India is one of the fastest growing markets in the world, making it one of the more attractive investment opportunities for companies across the world. However the business opportunity comes with its own challenges – specifically, finding your way around the complex corporate, legal and tax systems.
The first question an overseas entity must ask is: What is the right structure for my India presence?
(No, the answer is not just “wholly owned subsidiary”, even if this is the most common answer).
There are multiple options, each of them with their own merits and demerits:
- Company (private or public) – The most common format which exists across the world, with limited liability. This is the default option for many reasons including that it is well-understood by everyone, however it has a higher compliance burden compared to some others.
- Limited liability partnership (LLP) – An entity with some features of a pure partnership firm and some features of a company, with limited liability. This is a relatively recent development and is useful in reducing the compliance burden on an ongoing basis.
- Branch office – Viewed as an extension of the overseas corporate itself, rather than as an independent Indian entity. While this is technically a viable option, most corporates don’t prefer it due to a higher tax rate on this type of entity.
- Liaison office – Similar to a branch office in that it is considered an extension of the overseas entity, however with restrictions on what business activities it may conduct. This is a useful option if the company is to be involved only in sales and support activities for its parent, as the compliance burden is quite minimal.
- Project office – An entity set up for a specific project with the understanding that it may only execute the project it was set up for. This is not used very frequently except in certain industries where companies find it easier to operate through project offices.
Is that it?
No. This discussion covers the options available and the basic differences in them. In practice, because of the various regulations that apply to overseas firms looking to enter India (corporate governance, taxation, foreign exchange and foreign direct investment controls) there are differences from sector to sector. For example, there are some sectors where companies may not be allowed to enter India at all, and there are others where they may be allowed subject to Government of India approval. The sectoral limits for investment may also apply.
The requirements for directors/partners and shareholders are varied and depend on (among others) the size, structure and activity of the business. Manufacturers typically have more regulations than distributors and service providers. Investing in property is another area in which the Government of India makes distinctions between residents and non-residents.
While most corporates think of a presence in terms of a subsidiary company, it’s important to explore all the available options. The best fit might be another option with lesser compliance requirements and more straightforward tax policies.
In most cases it is possible to begin with a certain type of structure and transition at a later stage (when a certain scale has been reached) to a company structure. Asit Mehta & Associates has successfully guided multiple organisations in the setup of various structures as well as transitioning to company structure after scaling up.