Over the past couple of decades, India has made rapid strides in developing its economy and natural resources. As India achieves greater rates of growth, the poverty levels are coming down. There is more employment, better facilities, and a more pronounced hope for the future. All these factors have brought a great deal of interest in companies registered outside to make investments in India.
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In 1991, liberation to the Indian economy came by way of removing obstacles to foreign investments. The money that came through foreign investment brought in working capital. The capital formed the backbone of economic development.
A foreign company planning to set up operations in India has plenty of investment options. When forming operations in India, a foreign company can manifest in any of the following forms.
Setting up a company (Indian or foreign company)
A. As an Indian company
A company registered abroad having no presence in India can setup an Indian company by incorporating the company under the Companies Act, 1956. This is achieved typically through joint ventures or wholly owned subsidiaries.
Joint Ventures: By enabling joint ventures, foreign companies get the established market and distribution channels of the Indian partner. They also use the existing financial resources, contacts, and other such types of assets that let them set up operations easily in India.
This is often an excellent strategy for foreign companies when entering high risk countries and markets. By setting up a joint venture, foreign companies incur lesser costs of operation, and establishment.
But there are cons to this approach. When two different entities come together, there is scope for some differences to happen in the management circles. There could be cultural contradictions too. Nowadays, the concept of joint ventures has been deeply studied, researched and documented. There are specialist joint venture consultants who look into this aspect.
Wholly owned subsidiaries: Foreign companies can set up wholly owned subsidiaries in sectors that allow cent percent foreign investment. Wholly owned subsidiaries help foreign companies minimize dissemination risk.
B. As a foreign company
Liaison Office/Representative Office: This office coordinates all activities between the business office (located in the foreign country) and its entities in India. Since it is non-commercial, this office cannot earn profits.
Project Office: Foreign companies can set temporary project offices to only monitor the execution of projects.
Branch office: Branch offices are concerned with the export/import of products and services. They also engage in consultancy and professional services. Branch offices are more collaborative than commercial in nature.
Foreign direct investment procedures
Some sectors allow automatic route investments. Automatic route investments do not need prior approval from the government. Only the RBI’s regional office needs to be notified by the foreign company. The investment made by the company should be in accordance to the guidelines as specified by the RBI.
Government approved foreign direct investment
Some activities for investment are not covered under the automatic route. Such areas need prior government approval for foreign direct investment. The Foreign Investment Promotion Board (FIPB) considers these investments after scrutinizing them. Applications of such foreign direct investment cases need to be submitted to the FIPB.
Foreign direct investment in small scale sector
Small scale units are those that have collective investments not more than ten million rupees. Foreign companies can hold up to twenty four percent equity in small scale enterprises.
Non Resident investments in a proprietary concern/firm
An NRI (non-resident Indian) or PIO (person of Indian origin) can invest in a firm and contribute to the capital of the firm on a non-repatriation basis.
Foreign companies cannot invest in certain sectors in India. Some of them are railways, postal service, lottery, agriculture to name a few. Foreign company investments are a complex process. Given the depth of the Indian economy, it offers foreign companies a sea of opportunities.