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Incorporating an Indian Business Entity- A Non-Resident Perspective

April 16, 2020     by Nidhi Kapoor

After you have evaluated the novel markets of a foreign country, it is time to evaluate the various business structures offered by the law of the land and then very diligently decide on the best suited structure. The structure should be based on the idea of investment, your preferences on terms like liability, control, purpose of formations, expected lifeline of business, compliances, etc. With this article, we intend to bring out in brief the various types of business models prevalent in India and their feasibility for Non-Residents (NR).

Are you looking for an establishment to collect market information, internally transmit information and not undertake any business activity?

Liaison Office 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. It is not allowed to undertake any business activity in India and cannot earn any income in India; expenses should be met entirely through the foreign exchange from your Head Office outside India. Therefore, the role of a Liaison Office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by an “AD Category I bank”.

The PROI must have 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.

Are you looking for a temporary presence in India and take back profits, if any to your home country?

Branch Office is a suitable business model for foreign companies looking to establish a temporary presence in India. The branch office serves as an extension of the head office business and carries on the same business and activity as that of its parent company. Most businesses use this mode to export/import of goods; rendering professional or consultancy services; carrying out research work in which the parent company is engaged.

The PROI must have a profit-making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.

Do you have a project in hand and need to enter India solely for this purpose?

Project Office is a place of business in India to represent the interests of the foreign company which can be set up to execute specific projects in India. It cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.

Do you want to enter India for manufacturing/ service and other related business operations?

A Limited Liability Partnership (LLP) is a partnership in which partners have limited liabilities. It, therefore, can exhibit elements of both, a partnership and a corporation. Limited liability partnerships are distinct from limited partnerships in some countries, which may allow all LLP partners to have limited liability, while a limited partnership may require at least one unlimited partner and allow others to assume the role of a passive and limited liability investor. As a result, in these countries, the LLP is more suited for businesses in which all investors wish to take an active role in management.

In India, an LLP is different from a Limited Partnership i.e an LLP operates like a limited partnership, but in an LLP, each member is protected from personal liability, except to the extent of their capital contribution in the LLP. FDI is permitted under automatic route in LLPs operating in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance conditions.

You can set up a Private Company either in the form of a Joint Venture or a Wholly owned subsidiary (100% holding) or Majority owned subsidiary (51% or more holding), subject to the FDI norms, restrictions and sectoral caps on foreign investment. Private limited companies are seen as particularly ideal for Non-Residents due to its’ well established and robust legal and operational flexibilities.

FDI is permitted in almost all sectors under automatic route (popularly known as automatic route sectors), with very few restricted sectors such as multi-brand retail trade, and FDI exceeding prescribed limits in sectors such as defence, telecom, broadcasting and aviation. Accordingly, persons resident outside India would need to ensure that the conditions specified under the FDI guidelines are complied with. For permissible sectors, there is no requirement of prior approval from the Government or the Reserve Bank of India for directing foreign investments into a private limited company.

Minimum requirements-

Capital: There is no minimum capital required to form a Private Limited Company in India.

Directors: Minimum two directors, both should be individuals and at-least one of whom should be a resident of India.

Shareholders: Minimum of two shareholders, either individuals or entities or a combination of both. There is no condition for residential status of shareholders.

Important Links for the reader:

  1. Reserve Bank of India (RBI): The RBI regulates and approves foreign investments through two routes- the automatic route and the government route. The Automatic Route- 100 per cent foreign direct investment is permitted under the automatic route in many sectors, except the ones where a prior government approval is required.

  1. RBI on Foreign Company: Establishment of branch office/ liaison office / project office or any other place of business in India by foreign entities.

  1. Ministry of Corporate Affairs: The Ministry is primarily concerned with administration of the Companies Act 2013, the erstwhile Companies Act 1956, the Limited Liability Partnership Act, 2008 & other allied Acts and rules & regulations framed there-under mainly for regulating the functioning of the corporate sector in accordance with law.

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