ENTRY STRATEGY INTO INDIAN MARKET - AS AN INDIAN COMPANY

 

ENTRY STRATEGY INTO INDIAN MARKET

AS AN INDIAN COMPANY

A foreign company can commence operations in India by incorporating a company under the Companies Act, 2013 through:

      Joint Ventures (JV)

or

        Wholly Owned Subsidiaries (WOS)

A) Joint Ventures (JV):

Joint Venture (JV) refers to the formation of a new company by two or more partners who join hands for a common objective.

Foreign Companies can set up their operations in India by incorporating a Joint Venture (JV) Company with an Indian partner and/or with the general public and operating either as a listed company or as an unlisted company.

Benefits of JV for a foreign investor:

•  Access to new markets and distribution networks.
• Increased capacity.
• Sharing of risks and costs (i.e. liability) with a partner.
• Access to new knowledge and expertise, including specialized staff.
• Access to greater resources, like technology and finance.

 

Drawbacks of JV for a foreign investor:

• The objectives of the venture are unclear.
• The communication between partners is not great.
• The partners expect different things from the joint venture.
• The level of expertise and investment isn't equally matched.
• The work and resources aren't distributed equally.
• The different cultures and management styles pose barriers to co-operation.
• The leadership and support is not there in the early stages.
• The venture's contractual limitations pose a risk to a partner's core business operations.

 

B) Wholly Owned Subsidiaries:

A wholly owned subsidiary is a company whose entire capital is owned by a parent company or holding company. Wholly owned subsidiaries allow the parent company to diversify, manage, and possibly reduce its risk. Foreign companies can also set up wholly owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.

For registration and incorporation of the company, an application has to be filed with Registrar of Companies (ROC) as well as RBI. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.

Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the FDI policy.

Benefits:

·       Maintenance of effective control over its subsidiaries.

·       Access to a new market.

·       ransaction costs including the cost of negotiating and transferring information and capability to another firm, cost of personnel training, cost of losing the opportunity to having direct sales or getting the full amount of profit, and the threat of creating a competitor in markets beyond the purview of the agreement might be avoided.

·       It minimizes the dissemination risk.

Drawbacks:

·       Involves highest level of risk and commitment by the foreign investing companies.

·       A few nations are hesitant to setup entirely owned subsidiaries by outsiders in their nation.

·       There may be a conflict of interest between the parent company and its subsidiaries.

·       More taxes may result with use of separate business entities.

Planning to set up a business requires detailed analysis of few of the below factors:

 

1. Feasibility of the product/service in question
2. Demand of the product/service in question
3. Nature of establishment
4. Ease of setting up
5. Cost & time involved in set up
6. Number of government approvals required to set up
7. Tax Liability
8. Post set up annual filings with the government

 

ENTRY STRATEGY INTO INDIAN MARKET AS A FOREIGN COMPANY

 

ENTRY STRATEGY INTO INDIAN MARKET

AS A FOREIGN COMPANY

 Foreign Companies can set up their operations in India through:

(A) Liaison Office/Representative Office (LO) or,

(B) Project Office (PO) or,

(C) Branch Office (BO)

A) LIAISON OFFICE (LO):

A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India.

Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India.

Role & Responsibilities

·        To collect information about possible market opportunities

·        To provide information about the company and its products to the prospective Indian customers.

Permissible activities for BO:

·        Representing in India the parent company / group companies.

·        Promoting export / import from / to India.

·        Promoting technical/financial collaborations between parent/group companies and companies in India.

·        Acting as a communication channel between the parent company and Indian companies.

Non Permissible Activities for BO:

·        To undertake any business activity in India and cannot earn any income in India.

 Prior Approvals:

Foreign Insurance companies can establish Liaison Offices in India only after obtaining approval from the Insurance Regulatory and Development Authority (IRDA).

Foreign banks can establish Liaison Offices in India only after obtaining approval from the Department of Banking Regulation (DBR), RBI.

Necessary Documentation and Form Filings:

An application for establishing office in India shall be filed in Form FNC (Annex-1) along with the documents mentioned therein to Foreign Investment Division, Reserve Bank of India, Central Office, Fort, Mumbai.

B) PROJECT OFFICE (PO):

Project Office means a place of business representing the interests of the foreign company executing a project in India.

RBI has  granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and,

·        the project is funded directly by inward remittance from abroad; or

·        the project is funded by a bilateral or multilateral International Financing Agency; or

·        the project has been cleared by an appropriate authority; or

·        a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

Non-Permissible Activities for PO:

·        Prohibition from undertaking or carrying on any activity other than the activity relating to the execution of the project for which such office is established.

Prior Approval:

Setting up of Project Offices by foreign Non-Government Organizations/Non-Profit Organizations/Foreign Government Bodies/Departments, by whatever name called, are under the Government Route. Accordingly, such entities are required to apply to the Reserve Bank for prior permission to establish an office in India, whether Project Office or otherwise.

Necessary Documentation & Form Filings:

The application for establishing Project Office in India may be submitted by the non-resident entity in Form FNC (Annex B) to a designated AD Category – I bank along with the prescribed documents mentioned in the Form.

 C) BRANCH OFFICE (BO):

Companies incorporated outside India and engaged in manufacturing or trading activities are allowed to set up Branch Offices in India with specific approval of the Reserve Bank.

Permissible Activities for BO:

·        Export / Import of goods.

·        Rendering professional or consultancy services

·         Carrying out research work, in areas in which the parent company is engaged.

·        Promoting technical or financial collaborations between Indian companies and parent or overseas group company.

·        Representing the parent company in India and acting as buying / selling agent in India.

·        Rendering services in information technology and development of software in India.

·        Rendering technical support to the products supplied by parent/group companies.

·        Foreign airline/shipping company.

Non Permissible Activities for BO:

·        To carry out retail trading activities of any nature.

·        To carry out manufacturing or processing activities in India, directly or indirectly.

 

Necessary Documentation & Form Filings:

Application for opening a new branch office in India shall be filed in Form FNC (Annex-1) and will be considered directly by the RBI if it falls under one of the sectors where 100% FDI investment is allowed.

Prior Approval

For sectors other than the allowed sectors an application must be approved by the Ministry of Finance as well as RBI.

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