Foreign Company

Foreign Company

There are various kinds of companies like public, private or government-owned companies that operate in a country. Depending on their specific nature, suitable rules and regulations have to be formulated for each kind of company. Every country has particular rules and regulations applicable for homegrown companies. Similarly, a company operating in a country other than its home country is required to follow the rules and regulation of the given local area of operation and the home country where it was originally incorporated.
In India, a foreign company is mandated to follow certain special or modified provisions as compared to a domestic company. For instance, a foreign company at the time of making investment in India or setting up an office is required to comply with the Foreign Exchange Management Act (FEMA). Similarly, if the foreign company is involved in selling of goods or providing services then it is required to comply with the Indian tax laws.
A ‘foreign company’ is an entity which is incorporated outside India, but has a place of business in India or conducts any business activity in India in any other manner. The accurate definition of foreign company is given under the Companies Act, 2013 though the concept of ‘foreign company’ was existent in the older act as well.
Definition of Foreign Company under the Companies Act, 2013 and its scope
The term ‘foreign company’ is clearly laid down under Section 2 sub-section 42 of the Companies Act, 2013 (New Act). A foreign company is any company or body corporate incorporated outside India which,

  1. has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  2. conducts any business activity in India in any other manner.
In order to be considered a ‘foreign company’, one has to fulfil both the abovementioned criteria. Hence, this new definition has a wider scope compared to the earlier Act. To fully appreciate the scope of the definition, it is necessary to define the terms ‘electronic mode’ as well as ‘business activity’

Documents Required

Documents required

  1. Address proof of the office and if accommodation is rented then latest electricity bill.
  2. For Indian citizen
    1. PAN card mandatory
    2. Address proof
    3. Photograph ID proof like passport, Aadhar card or driving license.
  3. For foreign national
    1. Passport mandatory
    2. Address Proof
    3. Photograph ID Proof like any government license or document containing name in full, photo and date of birth.)
    4. Documents submitted must be certified by the Indian Consular or consulate.

Procedure

  1. Wholly owned subsidiary Company
  2. A foreign company invests 100% FDI in Indian company through automatic route then it becomes Wholly Owned Subsidiary Company of that Foreign Company. Like if XYZ of US owns 100% shares in AB Ltd of India then AB Ltd becomes subsidiary company of XYZ
    It is an entity whose whole share capital is in the hand of a foreign corporate body. It can be a private company limited by guarantee or shares or an unlimited liability company.
    Procedure
    1. It requires 2 minimum shareholders, directors.
    2. All directors have to apply for DIN (Director’s Identification No.) and digital signature certificate.
    3. In Form INC-1 application for the name of the company has to be filed.
    4. You have to draft your MOA and AOA and then a subscription to MOA has to be done by shareholder and appropriate persons.
    5. When the registrar of company approves the applicant has to file form INC-7 (Application for Incorporation of Company), form DIR-12 (Particulars regarding appointment of directors, the key managerial personnel and any changes in them) and form INC-22 (Notice of location or change of address of the registered office of the company) along with MOA and AOA.
    6. Pay ROC online fees and stamp duty as per the authorized capital of the company.
    7. The registrar verifies all the documents and Form INC-22 and DIR-12 are approved and INC-7 is verified.
    8. When the registrar is satisfied with the documents certificate of incorporation is sent.
    9. apply for PAN card and for the opening bank account of the company.
    10. After subscription of share, capital documents have to be submitted for FDI compliance.
  3. Joint Venture
  4. It is an arrangement where two or more parties cooperate to achieve a commercial object or run a business. It may take various forms like Company, LLP, partnership etc. it can be on a long-term basis like running for perpetuity or for a limited time based on the object. It can involve an entirely new entity or existing business. Hence it is a very flexible concept.
    If any foreign partner or NRI is involved in a joint venture it requires governmental approval either from RBI or FIPB. Approval from RBI has to be taken it is covered under the automatic route. In any other case, approval from FIPB is necessary.
    The entity has to select a local partner with whom you want to enter into joint venture then a Memorandum of Understanding or a Letter of Intent is to be signed which will state the basis for the joint venture agreement. All the terms should be discussed thoroughly and negotiated and must be consistent with regional as well as international law. It should address the important matters like Dispute resolution agreements, law Applicable, holding shares, Transfer of shares, Board of Directors Non-Compete, Confidentiality etc.
  5. Setting Up a Liaison Office
    1. For setting up a Liaison office or representative office in India the criteria have been prescribed by RBI.
      • They must have a profit-making record in the immediately preceding 3 financial years in the home country and their net value should not be less than USD 50,000
      • A subsidiary of other company which does not satisfy the above condition can submit a letter of comfort from their parent company if the parent company satisfies the above condition.
    2. All the expenses are to be met entirely through inward remittances of foreign exchange from the Head Office outside India.
    3. It requires a specific approval of RBI under FEMA 1999 as well as approval from the Insurance Regulatory and Development Authority (IRDA).
    4. The application for establishing the office will be forwarded by the foreign entity to RBI through a designated Authorised Dealer Category–I Bank
    5. required documents should also be filed with application including an English version of the Certificate of Incorporation/Registration or MOA & AOA attested by the Indian Embassy/Notary Public in the Country of Registration, along with the latest Audited Balance Sheet of the applicant entity
    6. The office will be given a Unique Identification Number by RBI. It has to obtain PAN from Income Tax Authorities when setting up the office in India.
  6. Project office
  7. RBI prescribes the setting up of Project office in India by a foreign company.
    1. a foreign company can establishment office without the prior permission from RBI only when they have secured a contract from an Indian company to execute a project in India and
      1. it is funded directly by inward remittance from abroad or
      2. it is funded by a bilateral or multilateral International Financing Agency or
      3. it has been cleared by an appropriate authority or
    2. A company or entity in India providing the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project
    3. If the above conditions are not met the foreign entity has to approach the RBI for the approval.
  8. Branch Office
  9. A Foreign company can conduct business activity in India by opening a branch office with the prior approval of RBI.
    1. The company should be engaged in manufacturing or trading activities.
    2. It should have a profit in the immediately preceding five financial years and should have a net worth of not less than USD 100,000 in its home country.
    3. The subsidiary company of other if does not fulfil the above condition then they can submit a Letter of Comfort from their parent company if parent company fulfils the above condition.
    It can undertake following activities:
    • Import & Export of goods.
    • Providing professional or consultancy services
    • Carrying out research work in area which its parent company is engaged
    • The representing parent company in India and acting as buying/selling agent in India.
    • Providing IT services and developing software in India.
    • Providing technical support for products supplied by the parent
    • Foreign Airline/ Shipping Company.

Benefits

  1. Promotion of investment in key areas:
  2. By allowing FDI, we can promote investment in key areas such as infrastructure development as a result of which there will be more production of capital goods. For example, investment in power generation can generate more electric power which will enable the growth of more industries.
  3. New technologies:
  4. FDI can bring in more new technologies which were not adopted in the country till now. Examples are the recent developments in the Communications System. The launching of satellites with the help of other countries has enabled the growth of communication system in the country. Nokia has come to India for promoting India’s communication system.
  5. Increase in Capital inflow:
  6. FDI promotes more capital inflow into the country especially in key and core sectors. We have a shortage of capital not only in the form of money but also in the form of material. FDIs will bridge this gap by which there will be speedy economic growth in the country.
  7. Increase in Exports:
  8. With the help of FDI, the exports of many underdeveloped countries have increased. The creation of Economic Zones and promotion of 100% export-oriented units have helped FDIs in increasing their exports from other countries. Certain consumer products produced by them have world-wide markets. There is a change in the composition of exports and direction of exports with the presence of FDI.
  9. Promotion of Employment opportunities:
  10. The advent of FDI in developing countries has promoted the service sector. This has resulted in a change in the advertising and marketing technologies. This provides more scope for employment opportunities. Educated unemployment to some extent is reduced by the FDI as they could absorb some of Indian work force.
  11. Promotion of financial services:
  12. FDI strengthens financial services of a country by not only entering its banking industry but also by extending other activities such as merchant banking, portfolio investment, etc., which has resulted in the promotion of more new companies. It has also helped the capital market in the country.
  13. Exchange rate stability:
  14. Reserve Bank of India has been maintaining the exchange rate in the country through its exchange control measures. But the constant and continuous supply of foreign exchange is a must for continuing exchange rate stability. With more FDIs coming into the country, this is made possible and today RBI is having a comfortable foreign exchange reserve position of more than 1 billion dollars.

FAQ's

  1. Foreign Representation
    1. Liaison Office ('LO')
    2. Branch Office ('BO')
    3. Project Office ('PO')
  2. Incorporated Entity
    1. Wholly Owned Subsidiary ('WOS')
    2. Joint Venture ('JV')
    3. Limited Liability Partnership ('LLP')*
    * Foreign Direct Investment (FDI) in LLP is only under Approval Route & Conditional.

Business ‘Form’ purely depends on the business need. Such need could be to execute one-time project in India, promote the product, understand the market, appoint a distributor, just have a place of business or hire an employee in India etc.

Till the time investment decisions are not firm, business in India can be done by appointing an agent, distributor in India or directly providing services from abroad. Such arrangements are subject to applicable tax withholding rules in India. The payment from India is governed by rules of Foreign Exchange Management Act (FEMA) and controlled by Reserve bank of India (RBI).

Initial approval of a LO is granted by Reserve Bank of India for 3 years. Subsequent request for an extension is generally approved for next 3 years. Further extensions can again be applied, however approval by Reserve Bank of India (RBI), is granted on a case to case basis.

There is a requirement to appoint an Authorized Representative of an LO. He/she can be a resident of India or US. An Authorized Representative can be changed at the will of the Board of Parent Company. The person however must have an Indian Permanent Account Number (PAN). PAN is a unique number, obtained by registering at Indian Income Tax.

BO can be opened with a prior approval from RBI and it’s regarded as Foreign Company in India. As it’s not a separate entity from its parent company, all business risk and liabilities are directly assumed by the Parent company. It can conduct full-fledged business activities in India, except Manufacturing. It can however subtract such activities to Indian vendors. BO, being a foreign company taxed at a higher rate (presently 40%).

You don't need to incorporate. In case you have awarded a specific contract in India, you can set up a PO without prior approval of Reserve Bank of India. After completion for the project the net of tax, proceeds can be repatriated to the Parent Company.

Most of the business sectors don't require a prior approval and 100% FDI is permissible. In all such cases, only reporting is required to RBI, within 30 days of receipt of equity/allotment of shares. Where ever automatic route is not available i.e. sectors which has a cap on FDI, prior approval from Foreign Investment Promotion Board (FIPB) is required e.g. Whole Sale Trading.

Recently the requirement of Minimum Share capital (Private Limited- INR100K, Public Limited- INR500K) is being lifted by Indian Government. There is however requirement of minimum 2 Shareholders & 2 Directors (at least 1 to be resident director). There is also a provision of One Person Company (OPC), however it is allowed only to a resident Indian.

An address to be termed as a “Registered Office’ is required. Commercial or business address can be at a different location. There is no requirement of any minimum area, location etc. A business incorporated at any place in India, can do business throughout India. State Government however may require some local registrations.

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Manish Moyal

Director

I am very pleased with the project you have done, and especially your commitment to providing a quality solution when it meant going the extra mile to do so.

Bharat Arora

Director

WE WORKED WITH THELEGALBANK TO REGISTERED OUR COMPANY Protocloud Technologies PVT. LTD. THE COMPANY IMPRESSED US WITH THEIR SERVICES.

Puspandra

Director

WE WORKED WITH THELEGALBANK TO REGISTERED OUR COMPANY PIXYRS SOFTECH & RESEARCH PRIVATE LIMITED THE COMPANY IMPRESSED US WITH THEIR SERVICES.

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