Regulatory Environment in India
Indian government has introduced several reforms to improve regulatory situation in India and improving the ease of doing business in the country. The Ministry of Finance issued an Office Memorandum that listed the administrative ministries for 11 notified sectors that require the government’s approval under the FDI policy. The Department of Industrial Policy and Promotion is also expected to help the ministries to process FDI proposals. The foreign investment related rules have been liberalised in many sectors including the financial services, airlines and defence sectors. 32 labour law related compliance requirements have been rationalised and simplified and a consolidated appellate process has been put in place for several financial regulators.
A foreign company operating in India can either operate as a foreign entity with an office in India or as an Indian company by creating a separate legal entity in the country. If a foreign company operates as an Indian company by setting up a wholly owned subsidiary, that requires two shareholders in case of a private limited company and seven shareholders in case of a public limited organisation. Another way is through functioning as an LLP (Limited Liability Partner), In this case, two partners are required and one of them has to be an Indian resident. LLP is a structured hybrid that enjoys the advantages of a separate company and benefits of organisational flexibility as well. Foreign companies also have the option of carrying out business in India by forming strategic alliances with Indian partners. Though this is not a preferred option but many foreign companies go for such joint ventures.
If a company chooses to operate as a foreign entity, it can set up an office in India in the form of a liaison office, a branch office or a project office. The foreign company has to submit an application to the Authorised Dealer bank in order to open such an office according to their commercial needs and activities. There are certain circumstances under which the approval of RBI becomes necessary. These circumstances include the applicant being a citizen of Pakistan or being registered or incorporated there or if the applicant is a Non-Government Organization, an entity or department of a foreign government etc. After the office is set up, it needs to be registered with the Registrar of Companies.
The most common practice amongst foreign companies is to set up a LO or liaison office, its role is limited to collecting information about the market and providing data relevant to the company and the Indian customers. It cannot earn any income in the country. A branch office can participate in a number of activities, including revenue generation and can export or import good, it can provide professional or consultancy services, promote technical and financial collaboration, offer IT and software development services or act as a foreign airlines or shipping companies. The companies planning to execute special projects in India set up project and site offices. FDI is permitted in all sectors in except in a listed few. Foreign investment is allowed in two ways either through automatic route where prior approval is not required from the government or through approval route where the government’s approval is required for receiving foreign investment.
There are multiple funding options in India for foreign companies. One way is through equity capital where equity share constitute the common stock of a company. It provides voting rights to the holder in the shares via dividends or capital appreciation. Then there are fully and compulsorily convertible preference shares and debentures through which Indian companies can receive foreign investments. The circumstances under which the optionality clauses are allowed include minimum lock in period of one year. Yet another way is External Commercial Borrowings (ECBs). These are commercial loans that include bank loans, buyers’ credit, suppliers’ credit and other financial services. It can be availed both under the approval route and the automatic route.
The framework of availing an ECB loan comprises of three tracks. There are ECB guidelines that vividly describe the process of raising funds through ECB and there are specific borrowers that are eligible for ECB. These borrowers include shipping and airline companies, core investment companies, software development companies, enterprises in the infrastructure sector and organisations engaged in the miscellaneous sector. A corporation can also rupee denominated bonds with the prior approval of RBI also called masala bonds. The investment capability for investments by FPI has been increased by the RBI and SEBI.
Foreign exchange transactions are regulated by FEMA and are divided into two categories current account transactions and capital account transactions. Usually, all current account transactions are permitted unless there are some specific restrictions. The withdrawal of foreign exchange is prohibited for purposes like remittances from lottery winning, or of income from racing etc. CAT rules clearly specify the purposes for which the transactions are prohibited. Capital account transactions on the other hand are usually restricted unless they are specifically permitted by RBI, which has prescribed the permitted capital account transactions for residents in or outside India. Foreign investment made in India under normal circumstances is repatriable along with capital appreciation after payment of all taxes due on the condition that the investment was made on repatriable basis.
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