The Indian Government embarked on liberalizing the Indian regulatory framework with specific reference to foreign investment, through the Statement on Industrial Policy of 1991. Since then the Indian regulatory environment for foreign investment has been eased consistently to make it increasingly investor-friendly.
Entity Options
A foreign company looking at setting up operations in India has the following options for formulating its entry strategy:
1: Operating as an Indian Company, through:
(A) Wholly owned Subsidiary Company
A foreign company can set up a wholly owned subsidiary company in India for carrying out its activities.
Such subsidiary is treated as an Indian resident and an Indian Company for all Indian regulations (incl. Income Tax, FEMA and Companies Act), despite being 100% foreign owned. At least two and seven members are mandatory for a private limited and public limited company respectively.
(B) Joint Venture with Indian Partner : equity participation
Though a wholly owned subsidiary has been the most preferred option, foreign companies have also been setting up shop in India by forging strategic alliances with Indian partners. The trend in this respect is to choose a partner who is in the same field/area of activity or brings synergy to the foreign investor’s plans for India.
2: Operating as a Foreign Company, through:
(A) Liaison Office
(B) Project Office
(C) Branch Office
Foreign Investment not permitted
Under the current FDI framework, foreign investment is permitted from all categories of investors and in all sectors except in certain sectors, namely:
• Atomic Energy
• Lottery Business, Gambling & Betting
• Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture and cultivation of vegetables, mushrooms etc.)
• Plantations (excluding Tea plantation)
• Retail Trading (other than Single Brand retail)
• Real Estate (except construction development projects)
Sectors where Foreign Investment is permitted
For other sectors, there are two approval routes for foreign investment in India:
• Automatic route under delegated powers exercised by the Reserve Bank of India (RBI),
• Approval by the Government through the Foreign Investment Promotion Board (FIPB) under the Ministry of Finance.
Automatic Route
FDI is permitted under the automatic route (i.e. without requiring prior approval) for all items/activities except the following:
• where the foreign collaborator has an existing venture/tie-up in India in the same field (‘same field’ means 1987 NIC code) as on January 12, 2005, with the exception of following cases which would not require prior FIPB approval :
• investment by a Venture Capital Fund registered with SEBI;
• existing joint venture has less than 3% investment by either party;
• existing joint venture is defunct or sick.
• proposals falling outside notified sectoral policy/caps or sectors in which FDI is not permitted.
Automatic Route is not available to:
• Unregistered entities overseas
• Investments other than shares and convertible debentures
• For consideration other than cash (except for capitalization of ECB due for repayment and interest on such ECB, technology royalty due for payment)
FIPB Route
In all other cases of foreign investment, where the project does not qualify for automatic approval, as given above, prior approval is required from FIPB.
The proposal for foreign investment is decided on a case-to-case basis depending upon the merits of the case and in accordance with the prescribed sectoral policy.
to be continued...
(Disclaimer: Please check the latest rules and regulations by the appropriate authorities as they are subject to change at any time)
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