Investment by a foreign owner in an Indian company is generally referred as Foreign Direct Investment (FDI). FDI in India is governed by the FDI Policy announced by the Government and the provisions of the Foreign Exchange Management Act (FEMA), 1999
While formulation of FDI policies fall under the ambit of the Central Government; FEMA regulations prescribe the mode of investments, i.e. the manner of receiving funds, issue of shares/convertible debentures and preference shares, and reporting investments to the Reserve Bank of India (RBI).
A foreign company planning to set up business operations in India shall have the below options:
A corporate entity registered anywhere in the world, except few countries, can invest in India by registering as a Limited Company. A Limited Company can be registered in India as a 100% subsidiary or as a joint venture with other investors, including Indian investors.
FDI up to 100% in shares of Limited Companies is freely permitted under automatic route, subject to sectoral caps as stipulated in the Consolidated FDI Policy of India.
FDI in sectors/activities to the extent permitted under the automatic route does not require any prior approval of either the Government or the RBI. FDI in activities not covered under the automatic route or beyond the sectoral cap as stipulated under the FDI Policy requires prior approval of the FIPB.
Limited Liability Partnership (LLP) is a body corporate with all the features of a limited company. This is a new business organization in India with all the features of LLC in the US and an LLP in the UK. This is an ideal organization for business as compared to a company. The law governing LLPs in India is contained in the Limited Liability Partnership Act, 2008.
An LLP combines the advantages of both—'Company' and 'Partnership'—in a single business entity. In an LLP, a partner is not responsible or liable for another partner's misconduct or negligence. Instead, all partners have limited liability, limited to their own acts of commission or omission, similar to shareholders' liabilities in a limited company.
FDI is permitted in LLPs operating in business activities where 100% FDI is allowed through the automatic route like company. FDI in LLPs will not be allowed in sectors such as agricultural/plantation activity, print media or real estate business.
Business entities registered outside India (foreign company) can establish their business operations in India without creating and registering a subsidiary company. Subject to the RBI guidelines, a foreign company can open a branch office in India. The scope of operations of such offices is typically limited to activities and functions such as country representative office, sourcing, technical and/or marketing support, import and export, etc. Branch office can undertake the business activities that of parent company subject to RBI Approval.
A foreign company can open a Liaison Office (LO) in India Subject to the Reserve Bank of India (RBI) guidelines. The scope of operations of a Liaison office is limited to representing the parent company in India, promoting export/import from/to India and technical/financial collaborations and acting as a communication channel between the parent company and Indian customers. LOs are not allowed to undertake any business activity in India and cannot earn any income in India.
Foreign Direct Investment (FDI) is freely permitted in Limited Companies subject to the FDI Policy in almost all sectors except certain strategic areas
Under the FDI Scheme, non-residents can make investments in shares/convertible debentures/preference shares issued by an Indian company through Automatic Route or Approval Route.
Under the automatic route, 100% FDI is permitted subject to sector-specific caps as stipulated by the FDI policy. FDI to the permitted extent under the automatic route in specific sectors/activities does not require any prior approval from the RBI or Government of India.
FDI in activities not covered under the automatic route requires prior approval of the Foreign Investment Promotion Board (FIPB). Any Indian company with FIPB approval for FDI does not require additional clearances from the RBI to receive inward remittances and issue shares to non-resident investors.
Indian companies receiving FDI through the Automatic Route must fulfill the following compliance requirements under FDI regulations:
FDI in an LLP is allowed subject to the following conditions: