Mode of Entry

International Business – By Prof Brijesh Poojari

What are the Ways in Which Foreign companies can be Registered in India?

A foreign national can establish a foreign company as a private limited company

in India. Establishing a private limited company is the fastest way to set up a
company in India. FDI of up to 100% into a private limited company is permitted
under the FDI policy under the automatic route. A foreign national can
incorporate a private limited company as a joint venture or a wholly-owned
subsidiary.
 Joint Venture

A foreign entity will elect a local partner in India with whom it wishes to enter into
a joint venture to operate its business in India. A Letter of Intent or Memorandum
of Understanding (MOU) is signed between the foreign entity and the local
partner, which will state the joint venture agreement basis. The joint venture
agreement contains all the business terms, and it must be consistent with
regional and international law.
 Joint Venture – Registration Process
• A joint venture is a contract/arrangement where two or more parties get together to run a
business or achieve a commercial object.
• To establish a company in India through a joint venture, the foreign entity/national has to
choose a local partner with whom they want to enter into a joint venture.
• Then, the foreign entity and the local partner should sign an MOU or a Letter of Intent.
• The MOU or a Letter of Intent should state the basis for the joint venture agreement.
• The foreign entity and the local partner must negotiate and discuss all the terms of the
joint venture agreement thoroughly.
• The joint venture agreement must be consistent with regional and international law.
• It should contain essential matters like dispute resolution agreements, holding shares,
applicable law, transfer of shares, confidentiality, board of directors non-compete, etc.
 Advantage of Joint Venture

• access to new markets and distribution networks

• increased capacity
• sharing of risks and costs with a partner
• access to new knowledge and expertise, including specialised staff
• access to greater resources, for example, technology and finance
• Joint ventures often enable growth without having to borrow funds or look
for outside investors. You may be able to:
• use your joint venture partner's customer database to market your
product
• offer your partner's services and products to your existing customers
• join forces in purchasing, research and development
 Disadvantage of Joint Venture

• Partners expect different things from the joint venture

• Level of expertise and investment isn't equally matched
• Work and resources aren't distributed equally
• Different cultures and management styles pose barriers to co-operation
• Leadership and support is not there in the early stages
 Wholly-owned subsidiary

A foreign company can invest 100% FDI in an Indian company through the
automatic route for the purpose of registering foreign in India. When a foreign
entity invests 100% FDI in an Indian company, the Indian company will become
a wholly-owned subsidiary of the foreign company.
 Wholly-owned subsidiary registration process

• A minimum of two directors are required to register a wholly-owned subsidiary, out of which
one director must be a resident in India.
• All directors must apply for DIN (Director Identification Number) and DSC (Digital Signature
Certificate).
• The Memorandum of Association (MOA) and Article of Association (AOA) must be drafted.
• The shareholders must subscribe to the MOA.
• After submitting the required documents, the applicant must pay the applicable fees and
submit the registration application.
• The Registrar of Companies (ROC) will verify all the documents.
• When the ROC verifies the correctness of the form, he/she will issue the Certificate of
Incorporation and the PAN number.
• The company must open a bank account.
• After the subscription of the company share, share capital documents must be submitted
for FDI compliance.
 Advantage of Wholly-owned subsidiary
Financial advantages:
• Easy reporting: The reporting procedure in a wholly-owned subsidiary is relatively straightforward.
Generally, the parent company takes charge of consolidating all the subsidiary's financial statements.
Hence, the burden of creating different financial statements is not on the subsidiary. Further, all kinds of
assistance are provided to the subsidiary when the parent company consolidates all the financial
statements into a single one.
• Access to more resources: The financial resources at the company’s disposal increase as the parent firm
can arrange for more financial resources as it receives all earnings from the subsidiary. Parent companies
can use these funds to grow the company or invest in other businesses that can create value for it and
improve ROI.
• Reduces cost: The subsidiary's costs also go down as the parent company takes care of all pivotal
overhauls. Also, there can be a mutual understanding between the parent company and the wholly-owned
subsidiary where they mutually benefit from shared resources. This reduces the cost of procuring new
technology and making changes in the financial systems as the parent company will already use its
resources to understand the changes in the financial systems.
• Low tax liability: One of the most notable financial advantages of wholly-owned subsidiary is lower tax
liability. Companies owning multiple subsidiaries can counterbalance the profits of one subsidiary with the
losses of another, resulting in lower tax liability.
 Advantage of Wholly-owned subsidiary
• Operational advantages
• Easy operations: The parent company has complete control over a wholly-owned subsidiary and can
make any decisions concerning the subsidiary. The parent company can fully control all operations
and strategically control the wholly-owned subsidiary.
• Better negotiations: When a parent company and wholly-owned subsidiary work together and share a
business relationship, they gain more substantial negotiating power. This business relation gives them
the authority to negotiate better with suppliers and other stakeholders that might impact these
companies.
• Vertical integration: Vertical integration occurs when a strategic relationship exists between the parent
company and the wholly-owned subsidiary. This increases the competitiveness of the companies that
constantly try to outperform each other.
• Access to parent company’s resources: The best part of being a wholly-owned subsidiary is accessing
all the parent company's resources. However, this works the other way, too. Both companies can use
each other's resources which are not limited to assets and property. The two organizations can also
utilize expertise in finance and marketing to grow. This, in turn, brings down any administrative
overlap and promotes seamless integration between the two companies.
 Advantage of Wholly-owned subsidiary
• Strategic advantages
• Easy decision making: The decision-making process becomes easy and quick as the business model becomes flexible.
The parent organization can give a direction to the wholly-owned subsidiary, and the subsidiary, in turn, can follow its
footsteps and prioritize what seems necessary.
• Better synergy: Promotion of synergies between the two companies in different verticals like information technology,
finance, marketing, etc., can benefit the parent company and subsidiary in terms of cost reduction and strategic
positioning. Also, research and development become better when two companies come together. The strategic support
lasts long, giving confidence to the wholly-owned subsidiary.
• Improved risk-taking ability: As a parent company backs the wholly-owned subsidiary, it can afford to take risks by
diversifying business and entering new markets. Also, if the parent acquires a foreign subsidiary, they can use it to
strengthen their foothold in that country.
• Limited liability of owners: A wholly-owned subsidiary is a separate legal entity. The parent-subsidiary structure helps the
company strategize and mitigate business-related risks. The losses incurred by the subsidiary may not affect the parent
company.
• Better risk mitigation: Parent companies can also use their data access and security directive for the wholly-owned
subsidiary to mitigate the risk of theft of technology and intellectual property loss.
 Disadvantage of Wholly-owned subsidiary
• Financial disadvantages
• More taxes on parent company: The tax levied on the parent company might increase
as more taxes are levied on companies having subsidiaries.
• Complex documentation: Owning a wholly-owned subsidiary comes with a lot of
paperwork and legal formalities, which will increase the cost structure of the parent
company.
• Increased cost for parent company: A parent organization must buy into the company's
assets, making a total investment. This is practically impossible if the aspiring parent
organization is a small or medium-sized firm with limited resources.
• Overvaluation: The parent company might pay too much for the subsidiary's assets if
the assets are overvalued and multiple businesses are bidding for the same company.
• Higher reporting risk: A minor execution error in financial reports may disturb the parent
company’s fiscal performance.
 Disadvantage of Wholly-owned subsidiary
• Operational disadvantages
• Increased impact of losses: Suppose the wholly-owned subsidiary has to bear any losses. Those losses
will directly impact the parent organization, and the parent organization must intervene to help the
subsidiary recover.
• Onboarding additional resources: Every country sets its own rules and regulations for running a business.
Managing a wholly-owned subsidiary based out of a foreign country can be challenging as you may not
know the country’s laws and industry regulations. Hence, you might hire additional resources for
managing your wholly-owned subsidiary in a foreign country. This can create an additional financial
burden.
• Dependency: Suppose there are any disruptions in the working of the wholly-owned subsidiaries. In that
case, it will directly impact the flow of work in the parent organization; hence, the entire atmosphere gets
disrupted.
• Legal restrictions: Certain countries hesitate to allow foreign companies to set up a wholly-owned
subsidiary.
• Technological and intellectual risks: The parent company with foreign-based subsidiary is at high risk of
losing technology and intellectual property to other companies that can affect operations. Specific
protection directives and data access regulations are required to avoid theft-related risks.
 Disadvantage of Wholly-owned subsidiary
• Strategic disadvantages
• Challenges in diversification: When a parent company focuses on diversifying the operations of the
wholly-owned subsidiary, it might lose focus on its function, which will hamper the company in the long
run.
• Increased cultural differences: With diversification, the central issue of cultural difference arises,
disrupting the day-to-day operations of the subsidiary and organization.
• Rise of conflicts: There are high chances of conflict between the management of the parent company
and the wholly-owned subsidiary, which might directly affect the working of both companies.
• Reduced privacy: When a wholly-owned subsidiary and a parent company work closely, there is a
possibility of disclosing corporate secrets and sharing confidential techniques. This may create
problems since sharing technologies with a domestic entity in a foreign country may reveal sensitive
information causing the subsidiary to lose its competitive edge.
• Impact of dynamic business environment: Several cultural and political challenges might affect the
dynamics between the two companies, affecting the success of both these companies. For instance, if
there is a recession in the country where the wholly-owned subsidiary is located, the parent company's
performance is directly impacted.
 Liaison office

A foreign company can establish a liaison office for all liaison activities in India.
The parent company (foreign company) will meet all the expenses of a liaison
office through foreign remittance.
 Liaison office registration process

A foreign company can open a liaison office in India with the prior approval of RBI. The process is as follows:
• The foreign company must have a profit-making record during the prior three financial years in the home country. Its
net value should not be less than USD 50,000 to set up a liaison office in India.
• The foreign entity should forward the application to establish a liaison office to the Foreign Exchange Department
through a designated Authorised Dealer Category–I Bank (AD).
• It should file the English version of the certificate of incorporation/registration or MOA or AOA and its latest audited
balance sheet attested by the Indian Embassy or Notary Public in the country of registration.
• The RBI will give the liaison office a unique identification number.
• The foreign company has to obtain PAN from Income Tax Authorities when setting up the liaison office in India.
• All the expenses should be met entirely through inward remittances of foreign exchange from the Head office
located outside India.
• If a foreign entity that is also a subsidiary of other company does not fulfil the above condition, it can submit a Letter
of Comfort from its parent company if it satisfies the above conditions.
• A foreign insurance company can establish a liaison office after getting approval from the IRDAI (Insurance
Regulatory and Development Authority)
• A foreign bank can establish a liaison office after getting approval from the Department of Banking Regulation
(DBR).
 liaison office can undertake the below activities:
• Representing the parent company or parent company in India.
• Promoting export or import in India.
• Promoting financial or technical collaborations on the group or parent
company’s behalf
• Coordinating communications between the parent or group companies and
Indian entities.
• However, it cannot undertake any business activity and earn any income in
India.
 Project office

A foreign company can establish a project office in India to execute projects

awarded to them by an Indian Company. However, to establish such a project
office, the foreign company may be required to obtain approval from the
Reserve Bank of India.
 Project office registration process
The RBI prescribes the process for setting up a project office in India by a
foreign company when the following conditions are fulfilled:
• A foreign company can establish a project office without prior permission from
RBI only when it has obtained a contract from an Indian company for
executing a project in India.
• The project should be funded directly by inward remittance from abroad.
• The project should be funded by a bilateral or multilateral International
Financing Agency.
• An appropriate authority has cleared the project.
• A company or Indian entity providing the contract has been granted a term
loan by an Indian bank or Public Financial Institution for the project.
 Branch office

A foreign company can establish a branch office in India. To establish a branch

office, the foreign company must be a large business and provide proof of
profitability.

Eg: Starbucks
 Branch Office registration Process
A foreign company can open a branch office in India and conduct business activity with the prior approval of
RBI. The process is as follows:
• The foreign company should be engaged in trading or manufacturing activities.
• It should have a profit record during the preceding five financial years and a net worth of not less than
USD 1,00,000 in its home country.
• The foreign entity should forward the application to establish a liaison office to the Foreign Exchange
Department through a designated Authorised Dealer Category–I Bank (AD).
• It should file the English version of the certificate of incorporation/registration or MOA or AOA and its latest
audited balance sheet attested by the Indian Embassy or Notary Public in the country of registration.
• RBI will give the branch office a unique identification number.
• The foreign company has to obtain PAN from Income Tax Authorities when setting up the branch office in
India.
• All the expenses should be met entirely through inward remittances of foreign exchange from the Head
office located outside India.
• It requires specific approval from the Reserve Bank of India (RBI) under FEMA 1999 and approval from
the Insurance Regulatory and Development Authority (IRDA).
• If a foreign entity that is also a subsidiary of other company does not fulfil the above condition, it can
submit a Letter of Comfort from its parent company if it satisfies the above conditions.
 Branch Office can Undertake below Activities

• Import and export of goods.

• Providing consultancy or professional services.
• Undertaking research work in areas in which its parent company is engaged.
• Promoting financial or technical collaborations on behalf of the parent
company.
• Representing the parent company in India and acting as a selling or buying
agent in India.
• Developing software and providing IT services in India.
• Giving technical support for products supplied by the parent company.
• Foreign airline or shipping company.
• It cannot undertake retail trading activities and manufacturing or processing
activities in India, indirectly or directly.
Thank You