By Vineet Aneja, managing partner of Clasis Law
India has one of the most transparent and liberal foreign direct investment regimes amongst the emerging and developing economies. Any foreign investment proposed to be brought into an Indian entity is governed by the Foreign Exchange Management Act, 1999, the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2017, and the ‘Consolidated Foreign Direct Investment Policy’ issued by the Department for Promotion of Industry and Internal Trade (“FDI Policy”) (collectively referred to as the “FDI Norms”).
See Vineet Aneja’s video on doing business in India here:
Foreign corporate and individual investment in India, termed collectively as Foreign Direct Investment (“FDI”) are primarily permitted to be made in equity shares/ fully, compulsorily and mandatorily convertible debentures/ fully, compulsorily and mandatorily convertible preference shares of an Indian company.
FDI in an Indian company may be routed by way of:
- subscription, ie, direct contribution to its share capital; and/or
- purchase, ie, acquisition of its securities from its existing holders.
FDI may be made in an Indian company through one of following two routes:
As per the FDI Norms, investment in most sectors in India is permitted without the requirement of prior governmental approval and such route for investments is classified as ‘automatic route’. While, almost all sectors are open to 100 percent FDI through the automatic route, some of such sectors are subject to certain sector specific conditions, such as:
- Single brand retail trade (100 percent FDI through the automatic route subject to fulfilment of sourcing norms),
- Marketplace based model of e-commerce (100 percent FDI through the automatic route subject to compliance with the guidelines for FDI in e-commerce),
- Wholesale trading (cash and carry services), and
- Construction development projects (except real estate business).
Investment proposals for FDI through the approval route require a prior approval from the Government of India (through the department concerned for such sector). Certain sectors which are open to FDI through the approval route are:
- Multi brand retail trade — Up to 51 percent FDI is permitted through the Government route, and
- Defence sector — 100 percent FDI is permitted (however, 49 percent FDI is permitted through the automatic route and beyond 49 percent FDI is subject to the approval route, wherever it is likely to result in access to modern technology or for other reasons recorded).
Business structures/ forms of entities for doing business in India
- Company (private or public set up as a wholly owned subsidiary or by way of a joint venture)
A company can be a private limited company or a public company, however the common form of entity, in India, is a private limited company, set up as a subsidiary or a joint venture between two companies.
- Limited Liability Partnership
LLP is a body corporate and a legal person separate from its partners. FDI is permitted in LLPs operating in sectors/activities where 100 percent FDI is allowed through automatic route and there are no FDI — linked performance conditions.
- Offices (branch office, project office, liaison office)
A foreign company can open a branch office or liaison office or project office in India. The scope of operations of such offices is typically limited to activities and functions such as country representative office, sourcing, technical and/or marketing support, import and export, for executing a specific project, etc.
The establishment of a branch office or liaison office or project office is a two-pronged process and involves seeking Reserve Bank of India (“RBI”) approval (through an Authorised Dealer of a Category I Bank), and registration of the branch/liaison/project office with the Registrar of Companies.
- Franchise agreement/ distribution agreement/ agency
A foreign company, subject to the nature of its business, can proceed with doing business in India through an unincorporated presence. A foreign company may choose to appoint a distributor for the whole of India, or for a certain defined territory, by way of entering into a detailed distribution agreement. Further, a foreign company may choose to appoint an agent, wherein the foreign company is the principal and would retain control over the product sale and price. The agent only represents the foreign company in India.
Another form of doing business in India is the franchise model. A foreign company may adopt a franchise arrangement to distribute its products in India. The said arrangement is generally adopted where sharing of technical know-how and business methods is required. In India, many foreign companies have adopted the franchise model to sell their products.
Ease of doing business in India
The Government has taken many steps to enable business opportunities for foreign investors. This has resulted in India’s rank in the ‘World Bank’s Ease of Doing Business 2019’ survey climb to the 77th place among 190 countries surveyed. The key reforms that have taken place recently resulting in ease of doing business are in relation to:
Starting a business
- Permanent Account Number (PAN), Tax Deduction & Collection Account Number (TAN), Director Identification Number (DIN) have now been merged into a single form (SPICe) for company incorporation.
- The attachments for reserving the name of the Company with the Ministry of Corporate Affairs have been simplified into a simple web service.
- Registration under Employee State Insurance Corporation (ESIC) and Employee Provident Fund Organisation (EPFO) (which are social security benefits) are available at Shram Suvidha portal as a common online service with no physical touch point.
- Introduction of “RUN — Reserve Unique Name” web service for making the “Name Reservation” process Speedy, Smooth, Simple and reducing the number of procedures.
- eKYC drive for all DIN holders who have been allotted DIN on or before March 31, 2018 and whose DIN is in approved status. This drive is aimed at verification of individual DIN holders and weed out non-existent/dummy DIN holders and ultimately to clean up the Directors’ e-Registry.
- The indirect tax regime has undergone tremendous change with the enforcement of the Goods and Services Tax (GST) which has replaced many indirect tax laws that previously existed in India.
- The RBI issued a notification on July30, 2019 in respect of the External Commercial Borrowings (ECB) framework torelax theend-use restrictions. Proceeds of ECBs can now be applied towards: (i) repayment of INR loans availed onshore where proceeds of such loans have been utilised for capital expenditure; (ii) meeting working capital requirements; and (iii) general corporate purposes. For ECBs to be used for these end-uses certain minimum average maturity norms must be complied with.
- The Insolvency and Bankruptcy Code of 2016 has introduced new dimensions in resolving insolvency in India. It is India’s first comprehensive legislation of corporate insolvency.
- Under fast-track Corporate Insolvency Resolution Process (CIRP) for mid-sized companies, the process for insolvency shall be completed within 90 days with a maximum grace period of another 45 days.
New laws and measures underway
- The Code on Wages, 2019 has been passed by the Lok Sabha and Rajya Sabha and received the President’s assent on August8, The code shall streamline the definition of wages by amalgamating four related statutes: the Minimum Wages Act, 1948, the Payment of Wages Act, 1936, the Payment of Bonus Act, 1965, and the Equal Remuneration Act, 1976.
- The Code on Occupational Safety, Health and Working Conditions Bill, 2019 was introduced in the Lok Sabha on July23, With the ultimate aim of extending the safety and healthy working conditions to all workforce of the country, the Code enhances the ambit of provisions of safety, health, welfare and working conditions from existing about 9 major sectors to all establishments having 10 or more employees.
- The Personal Data Protection Bill, 2018 — The ever changing legal and regulatory landscape within India along with the enforcement of the General Data Protection Regulation (GDPR) in EU, has given rise to the need for having such a law for protection of personal data in India as well. This paves the way for the birth of the Bill which emphasises on the need for increased safeguards vis-à-vis personal data along with stringent penalties.
- The Government is considering increasing the foreign investment limit in the insurance sector from 49 percent to 74 percent under the approval route as well as ease the norms for FDI in single brand retail sector, aviation and AVGC (animation, visual effects, gaming and comics). The Government is also considering easing the sourcing norms in the single brand retail trade sector.
- In pursuit of the drive to curb the menace of shell companies, the Companies (Amendment) Act, 2019 (which received the President’s assent on July 31, 2019) provides additional powers to the Registrar of Companies to initiate action for removal of name of a company on specified grounds.
- Competition Commission of India (CCI) on August 19, 2019 issued a press release on “Introducing Green Channel clearance for Merger & Acquisitions”. The CCI has introduced an automatic system of approval for combinations under Green Channel in order to make the merger & acquisitions filings for approval faster. Under this process, the combination is deemed to have been approved upon filing the notice in the prescribed format. This system would significantly reduce the time and cost of transactions.
While the Government has taken numerous steps to give an impetus to foreign investment, there is a lot that remains to be done in terms of ground reality check and penetration of policies/ initiatives deep into the economy. Having said that, there are reforms taking place with the aim of moving towards India becoming a US$3 trillion economy by FY 2020.