Operating as an Indian Company

A foreign company can commence operations in India by incorporating a company under the Companies Act, 1956. In case of an incorporated presence, the extent of permissible foreign shareholding depends on the sector-level caps in the foreign investment guidelines. As a result, foreign investments can either be in 100% wholly owned subsidiaries, or in joint venture companies that have some Indian shareholding.

Option 1: Wholly-Owned Subsidiary Company

A foreign company can set up a wholly owned subsidiary company in India for carrying out its activities. Such a subsidiary is treated as an Indian resident and an Indian Company for all Indian regulations (including Income Tax, Foreign Exchange Management Act (FEMA) and the Companies Act), despite being 100% foreign owned. At least two members, for a private limited company, and seven members, for a public limited company, are mandatory.

Option 2: Joint Venture with an Indian Partner (equity participation)

In general, a wholly owned subsidiary has proved to be the preferred option, but foreign companies have also begun operations in India by forging strategic alliances with Indian partners. The trend is to choose a partner who is in the same field/area of activity or brings synergy to the foreign investor’s plans for India. Joint Venture may entail the following advantages for a foreign investor:

• Established distribution/ marketing set up of the Indian partner
• Available financial resource of the Indian partners
• Established contacts of the Indian partners which help smoothen the process of setting up of operations

The foreign investment guidelines for investment in an Indian company have already been discussed in the previous chapter.