Investment vehicles for foreign investors 02/02/2010
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Investment vehicles for foreign investors
02/02/2010
Choice of vehicle
Depending upon its business needs, a foreign company can choose between setting-up a liaison office, a branch office, a Project office or incorporation an Indian company, either its wholly owned subsidiary or joint venture with an Indian / Overseas partner.
Liaison office
A liaison office (LO) is permitted to act as a channel of a communication / carry out a liaison / representation role between the head office / group companies and parties in India. It’s not permitted to undertake any commercial / trading/ industrial activity, directly or indirectly. The LO is obliged to maintain itself and meet its expenditure through inward remittances from the Head Office. A LO is generally approved only for specified period which is subject to renewal and in certain sectors, the LO is obliged to upgrade into a Company (wholly owned subsidiary / joint venture) post the initial approval period.
Establishing an LO requires prior approval of RBI which is location specific and subject to guidelines issued in this regard. The RBI also monitors its activities on an ongoing basis primarily by seeking an annual compliance / activity certificate for the LO’s operation from its Auditors in India.
A draft circular was issued by the Reserve Bank of India (RBI) in May 2008 and is placed in the public domain which laid down the eligibility criteria and procedural guidelines for establishment of liaison offices by foreign entity needs to have a successful profit making track record during immediately preceding 3 years in the home country. Further, a net worth of not less than USD 50,000 is also be required.
Through this draft Circular, the RBI had also proposed certain procedural changes to the application procedure and to delegate certain powers to Authorised Dealers regarding extension of validity period of liaison offices of foreign entities and closure of their liaison offices in India.
The foreign exchange provisions for LO and the proposed amendments do not fully apply to applications for banks (which are covered and need approval under the banking regulations from the RBI) and insurance companies (which are permitted to set-up liaison office under general permission subject to necessary approval from Insurance Regulatory and Development Authority of India).
Post set-up in India, various registrations and compliance obligations entail on the LO, and in view of sizeable paperwork and time frame obligations, the entire process needs to be carefully planned and implemented.
Branch office
A Foreign Company is permitted to establish a Branch office (BO) in India to undertake prescribed commercial activities and is generally suitable for manufacturing and trading foreign companies wanting to market / sell their products in India or IT Enabled / Consultancy Firms wanting to render services in India. The opening and operation of BO is regulated by the RBI on similar lines as that of LO including obtaining of a prior approval but excluding the period and upgrade obligation.
The activities permitted for a BO do not include manufacturing (unless setup in Special Economic Zones which set-up and operation is governed under the separate regulations) and retail trading.
As per the Draft RBI circular referred earlier, the RBI has clarified its internal norms that the foreign entity proposing to set-up a BO in India needs to have a successful profit making track record during immediately preceding 5 years in the country. Further, a net worth of not less than USD 100,000 is also required. Approval for BO is location specific and various criteria apply to the same.
Project office
Foreign companies undertaking projects in India and satisfying prescribed requirements can set up project / site offices (PO) for the purpose of executing the project.
The requirement of obtaining prior RBI approval for PO that meets specified conditions has been dispensed with. A PO can only undertake activities relating to and incidental to the execution of specific projects in India and has to wind up post the completion of the Project.
A PO can is now permitted to open foreign currency accounts subject to prescribed conditions / parameters.
Local Indian Subsidiary or Joint Venture Company
Subject to Foreign Direct Investment Guidelines and Foreign Exchange Regulations, a foreign company can set-up its own wholly owned Indian Subsidiary or Joint Venture Company with an Indian or Foreign Partner.
Subsidiary or a Joint Venture Company can be formed either as a Privated Limited Company or a Public Limited Company. A private limited company is obligated to restrict the right of its members to transfer the shares, can have only 50 shareholders and is not allowed to have access to deposits from the public directly. It is also subject to less corporate compliances requirements as compared to a public company which is eligible for listing on stock exchanges. A company is regulated inter alia by the Registrar of Companies (ROC) under the Companies Act, 1956. The table bellow highlights certain key differences a private and public company.
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