Entry options in India

Following structures are typically used by foreign investors in India:

Liaison office (LO)

Foreign corporations are permitted to open liaison or representative offices in India, subject to obtaining specific approval from the RBI, to undertake liaison activities on their behalf. These offices act as a communication channel between the Head Office of foreign corporations and parties in India. Such offices are normally established by foreign corporations to promote their business interests by spreading awareness about their products and also to explore opportunities to set up a more permanent presence in the country.

A LO in India is permitted by the RBI to undertake the following activities:

  • Represent the parent company or group companies in India

  • Promote export and import from and to India

  • Promote technical and financial collaborations between parent and group companies and companies in India

  • Act as a communication channel between the parent and Indian companies

A LO is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the head office outside India.

Permission to set up a LO in India is initially granted for a period of three years, which is likely to be extended from time-to-time. Upon expiry of the validity period, LO may have to either close down or be converted into a company in conformity with the FDI policy.

Branch office (BO)

Foreign corporations can open branch offices to conduct business in India, which requires specific approval from the RBI. A foreign corporation cannot undertake any activity in India that is not specifically permitted by the RBI.

A BO is permitted by the RBI to represent the parent/group companies and undertake the following activities:

  • Export and import goods

  • Render professional or consultancy services

  • Conduct research work for the parent company

  • Promote technical and financial collaborations between Indian companies and the parent or overseas group company

  • Represent the parent company in India and act as buying and selling agents in the country

  • Provide IT services and develop software in India

  • Render technical support for the products supplied by parent or group companies

Normally, the BO should be engaged in the activity undertaken by the parent company. A branch office is not allowed to carry out retail trading, manufacturing, except manufacturing within SEZs, or processing activities in India. Branch offices are allowed to be established in SEZs to execute manufacturing and service activities in India without specific approval from the RBI, subject to prescribed conditions.

A BO provides the advantage of ease-of-operation and uncomplicated closure. However, since such operations are strictly regulated by exchange control guidelines, a branch may not provide a foreign corporation with the optimum structure for its expansion and diversification plans.

Project office (PO)

A foreign corporation that has secured a contract from an Indian company to execute a project in India can establish a project office in the country without obtaining prior permission of the RBI, provided:

  • The project is funded directly by inward remittance from abroad

  • 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 term loan by a public financial institution or a bank in India for the project

However, if the above criteria are not met, the foreign entity has to approach the RBI’s Central Office for approval.

Local Indian subsidiary companies

Foreign corporations can locate wholly-owned subsidiary (WOS) companies in India in the form of private companies, subject to prescribed FDI guidelines. Furthermore, foreign corporations can establish a joint venture company with an Indian or foreign partner.

FDI in a company engaged in undertaking permitted activities is allowed under the automatic route and does not require prior approval from the GoI or the RBI. However, FDI in a company engaged in activities not covered under the automatic route require prior government or FIPB approval.

As compared to branch, liaison and project offices, a subsidiary company provides the maximum flexibility to conduct business in India. A company can be funded through a mix of equity, debt (both foreign and local) and internal accruals.

The exit procedure norms of companies are relatively more cumbersome in comparison to the other forms of business.

Limited liability partnership (LLP)

LLP aims to provide the benefits of limited liability to a company, and simultaneously allow its members the flexibility of organizing their internal management on the basis of mutual agreement. LLP is a corporate body and legal entity that has perpetual succession and is separate from its partners. The liability of the partners is limited to their agreed contribution to the LLP.

100% FDI is permitted in LLP with prior approval of FIPB in sectors where 100% FDI is allowed under the automatic route. However, foreign institutional investors/foreign venture capital investors are not permitted to invest in LLPs.

Capital contribution by partner in a LLP should only be in the form of cash. Furthermore, LLPs are not permitted to avail ECBs.

LLPs with FDI are not eligible to make any downstream investments. Indian companies with FDI are permitted to make downstream investment in LLPs only if both the Indian company and the LLP operate in sectors where 100% FDI is permitted under the automatic route and no FDI-linked conditions are attached.

Conversion of company with FDI into LLP is permitted only on prior approval of FIPB or Government of India.

Taxation of LLP is similar to taxation of general partnership firms, whereby the profits are taxed only in the hands of the LLP. Remuneration of individual working partners and interest payment to partners are tax deductible within prescribed limits, subject to conditions.