Foreign Direct Investment By Swapnil Mali - 11037
Strategies for foreign investorsto invest in India• Two major types A foreign investor may directly set up its operations in India through a branch office, a representative office, a liaison office or a project office to carry out business. It may do so through an Indian arm i.e. through a subsidiary company set up in India under Indian laws.• Second option is advisable, especially when investment is large.
Strategies for foreign investorsto invest in India• A foreign company is one which has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of Indian Companies Act, 1956• Liaison offices, project offices, branch offices have to register themselves with the Registrar of Companies in New Delhi, within 30 days of setting up business in India
Liaison Offices• This option is limited as company not allowed to undertake any business hence cannot earn income.• Have to make an application in form FNC-1 to the Reserve Bank of India, along with the following documents: English version of the certificate of incorporation / Registration or Memorandum & Articles of Association attested by Indian Embassy/ Notary Public in the country of Registration. Latest Audited Balance Sheet of the applicant entity.• Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time by the Regional Office of RBI under whose jurisdiction the office is set up
Project Office• A foreign company, which has secured a contract to execute a project in India is allowed to set up Project Office in India.• Project office approvals are granted only for the specific project being executed in India and must close after the project is completed.• Required to register itself with the Registrar of Companies (ROC) and to comply with certain procedural formalities, as prescribed under the Companies Act, 1956.
Branch Office• Approval from the RBI must be compulsorily registered under the (Indian) Companies Act, 1956.• A branch office so approved and registered can carry on the following activities: Export / Import of goods Rendering professional or consultancy services Carrying out research work, in which the parent company is engaged Promoting technical or financial collaborations between Indian companies and parent or overseas group company Representing the parent company in India and acting as buying / selling agents in India Rendering services in Information Technology and development of software in India
• Unlike a liaison office, branch offices can generate revenue from the sales in the local market and repatriate the profits to the foreign parent company.• Funding is possible through the receipts from the parent company and from business operations in India.• A branch office cannot carry on any manufacturing activities. Manufacturing activities can be carried on only through the means of a company incorporated in India.• A branch office of a foreign company in India is taxed at higher rates of corporate income tax than a domestic company.
Through Indian arm• As an Indian company A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956 Foreign equity in such companies can be up to 100% depending on the business plan of the foreign investor For registration as an Indian company and its incorporation, an application has to be filed with the Registrar of the Companies
• Joint Venture A Joint Venture is a strategic alliance where two or more parties form a partnership to share markets / intellectual property and its knowledge and of course profits. Availability of human resources in marketing / R&D/ Production and Operations. Availability of legal resources with the local partner to structure the joint venture and ensure all compliances. Accessibility of distribution channel. Reduction in over all costs/ economies of scale. Spreading of risks mainly on large scale investments.
• Wholly owned subsidiary company Instead of having a joint venture company, a foreign company may incorporate its wholly owned subsidiary in India, where 100 per cent FDI is permitted. All such cases are subject to prior approval from the Foreign Investment Promotion Board (FIPB). At least 50 % of the production is to be exported.
• GDR – • A global depository receipt (GDR) is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account. GDRs represent ownership of an underlying number of shares. • If the Indian Company which has issued GDRs in the American market wishes to further extend it to other developed and advanced countries such as Europe, then they can sell these ADRs to the public of Europe and the same would be named as GDR.• ADR – • An American depositary receipt (ADR) is a negotiable security that represents securities of a non-US company that trade in the US financial markets. • The first ADR was introduced by J.P. Morgan in 1927 for the British retailer Selfridges.
• FCCB – foreign currency convertible bonds FCCBs are issued in currencies different from the issuing companys domestic currency. Corporates issue FCCBs to raise money in foreign currencies. These bonds retain all features of a convertible bond making them very attractive to both the investors and the issuers. FCCBs appear on the liabilities side of the issuing companys balance-sheet