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

 

After carrying out the feasibility studies for the business idea and estimating the nature of demand, the key factor in setting up a business is the kind of establishment that is best suited as per the business requirements. The options available in India are:

                                                                                                                                 

·       
Company (Joint Venture or Wholly Owned Subsidiary)------

      I. Public  II. Private 

·        Limited Liability Partnership (‘LLP’)

·        Liaision Office (‘LO’)/Branch Office (‘BO’)/Project Office (‘PO’) for foreign investors

Every option has its own merits and set of applicable laws. The table below highlights their various aspects:

 

Nature of Establishment/ Particulars	Company	LLP	LO/BO/PO
Governing law	Companies Act, 2013 along with applicable Rules	Limited Liability Partnership Act, 2008 along with applicable Rules	RBI Guidelines along with few applicable sections of Companies Act, 2013
Minimum  required Investment	No requirement	No requirement	Eligibility Criteria based on Net Worth of the parent company has to be met
Prior Set up Approvals required	Certificate of Incorporation and Certificate of Commencement of Business	Certificate of Incorporation	Prior approval of RBI
Expected time of set up

Number of Members	Min.     – 2 & 7 Max. – 200 & unlimited	Min 2 Partners	One Indian citizen to act as the Authorised Representative
Liability of Members/Partners	Limited	Limited	NA
Tax Liability	30% plus surcharge	30% plus surcharge & cess	LO    – No Tax BO – 40% plus surcharge & cess PO    – No Tax
Annual Filing requirements	Annual Return, Balance Sheet and Profit & Loss Account statement with ROC	Annual statement of solvency & annual return with ROC	Annual Activity Certificate with AD Banks

 

With respect to providing ease in doing business, India has been actively undertaking reforms in various areas like Starting a Business, Dealing with Construction Permits, Trading Across Borders and Resolving Insolvency.

 

As per the World Bank’s Ease of Doing Business (EODB) rankings 2020, India stands at 63^rd position from rank 77 in 2019. Among the Indian states, Andhra Pradesh tops the list followed by Uttar Pradesh and Telangana at second and third position respectively.