Foreign Investment

How can a Foreign Entity enter into the Indian Market?

Foreign businesses are showing great interest in the Indian market considering the opportunities that are on offer. Foreign businesses are attracted to the Indian market due to cheap labour cost, simple investment procedures, tax relaxation, skilled workforce etc. Trends reveal the fact that FDI inflow in India is on the rise as various foreign businesses are starting their operations in India. In this article, we shall look at the factors causing foreign entities to enter into the Indian market and also look at how various foreign entity is making their way into Indian market.

What do you mean by a Foreign Entity/Company?

As per the Companies Act, Foreign Company is any company or body corporate incorporated outside of India having a place of business in India, whether by itself or via an agent, and conducts business activity in India. 

Factors responsible for foreign entities doing businesses in India

The following factors are attracting foreign entities to enter into the Indian market:

• Business Friendly laws

India is one of those countries with business friendly laws. Therefore entities get attracted to it.

• Low Operational Cost

Foreign entities investing in India relish the low operational cost. The cost of setting up the business here is comparatively low, which makes investing in India engrossing and serviceable.

• Potential of the Indian market

Another important factor involves is the great potential of the Indian market.

• Sustainable Progress

Companies entering into India can take advantage of the fact that Indian market has favourable conditions that allows it to make sustainable progress.

• Tax advantages

Foreign entities setting up businesses in India also enjoys tax relaxations and other tax advantages.

• Significant amount of English speaking population

This is another advantage of starting a business in India as a foreign entity. India has a significant amount of people who have a good command over English language. This makes it an attractive location for foreign entities to set up a business here.

Ways in which Foreign Entity make their way into Indian market

Foreign entities can make their way into Indian market through:

• Liaison Office in India;
• Branch Office in India;
• Project Office in India;
• Wholly Owned Subsidiary and JV in India;
• LLP in India.

Liaison Office in India-

The term liaison refers to communication and cooperation. So liaison office is used for communicating with the head office of the company. It is referred to as the representative office of the company. It cannot undertake any trading, commercial or industrial activity. The foreign entity should have a decent profit making track record in the home country and must also have minimum net worth $50k. The office can be set up subject to the permission of the RBI initially for a 3 year period. Extension can also be obtained for the same.

Activities allowed-

• Importing/exporting from/to India;
• Being a channel for communication between the parent and Indian Companies;
• Promoting/representing parent company in India;
• Promoting technical and financial collaboration among parent/group of companies and Indian Companies.

Branch Office in India-

Companies incorporated outside India and involved in the manufacturing and trading activities can establish Branch office in India subject to the permission from RBI^[1]. The branch office must be doing the same activities which the parent company does. Retail trading activities are not permitted for branch offices and they are also not permitted to perform manufacturing/processing activities directly or indirectly.

Activities allowed-

• Providing professional and consultancy services;
• Import and Export of Goods;
• Performing research work;
• Representing parent company and acting as an agent in the business;
• Foreign airline and shipping;
• Providing services in IT and software development.

Project Office in India

Project Office can be established by foreign entities in India to execute special projects and it’s formed to meet short term projects. Project offices is usually established when a foreign company gets a project from an Indian Company and if the project is provided funds by bilateral or multilateral financing agency.

Wholly Owned Subsidiary and JV in India

A wholly owned subsidiary is company whose shares are held entirely by the parent company. It should be registered with the ROC. Another method is called the Joint Venture, where investment can be made directly in a foreign company by subscribing to its shares.

LLP

A foreign investor can enter into India by investing in an LLP in India. The Reserve Bank has permitted FDI under automatic route for making investments in LLPs. 100% FDI is permitted. 

Takeaway

From the information provided above, it can be concluded that a new entity can be created in India in the form of JV, Wholly Owned subsidiaries and LLPs and through which a foreign company can invest and set up their business whereas, through liaison office, branch office and project offices, an already set up brand in the foreign can establish it in India as well. In the coming times, an increased number of foreign entities are expected to enter into the Indian market, benefiting both the foreign entity as well as the Indian economy by creating more employment and enhancing their incomes.

Read our article:What are the types of Foreign Direct Investment?