A physical presence in India is essential to break into the country’s emerging market. However, setting up the right kind of presence can mean the difference between success and wasted efforts.
Foreign companies should consider state regulations, physical connectivity, and local costs when choosing a location for their Indian office. Of equal importance is the type of Indian presence foreign companies choose.
India’s Reserve Bank of India (RBI), in conjunction with the Registrar of Companies, allows for several types of offices – Liaison, Branch, and Project – in addition to firms and partnerships for foreign companies hoping to establish themselves.
Here, we run you through a short description of each type as well as their respective benefits and drawbacks. For more information on each office type, please use the clickable resources
A Liaison Office (LO), sometimes referred to as a Representative Office, is a good way to establish a new presence in India. An LO liaises, communicating between the parent company and Indian entities. While an LO can promote the parent company’s interests and build a network, it cannot make money within India; all operating costs are borne from internal funds.
LOs are by far the cheapest option of establishing an office in India, but provide limited scope of what a business can do in the country. Foreign companies use LOs primarily to oversee networking, create visibility about a company, and to chart out future business opportunities in India. Since LOs do not make any money, the Indian government does not tax them.
Similar to an LO, Branch Office (BO) is not an incorporated company, but an extension of a foreign company. BOs can, however, engage in commercial business as a representative of the parent company. The BO can conduct research, carry out import and export activity, provide consultancy support, provide services in information technology (IT), and provide technical support for products supplied by its parent company. A BO actually does business in India and is, therefore, subject to taxation. A BO can repatriate profits back to their parent company after paying taxes.
The RBI prohibits BOs from conducting manufacturing and processing work directly. BOs must subcontract such work to an Indian manufacturer. However, the RBI has made exception for BOs operating in Special Economic Zones (SEZs), allowing these particular BOs to engage in manufacturing themselves.
A project office operates similarly to a branch office, the main difference being that a company establishes a project office for specific work in India. Project offices may be set up for carrying out construction or for projects co-funded by Indian and international financial institutions. Though more difficult, project offices can be approved for private projects.
A partnership firm is an association of two or more persons who operate a for-profit business as co-owners. Partnership firms are relatively easy to establish; however, each partner assumes unlimited liability as the partnership itself is not a separate legal entity from its members. This means that partners purchase land and hire employees in their own names and not – legally – through the firm. Similarly, a partnership firm cannot sue or be sued.
The Indian Partnership Act, 1932 governs partnership firms. A minimum of two persons are necessary to form a partnership; the maximum number of partners is ten in the case of banking, and 20 in all other circumstances. Foreign investment into partnership firms requires approval from the RBI.
Limited Liability Partnership
A limited liability partnership firm (LLP) is a cross between partnership firms and a proper company. An LLP is a separate legal entity than its members, which means that the liability of members is limited to their agreed contributions. Only in sectors where the RBI permits 100 percent foreign direct investment (FDI) can a foreign company establish an LLP. Under Prime Minister Modi, the Indian government has eased FDI restrictions and the list of sectors under 100 percent FDI is growing.
LLPs can buy and own property, produce revenue, and remit earnings outside of India. LLPs are taxed at 30 percent, and an additional surcharge of 10 percent is applied to LLPs if total income exceeds one crore – approximately US$155,000. In comparison to a Limited Company, an LLP requires less paperwork and minimal record keeping. An LLP also has a reputational advantage over a Partnership Firm because of the additional registration involved. An LLP must register with the Ministry of Corporate Affairs, lending credible proof of the company’s existence.
A limited company is an incorporated entity that is legally separate from its shareholders and members. A limited company requires a minimum of two shareholders and foreign companies can hold up to 99.9 percent of its shares. Limited companies can own property, hire employees, sue and be sued. A limited company also has unlimited existence, meaning its existence is not dependent on the status of shareholders or members. Limited companies can borrow funds.
Establishing a limited company provides the most control and strongest presence to a foreign company.
A joint venture is a partnership between two or more companies or individuals who agree to pool capital or goods into a uniform project. Joint ventures in India have been most popular for sectors that do not have 100 percent FDI.
Joint ventures offer relatively low risk to foreign companies, provided that these companies conduct due diligence on their Indian partners. A joint venture allows foreign companies to utilize the existing networks of their Indian partners, and once taxed, such companies can remit their Indian profits outside the country.
Making the right choice
Choosing whether to set up an office, firm, or company in India has to correspond to a company’s size, ambitions, and desired trajectory in the country.
An LO may work best for a smaller company exploring prospects in India. Alternately, incorporating a limited company would be the logical decision of a company looking to aggressively expand within Asian emerging markets.
In making a decision for your business, do consider consulting a professional advisor on the following:
- A review of the latest laws and regulations;
- Due diligence for would-be partners and service providers;
- Exit strategy planning for limited control establishments; and,
- Operational issues – such as connectivity, labor laws, and state-based regulations –when planning the physical location of your Indian presence.
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