Foreign direct investment (FDI) contributes significantly to the growth of the Indian economy as it helps in achieving self-reliance in various of the economy. Since the announcement of Industrial Policy in 1991, huge incentives and concessions were granted for the flow of foreign capital to India.
India is a growing country which has large space for consumer as well as capital goods. India’s abundant and diversified natural resources, its sound economic policy, good market conditions and highly skilled human resources, makes it a suitable destination for foreign direct investments. Due to positive economic reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia - Pacific region. Presently, India is the world’s fastest growing economy and has overtaken China.
Under the current Indian FDI scheme, investments can be made by non-residents in shares or convertible debentures or preference share of an Indian Company through two routes, namely:
- The Automatic Route
- The Government Route
The Automatic Route:
- Under the Automatic Route, foreign investors do not require any prior approval from the Reserve Bank of India or the Government of India for investment.
- Under the government route, FDI in those activities that are not covered under the automatic route require prior approval from the government of India and is considered by the Foreign Investment Promotion Board (FIPB).
- A Company has to be incorporated for doing business in India. The proposed directors have to obtain PAN & DIN before incorporation. There should be a minimum of two directors & two shareholders in the Company. The Company can be fully owned by foreign nationalities and no local parties are required. Immovable properties have to be purchased in the name of the Company for the purpose of its business. Certain registrations have to be obtained from Income Tax and Central Board of Excise and Customs local governments depending on the State in which the investor proposes to carry on the business.
- In India foreign nationals and NRIs can set up or invest in a Private Limited Company or Limited Company or Limited Liability Partnerships (LLP) through the automatic route However, they are not permitted to invest or set up a Proprietorship or Partnership or One Person Company (OPC) in India.
- A private company can be formed by minimum two persons who are required to subscribe their names to the Memorandum of association (a person who is competent to contract can be a subscriber). A person becomes a subscriber by signing the memorandum. All the subscribers may be foreigners and the company will still be an Indian Company if registered in India. The memorandum of the company shall state the name of the Company with ‘Private Limited’ as the last words of the name and the State in which the registered office of the Company is to be situated.
It is mandatory that foreign companies which establish a place of business in India have to deliver the following documents to the ROC (Registrar of Companies) for registration within thirty days of the establishment of the place of business in Form FC-1:
- A certified copy of the charter, statutes or memorandum and articles, of the company or other instrument constituting or defining the constitution of the company and, if the instrument is not in the English language, a certified translation thereof in the English language;
- The full address of the registered or principal office of the company
- A list of the directors and secretary of the company containing such particulars as may be prescribed;
- The name and address or the names and addresses of one or more persons resident in India authorized to accept on behalf of the company service of process and any notices or other documents required to be served on the company;
- The full address of the office of the company in India which is deemed to be its principal place of business in India;
Particulars of opening and closing of a place of business in India on earlier occasion or occasions;
Declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; and Any other information as may be prescribed.
Moreover, as per FEM (Establishment in India of a Branch Office or other Place of Business) Regulations, 2000 foreign companies require the approval of RBI for opening up branch offices in India. General permission has been granted to foreign companies to establish unit / branch office in Special Economic Zone [SEZ] to undertake service activities subject to conditions. The application for permission should be made to Central Office of RBI in Form FNC.
Specified under the Regulation.
The SPV can also do the business with an Indian under contractual Agreement. This will help them to do the Business avoiding statutory formalities like maintaining of books accounts relating to Indian business and filing audited profit and Loss accounts, Income Tax Returns with ROC and to remit other hidden fees and Taxes. On verifying with my Chartered Accountants they suggested it is more advisable.
Being a Foreign Company carrying on business in India through an agent it is deemed to be a foreign company doing business in India. Hence the above referred statutory formalities are same as that of foreign company establishing a place of business in India.
The laws applicable to the labour are the Indian Laws. The foreign Company doing business in India is amenable to the jurisdiction of Indian Courts. As regards contractual and other obligations the law of the place of business alone will govern, as regards Status, the Law of the place of incorporation applies.
These are only the general legal aspects. For further clarifications kindly contact one of our lawyers.
We can undertake to provide all the required services for FDI in India.
Sectors where FDI is prohibited in India:
- Lottery Business including Government /private lottery, online lotteries, etc.
- Gambling and Betting including casinos etc.
- Nidhi company (borrowing from members and lending to members only).
- Trading in Transferable Development Rights (TDRs)
- Chit Funds
- Real Estate Business (other than construction development) or Construction of Farm Houses
- Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes
- Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than construction, operation and maintenance of
- Suburban corridor projects through PPP,
- High speed train projects,
- Dedicated freight lines,
- Rolling stock including train sets, and locomotives/coaches manufacturing and maintenance facilities,
- Railway Electrification,
- Signalling systems,
- Freight terminals,