An idea of investing in the right sources pays back great returns and when it comes to investing at the right place, this world functioning with different markets is your oyster. One can invest in foreign markets and leverage their growth for gaining higher results. A Foreign Direct Investment is an investment having controlling ownership in a business of one country, by an entity based in another country. Foreign Direct Investment (FDI) in India is a major monetary source for its economic development. The Indian market has proven to be one of the fastest-growing economies in the world as India ranks among the top 100’s on the Ease of Doing the Business (EODB) Index. We have received a total of $64.375 billion as FDI in 2018-19 which indicates improving growth and development in India. India is now expected to experience huge growth on the launch of MAADHYAM – A Government initiative to expedite all the approvals / licenses required to spur a business on a domestic as well as global level. https://legaljini.com/blog/maadhyam-a-government-initiative-to-ease-your-business/ 

With a varied range of strategies and ownership structures available to enter India, a huge number of foreign entities are now willing to invest in India. Let us address some of these entry strategies for the foreign investors that allow foreign Direct or Indirect Investments in India.

It’s important to note that Foreign Direct Investment can be made using Two routes (FDI types) depending upon the area and sector of your Investment.

  1. Automatic Route that does not require prior approvals from Government of India.
  2. Government Route that requires prior approval from Government of India.

Automatic Route A non-resident person / entity can invest in India, subject to the FDI Policy, except in those sectors/activities which are prohibited. Capital instruments can be issued by Indian companies to non-resident person / entity subject to prescribed FDI limits, sectoral regulations, licensing requirements applicable for various sectors/activities (if any) but without any prior approval from the Government of India for such foreign investment in India. Under the Automatic Route, an Entity or a Person can expand its Business through investment in India without any prior approval of the Government of India and such investment can be for Horizontal FDI or Vertical FDI or Conglomerate FDI business operations / expansion through branch office, project office or subsidiary company in India of that foreign entity

Instruments through which one can invest in India using the Automatic or Approval route.

Investments can be made by Foreign Entity / Person through the following modes/instruments:

  1. Equity shares of an Indian company.
  2. Fully, mandatorily convertible debentures of an Indian company.
  3. Fully, mandatorily convertible preference shares of an Indian company.

Government Approval Route : Investing in some sectors in India demands approval from Government of India / Sector Specific Ministry prior to making investment or starting business.  The entity who is about to receive the Foreign Investment shall make an application on the Foreign Investment Facilitation Portal (FIFP) and approval will be granted, keeping in mind multiple factors like inflow and outflow of foreign exchange, general benefit to the Indian economy, induction of technology, export potential, the potential for large-scale employment, etc.

To know about the areas allowing or restricting FDI visit https://www.makeinindia.com/policy/foreign-direct-investment

Entry to India – Foreign Entity / Person

Following are some legal structures depending upon the proposed activity-

a) Operating as a foreign entity:

(i) Liaison office.

(ii) Project office.

(iii) Branch office.

Liaison Office does not undertake any commercial / trading / industrial activity, directly or indirectly. It represent Parent Company in India and merely acts as a medium of communication between the Indian Customers / Companies and its parent company / head office / branch present in the foreign country and it also promote Import / Export to India. Expenses of a Liaison Office are met entirely by the parent company outside India. Therefore, one can say that the Liaison office in India is just represents its foreign entity to the potential customers in India and communicates about different opportunities present in the Indian markets.

Branch Office means establishing a proper formal office in India that carries out the commercial activity including import, export, consultancy, providing services, work relating to research etc. for its parent company / head office situated in foreign country. For example, if the foreign entity is into export/import, it’s a branch office in India can carry out similar activities along with its research with specific approval of the Reserve Bank of India and another respective Ministry.

Project Office means a place of business in India, which depicts the interests of the foreign company implementing a project in India but eliminates a liaison office. Reserve Bank gives approval to foreign companies to establish Project Offices in India, provided they have ensured a contract from an Indian company to implement a project in India and the project is financed by bilateral or multilateral International Financing Agency or directly by inward remittance from abroad or company or entity in India.

b) Operating as an Indian entity:

(i) By incorporating an Indian company (FDI Company / Wholly owned subsidiary)

(ii) Limited Liability Partnership (LLP)

(iii) Joint venture with an Indian Company.

FDI Company / Wholly owned subsidiary : A wholly owned subsidiary of a foreign company can be established under the Companies Act, 2013 which is limited by share, guarantee or liability, whose entire share capital is held by its foreign entity/parent company. It can carry out any commercial activity under 100% automatic route or through approval route based on sector of activity. The company’s Board should have at least one resident director holding Directors Identification Number (DIN) and Digital Signature Certificate (DSC) .

Limited Liability Partnership : Limited Liability Partnership is governed by Limited Liability Partnership Act, 2008. NRI’s including foreign companies and LLPs can incorporate an LLP in India, provided at least one designated partner is a resident of India. Even an Indian company can be converted into an LLP under the automatic route without government approval authorizing LLP having foreign investments to access external borrowings at a lower cost.

Joint venture with an Indian Company : Corporate joint ventures is a form of tactical partnership where two or more people or companies agree to put together goods, services and/or capital to carry out commercial operation based on their mutual agreement. A memorandum of understanding (MoU) or a letter of intent signed by the parties is the most significant documents. The Joint Venture allows the parties to enter the vibrant Indian market even in sectors where 100 percent FDI is not allowed. Joint Venture is the best medium and offering a low-risk option compared to companies.

Forthcoming Corporations and Investors striving to take benefit of India’s liberalized FDI Policy must have to carefully evaluate their alternatives for investment in India and select a business or corporate entity that takes care of their reporting compliances, statutory liability as well as tax planning issues. Right from advisory on FDI and selecting the right structure for your legal entity and to help you to solve your tax planning and daily accounting matters, we at www.legaljini.com are well equipped with the most experienced professionals on Board. Get in touch with our experts today as your Foreign Direct Investment paves it way.

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