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Types of Business entities
Introduction
Foreign companies wishing to do business or establish a presence in India have a number of options as discussed below.

Distributorship arrangement
Before establishing a representative office, it is common for foreign companies to test market potential by appointing a sales representative or distributor. This provides a relatively low-risk and low-cost method of testing the marketplace.
India’s distribution channels are diverse, and there are few established retailers that operate on a national level. It is important to investigate a potential distributor’s creditworthiness, reputation and capabilities before selecting them.

Foreign direct investment
Automatic route
Foreign direct investment (FDI) in the equity share capital of an Indian company is permitted in all sectors under the “automatic route” (without prior approval) of the Foreign Investment Promotion Board (FIPB), except with respect to the following:
  • manufacture of cigars and cigarettes of tobacco and manufactured tobacco substitutes
  • commodity exchanges
  • courier services
  • credit information companies
  • print media companies
  • manufacture of items exclusively reserved for the small-scale sector with more than 24 per cent FDI
  • proposals in which the foreign collaborator had an existing financial/technical collaboration in India in the “same” field prior to 12 January 2005
  • manufacture of electronic aerospace and defense equipment’s (all types)
  • further specialized sectoral limitations as noted in the FDI Policy such as 49 percent automatic route allowed in the private banking sector.
Under the automatic route, foreign companies may acquire shares in existing Indian companies without obtaining prior regulatory or government approval. The Indian company, however, must notify the relevant regional office of the Reserve Bank of India (RBI) within 30 days of receiving investment funds from the foreign investor, and must file certain documents with the regional office within 30 days after the issue of shares to the foreign investor.

FDI is prohibited in certain sectors. A non-exhaustive list of sectors includes gambling, lottery business, atomic energy and retail trading (except single brand product retailing, which requires specific clearance).

Wholly owned subsidiaries
Foreign companies are permitted to establish wholly owned subsidiaries in India. Such companies may be established as a private limited or public limited company, subject to the requirements of the Companies Act 1956. Foreign equity ownership may be up to 100 per cent except in certain specified sectors. The Indian subsidiary company must register with the Register of Companies (ROC) and is subject to the same laws as domestic companies. The steps for establishing a private company in India are set out in Annex A.

Joint ventures
As with wholly owned subsidiaries, foreign companies are permitted to incorporate a company locally in India as a joint venture company with an Indian partner/other shareholder as either a private limited or a public limited company. Equity ownership restrictions apply to certain industry sectors, as mentioned above.

FDI beyond automatic approval
In cases where the automatic approval route is not available, clearance from the FIPB is required. Additionally, in certain cases, the approval of the RBI may also be required.

Repatriation of investment capital and profits earned in India
Investment capital and profits earned may be repatriated without restrictions, except in the case of non-resident Indians (nRIs) who choose to invest specifically under non-repatriable schemes.
  • carrying out research work in which the branch office’s parent company is engaged
  • promoting technical or financial collaborations between Indian companies and the branch office’s parent company or the group of companies to which it belongs
  • representing the parent company in India and acting as its buying/selling agent
  • rendering services in information technology and development of software in India
Repatriation of sale proceeds of investments in India is permitted with prior approval of the RBI and tax clearance from the income tax authorities.

Liaison office
Foreign companies wanting to establish an initial presence in India often set up a liaison office. Prior approval of the RBI is required before setting up a liaison office in India.

A foreign company may open a liaison office in India to represent its parent company or the group in order to: promote the export or import of goods and services from or to India, to facilitate technical or financial collaborations between its parent or the group of companies to which it belongs and an Indian entity, to act as a communication channel between itself and an Indian entity. Liaison offices are not permitted to undertake any commercial, trading or industrial activity, or earn any income in India. Liaison offices are prohibited from charging any commissions or receiving other income from Indian customers for providing liaison services. Permission to establish a liaison office is initially granted for three years but may be extended beyond this period.

Branch office
Foreign companies engaged in manufacturing and trading activities may open a branch office in India for any of the following purposes:
  • undertaking export and import activities
  • rendering professional or consultancy services
  • rendering technical support to the products supplied by the branch office’s parent or the group of companies to which it belongs
  • undertaking activities of foreign airline or shipping company
  • manufacturing in a Special Economic Zone (SEZ).
Prior approval of the RBI is required before setting up a branch office in India. For income tax purposes, a branch office is treated as an extension of the foreign company in India, and is taxed at the rate applicable to foreign companies in India. A branch office is also required to register with the relevant Registrar of Companies (“ROC”).

Project office
Foreign companies may establish a project office if it is intended that its business presence in India will be for a limited period of time. Essentially, a project office is set up with the purpose of executing a specific project.
According to the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) (Amendment) Regulations 2003, a foreign company may open a project office in India, provided it has secured from an Indian company a contract to execute a project in India, and one of the following conditions is satisfied:
  • the project is funded directly by offshore funds
  • the project is funded by a bilateral or multilateral international financing agency
  • the project has been cleared by an appropriate authority
  • a company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.
The foreign company is required to furnish a report to the relevant regional office of the RBI under whose jurisdiction the project office is set up, giving certain details.

Foreign companies engaged in turnkey construction will normally set up a project office for their operations in India. Such offices cannot undertake activities other than activities relating and incidental to the execution of the relevant project.
Foreign technology agreements
Foreign companies may enter into technology agreements with Indian companies provided that:
  • The technical know-how lump sum payment does not exceed uS$2 million (per technology)
  • Royalties from wholly owned subsidiaries to their parent companies do not exceed 8 percent on exports and 5 percent on domestic sales (net of sales).
In situations where there is no technology transfer, remittance outside India for use of a trade mark or franchise right in India is permitted, without prior approval, so long as such payment does not exceed 2 percent of export sales and 1 percent of domestic sales. Where there is a transfer of technology, royalties that may be received for the granting of the right to use a trade mark, brand name or franchise right cannot exceed the maximum amounts referred to in the second point above.