificate of registration under the said Act and shall not seek permission under FEMA.
The non-resident entity applying for a LO in India should have a financially sound track record viz: a profit-making track record during the immediately preceding three financial years in the home country and net worth of not less than USD 50,000 or its equivalent.
Steps in setting up a LO
There are two routes available under the FEMA 1999 for setting up the LO in India:
- Reserve Bank Approval Route
- Automatic Route.
- Designate a Bank and branch where an account will be opened (post-approval of RBI) and an Authorized Dealer Bank (AD Bank) for LO in India.
- Apply LO with all necessary documents to the RBI through the AD Bank.
- Obtain approval of RBI.
- Apply to ROC to obtain a "Certificate of Establishment of Place of Business in India" within 30 days of approval by RBI.
- Apply for Permanent Account Number with Income Tax Authority.
- Apply for TAN with Income Tax Authority.
- Open an account with Bank and obtain a bank account number.
- Registration with police authorities if required.
Foreign Subsidiary in India
What is a Foreign Subsidiary?
A foreign subsidiary company is any company where 50% or more of its equity shares are owned by a company incorporated in another foreign nation. In such a case, the said foreign company is called the holding company or the parent company.
- Any foreign company (parent company) registered/incorporated outside India can operate in India through a subsidiary company (daughter company).
- The parent company must hold at least 50% of the shareholding of the subsidiary company.
- Sufficing those as mentioned above, the subsidiary can be registered as either a public limited company or a private limited company in India. However, the preferred mode is the latter.
- Out of the minimum requirement of two directors, such a subsidiary must have at least one Indian citizen (a person who stayed in India at least 182 days in the previous year) as a Director.
- The subsidiary company must have a registered office in India.
- The subsidiary company must comply with additional RBI regulations since it receives foreign investment through Form FC-GPR and FC-TRS.
- FC-TRS: This concerns the transfer of a foreign subsidiary company’s shares between an Indian resident to a non-resident investor or vice-versa. Such a transfer may be done by way of sale or gift. The Foreign Direct Investment policies require that such a transaction be reported within sixty days from the date of the transfer. The obligation of filing this form rests upon the Indian resident or the investee company as the case may be. This is regardless of whether the Indian resident is the transferer or the transferee.
- FC-GPR: This concerns the remittance received by the shareholders of a foreign subsidiary company. The form specifies the mode of transfer of the remittance by the company to its shareholders.
- Additionally, the subsidiary company must be compliant with FC-1, FC-3 & FC-4 forms.
- Other than those mentioned above, a subsidiary of a foreign company is treated at par with any other Indian company. Therefore, general requirements pertinent to any private/public company follows.
Steps in brief
- Apply for the company’s name reservation with ROC.
- Post-approval of the company’s name, apply by way of INC-7 for incorporation of the company attaching Memorandum and Articles of Association of the Company. Further, ROC fees and Stamp duty must be paid online. A self-attested photocopy of the passport is to be attached for foreign nationals.
- Post verification of documents, ROC issues COI. PAN & TAN of the company shall be issued simultaneously by the department by mentioning COI.
Post incorporation, the subsidiary must open a current account and bring share subscription money from all the shareholders. After which, it must intimate RBI regarding receipt of share subscription money, which will be considered as FDI, and within 30 days must file e-Form FC-1.