Starting a Foreign Company's Subsidiary in India

With a population of over 1.2 billion people, India is the largest democracy and one of the most promising emerging markets in the world. Therefore, there is immense interest among international businesses to tap the emerging opportunities in India and be among the early movers into the rapidly growing market. In this article, we look at ways a foreign company / foreign national can start a business in India and/or invest in businesses in India, and the related regulatory framework.

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A foreign national (other than a citizen of Pakistan or Bangladesh) or an entity incorporated outside India (other than entity incorporated in Pakistan or Bangladesh) can invest in India by acquiring shares of an Indian company, subject to the FDI Policy of India. Investment in equity shares of an existing business can be broadly divided into two categories: investment under automatic route and investment under the Government approval route. The automatic route requires no requirement of any prior regulatory approval for investment in equity shares of an Indian business and only post facto filing/intimation with the Reserve Bank of India within 30 days of receipt of investment money in India and filing of prescribed documents and particulars of allotment of shares within 30 days of allotment of shares to foreign investors. Investment in activities/industries where the automatic route is not available can be made with the approval of the Government under the Government Approved FDI method. The Foreign Investment Promotion Board (FIPB) grants such approvals.

Foreign Direct Investment of up to 100% is allowed under the automatic route in many activities/sectors in India. However, foreign investment in any form prohibits in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not which is engaged or proposes to engage in the following business: i) Business of chit fund; or, ii) Nidhi Company; or, iii) Agricultural or plantation activities (excluding floriculture, horticulture, development of seeds, animal husbandry, pisciculture, cultivation of vegetables, mushrooms, etc., under controlled conditions, services related to agro & allied sector and tea plantations); or, iv) Real Estate Business, or construction of farmhouses (Does not include development of townships, construction of residential/commercial premises, roads or bridges); or, v) Trading in Transferable Development Rights (TDRs).

A two-stage reporting procedure has been introduced for the purpose of reporting Foreign Direct Investment in India. First, on receipt of money for investment from a foreign investor, the Company should report to the Regional Office of RBI under whose jurisdiction its Registered Office is located, a report containing information about the investment must be filed. Next on the issue of shares to the foreign investor, within 30 days a report in the prescribed format has to be filed with the Regional Office of RBI. Further, a Certificate from the Company Secretary of the Company accepting investment and a Certificate from Statutory Auditors or Chartered Accountant in the required format is to be submitted.