Foreign Investment

India Entry Strategy: Indian Subsidiary Company vs. Joint Venture

India entry strategy

With globalization at its peak across the world, many foreign companies are planning to expand their businesses globally. India is one of the most lucrative options for global businesses to expand their global footprint and set up a global business or a business with ties to global players. Even businesses operating in India want to integrate their international operations to expand themselves in the international market. The Indian government has taken steps to liberalize the Indian entry strategies for foreign companies and to ease doing business in India. Global businesses who want to expand their business presence in India can opt for the following two most preferred India entry strategies:

  1. Indian Subsidiary Company
  2. Joint Venture
    The aforementioned India entry strategies are the most preferred. Both are used for expanding businesses in India, but both strategies are different in terms of incorporation, registration, strategic planning, etc. For a foreign company to choose the best entry strategy for India, it must know the basics about both companies. Let’s discuss both India entry strategies in detail.

Indian Subsidiary Company

Under this India Entry Strategy, the global business can establish a distinct entity in the form of a wholly owned subsidiary. This strategy is suitable for businesses that have multiple products and provide various services. It is a type of company where the parent or holding company owns the majority or all of the shares. The parent/holding company enjoys full-fledged control over the subsidiary company. However, as per Indian laws, both the parent/holding company and the subsidiary company are considered separate and distinct entities. In simpler words, it means, the subsidiary company is a separate legal entity from its parent company.

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Setting up an Indian subsidiary company has the following benefits:

  1. Substantial financial and personal support from the parent company.
  2. Transfer of technical know-how, experienced personnel, etc.
  3. Subsidiary companies help compensate the losses of the parent company by applying the set-off provisions.
  4. Joint ventures can be converted into a subsidiary to obtain better revenue and market coverage.
  5. It is easier for the parent company to open new channels of capital by subscribing to new subsidiary shares.

Joint Venture Company

Under this India Entry Strategy, the foreign business incorporates itself in the form of a joint venture as per the rules and norms prescribed under the Companies Act, 2013[1]. A joint venture is a combination of two or more parties for a defined purpose or project. Joint ventures are strategic partnerships with Indian partners. It is suitable for foreign companies that  want to invest in or venture with the already established businesses in India. The incorporation of a joint venture is similar to that of a Partnership firm: however, in a joint venture, the businesses join together for a specific or defined purpose. A joint venture can be perpetual or for a limited period.

Setting up a joint venture has the following benefits:

  1. It benefits from the already established distribution and marketing set-up of the Indian partner.
  2. It gets the support of financial resources from the Indian partner.
  3. It benefits from the established networks of the Indian partner which eases the process of setting up operations.
  4. Joint ownership of property, finances, effort, knowledge, skill, etc.
  5. A joint property interest in the subject matter.
  6. Joint control or management of the venture.
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Difference between an Indian Subsidiary Company vs. Joint Venture

ParticularsIndian Subsidiary CompanyJoint Venture
PurposeThe purpose is to utilize the brand name of the parent company and expand its business.The purpose is pre-defined.  
Sharing of profits/incomeThe profits belong to an Indian subsidiary company. Profit may be later transferred to the parent company in the form of a dividend.Profits are shared between the two businesses.
Ownership and ControlThe parent company has complete control over the Indian entity, as the majority of shares are owned by the parent/holding company.The control is divided based on the percentage of shareholding of both companies.
DiversificationSubsidiaries can diversify themselves by adding more products or by expanding themselves into different regions.For a joint venture, it is difficult to diversify as they are established for a specific and pre-defined purpose.

Factors to be considered while choosing an Indian Entry Strategy between an Indian Subsidiary company and a Joint Venture

  1. Consideration of the Industry and Market
    One of the most important components of the India Entry Strategy is to examine the industry and market in which the foreign business intends to operate. For more regulated sectors, entry would be easier as a joint venture with a local partner: however, for less regulated sectors, the Indian subsidiary company would be easier and better.
  2. Business Objective
    The business objective of the company has to be kept in mind while deciding upon the India entry strategy. If the company has long-term strategic goals to expand into other areas or multiple markets, an Indian subsidiary company would be a better option. Whereas a joint venture would be suitable if the business wanted to specialise  in a specific location or market.
  3. Financial Considerations
    The company willing to enter India should weigh the cost implications of both strategies. Establishing a subsidiary company requires a large initial investment with high future profits, whereas joint ventures are less expensive to establish but yield lesser profits.
  4. Sharing of responsibilities and risks
    Sharing responsibilities and risks is another important aspect to consider while choosing an India entry strategy. In a joint venture, the risk is mitigated with a local partner, so the risk is minimized as compared to a subsidiary company, where the entire risk has to be borne by the holding company.
  5. Compliance with taxes and regulations
    When choosing an India Entry Strategy between an Indian subsidiary and a joint venture, the foreign company should examine the compliance requirements. An Indian subsidiary company is subject to taxes and laws applicable to Indian companies, whereas a joint venture will be taxed on the profits. Further, an Indian subsidiary attracts more regulations as compared to a joint venture.
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Conclusion

In summation, the two most preferred options for foreign companies to enter the Indian market are an Indian subsidiary company or a Joint Venture. A subsidiary provides a foreign company with complete ownership and control over its operations. A joint venture is a partnership between a foreign company and an Indian company for a defined purpose. Both entry strategies will have their own merits as well as demerits. The choice of the foreign company should depend upon factors such as industry and business aspects, company-specific factors, strategic considerations, financial considerations, tax implications, etc.

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